Senators propose phasing out data center tax credit, House budget keeps it

On Sunday, the Virginia House of Delegates and Senate money committees unveiled their changes to former Gov. Glenn Youngkin’s final $212 billion budget proposal. One of the major divergences between the two bodies’ amendments came down to how to handle the sales and use tax exemption for data centers.

The Senate budget proposal would phase out the sales tax exemption for the industry on Jan. 1, 2027 – an expedited sunset from the original 2035 end date. Currently the data center industry does not have to pay the 5.3% sales tax on the expensive server equipment and software housed in its facilities.

The state currently misses out on an estimated $1.6 billion every year in revenue from the industry, Senate lawmakers said. The plan would redirect those funds into transportation and water infrastructure projects.

“When legislators created the data center sales tax exemption in 2008, they were told it would cost up to $1.54 million a year — a modest price for bringing jobs to distressed communities. Nobody imagined it would one day cost over a thousand times that,” Sen. Scott Surovell, D-Fairfax, said in a statement Sunday. “At some point, a program never designed to be a blank check for some of the world’s most profitable corporations becomes exactly that.”

The House’s version of the budget bill kept the sales tax exemption in place, but added on requirements to meet certain clean energy standards. Youngkin amended his budget to not only keep the data center sales tax exemption, but to extend it through 2050.

The data center industry instantly opposed the Senate proposal. Nicole Riley, who represents the Data Center Coalition, quickly pushed back against the measure, pointing to how the industry has invested over $100 billion across the state in the last three years. 

“At a time when Virginia’s economy is facing significant challenges, this would be a self-inflicted hit to our economy that will cost Virginia billions in economic impact and tax revenue, and jeopardize tens of thousands of jobs,” Riley said in a statement.

Riley also stated that the state could lose out on an estimated $1.3 billion in net tax revenue over five years, 2024 to 2029, due to decreased investment in new facilities or renewed computer technology. 

In a biennial data center retail sales and use tax exemption report to the Department of Taxation, data centers voluntarily disclosed that during fiscal year 2024, data center operators reported to the the Virginia Economic Development and Partnership that they’d created 1,197 net new jobs to, an investment of about $32 billion. 

Of that, $21.7 billion covered equipment or software that was exempt from the sales tax. 

In fiscal year 2025, they reported 1,610 net new jobs and an investment of approximately $48.6 billion, $33.2 billion of which they said was exempt from sales tax.

A 2024 Joint Legislative Audit and Review Commission data center report found that the majority of jobs associated with the industry derive from the construction of the facilities, “rather than data centers’ ongoing operations,” the report read. 

Surovell said the construction jobs and local tax revenue have been a bright spot of the data center industry. He also believes that the data center industry can flourish here without the exemption, considering the AI boom and Virginia’s high ranking as a good state for business. Ending the industry’s tax carve out will boost affordability for tax payers who are also facing high utility bills, he said.

“Data centers also come with a lot of other costs, and they take a lot of energy. We have to build a lot of new transmission lines and energy generation facilities to deal with that,” Surovell said. “The cost of that is shared not only by the data center, but also by rate payers.”

The report also states that there is a net positive tax revenue from the industry of $2.1 billion over five years. The state exempted over $3.2 billion in fiscal years ‘24 and ‘25 of the total $80 billion in industry investments over those two years.

When reporters asked Sunday if she was concerned about data centers either leaving or choosing not to come to Virginia if the exemption were scrapped, Senate Finance Chairwoman Sen. L. Louise Lucas, D-Portsmouth, said she thinks it is the best move to make life more affordable for Virginians.

“It takes the savings back for them,” Lucas said. “I don’t think it does anything to the industry. A lot of folks are saying they are going to be leaving and going to other places. I don’t believe that’s going to happen. I think they will continue to build in Virginia but I think they understand it will be a different playing field now.”

The Senate and House are expected to vote on their respective budgets later this week – and the differences will have to be worked out in a conference committee, which is a closed door meeting.

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