Virginia General Assembly proposes to eliminate sales and use tax exemption for data centers

The Virginia House of Delegates and Senate have released their respective budget proposals, with each containing provisions that would materially impair or effectively eliminate the sales and use tax exemption (Exemption) for data centers.

Enacted in 2010, the Exemption allows data center operators meeting certain infrastructure investment and job creation criteria to purchase and/or lease computer equipment and software without paying retail sales and use tax. Currently set to expire in 2035, the Exemption has helped attract data center development in Virginia.

This alert provides a summary of the state’s budget proposals, key provisions, and the potential impact on data centers in Virginia.

Overview

As part of the biennial budget process in Virginia, each chamber of the Virginia General Assembly – the House of Delegates and the Senate – publishes its own budget proposal, which is then finalized through a series of negotiations and amendments, and forwarded to the Governor.

Currently, the budget proposal released by the House of Delegates, HB30, would maintain the 2035 sunset date but, in the meantime, would require data centers to meet a series of environmental and energy efficiency standards to qualify for the Exemption. The Senate budget, SB30, proposes to end the Exemption on January 1, 2027, eight years ahead of the current scheduled sunset. In short, the House of Delegates proposal preserves the Exemption in name, while the Senate proposal would end it outright.

Key provisions under HB30

In order to continue to qualify for the Exemption, HB30 would require data centers to meet the following criteria:

• Co-located generating facilities that emit carbon dioxide, other than back-up generators, are removed by July 1, 2027;


• Clean and renewable energy targets are met ten years earlier than the requirement for Dominion Energy; and


• Tier 4 back-up generators are installed by July 1, 2031.

Impact on data centers in Virginia

In the last two years, the data center industry has invested more than $80 billion in Virginia, generating $5.3 billion in local and state revenue through other levies beyond the sales and use tax. According to the General Assembly’s own Joint Legislative Audit and Review Commission and the Virginia Department of Taxation, at least 90 percent of this investment is attributable to the Exemption. As such, the budget proposals could place that investment, and future development, at risk.

According to the Data Center Coalition, the new eligibility criteria outlined in HB30 are unattainable and would disqualify many existing data centers in Virginia from the Exemption. By either sunsetting the Exemption early or subjecting it to new standards, both the House of Delegates and Senate budgets, as currently drafted, would effectively alter the terms of the deal under which the data center industry invested in Virginia.

For additional information or to discuss how these proposals may affect existing or planned data center investments, please contact the authors.