Virginia enacts first US data center power tax

Virginia has become the first US state to impose a tax directly on data center electricity consumption, after lawmakers approved a budget bill that introduces a $0.011 per kilowatt-hour (kWh) levy. The tax applies to all electricity used by data centers, including power from utilities, retail providers, and behind-the-meter generation. It takes effect on July 1, 2026, and is expected to raise $600 million per year for the state’s general fund over the next two years.

The legislation preserves Virginia’s existing sales and use tax exemption for qualifying data center equipment, a long-standing incentive for the industry. However, it explicitly excludes data centers from a separate utility rate provision that benefits large industrial and manufacturing customers with at least 25 MW of demand and 200 employees. That carveout is capped at 150 MW of aggregate demand unless regulators approve a higher limit.

How the tax works

The new tax will be collected monthly by the State Corporation Commission, which must develop implementation guidelines within 60 days of the budget’s passage. A refund mechanism is included: if annual collections exceed $600 million, the excess will be placed in a special fund and returned to data center operators proportionally.

For a continuously operating 500 MW facility, the tax would amount to roughly $48 million annually, while a 1 GW campus would owe nearly $100 million before any refunds. Rob Gramlich, president of power sector consulting firm Grid Strategies, estimated the tax represents a little more than a 10% increase in effective electricity rates for data centers.

The final version of the bill differs significantly from an earlier Senate proposal, which would have taxed backup generators based on permitted capacity and was projected to raise $1.8 billion over two years. Budget negotiators opted for the electricity consumption tax, which is expected to generate $1.2 billion over the same period.

Industry impact and broader concerns

Virginia’s Northern Virginia region, often called "Data Center Alley," is the largest data center market in the US and a critical hub for global internet traffic. The state’s policy decisions are closely watched by the industry, and the new tax could set a precedent for other states grappling with the costs of supporting data center growth.

Former Federal Energy Regulatory Commission (FERC) Chairman Mark Christie described the tax as an offset rather than a fundamental policy shift. In a LinkedIn post, Christie wrote:

“Data centers still keep the existing tax subsidies from the state, they are just offset by this new energy consumption tax.”

However, Christie and other observers noted that the tax does not address the broader question of who will pay for the generation and transmission infrastructure needed to serve growing data center demand. Christie argued that the measure "will do nothing to protect residential consumers from cost-shifting to them for all the new generation and transmission assets that must be built."

Gramlich highlighted another concern: utilities like Dominion Energy make expensive infrastructure investments before data center customers are fully committed, creating financial risk. "Dominion does not actually charge the data centers until they are close to complete, which means expensive investments are being made before there is any certainty or commitment from customers," he said.

What to watch

The tax’s impact on data center investment and operations in Virginia will be closely monitored, particularly as other states consider similar measures. The State Corporation Commission’s implementation guidelines, due within 60 days of the budget’s passage, will clarify how the tax is administered and enforced. Meanwhile, the industry will assess whether the new levy alters the state’s competitive position as a data center hub.