Earlier this summer, North Carolina and Virginia enacted significant legislation affecting the state taxation of data centers. This issue has emerged as a dimension of the prominent policy debates over the overall treatment of data center projects that have occurred nationwide this year.
While North Carolina repealed its sales and use tax exemption for electricity used by qualifying internet data centers, Virginia elected to preserve its existing sales and use tax exemptions and instead impose a temporary tax based on electricity consumption by data center operators. These differing approaches illustrate the growing scrutiny that state policymakers are placing on the economic, fiscal and infrastructure impacts associated with rapid data center expansion.
North Carolina – repeal of data center electricity exemption
In July, North Carolina S.B. 257 repealed the sales and use tax exemption for electricity used at eligible internet data centers and for eligible property located and used at eligible internet data centers.1 An eligible internet data center was limited to projects certified by the Secretary of Commerce that met specific investment requirements.2 The sales and use tax exemption for sales of eligible business property (e.g., cooling systems, generators, etc.) and data center support equipment (e.g., network connectivity equipment) remains effective. The repeal was originally effective as of July 7, 2026, the date on which the bill was enacted.3
However, H.B. 56 subsequently delayed the effective date of the repeal.4 Electricity consumed by data centers will now become subject to sales tax for the first electricity billing period beginning at least 30 days after the enactment of S.B. 257 (effective for billing periods on or after Aug. 30, 2026).5 As a result of the repeal, purchases of electricity by affected data centers will be subject to North Carolina’s combined 7% state and local sales and use tax rate.6
H.B. 56 also creates a quarterly reporting requirement under which data centers must report to the North Carolina Department of Revenue the amount of sales tax paid on purchases of electricity.
Virginia – new data center electricity consumption tax
In contrast to North Carolina, Virginia chose to impose a new tax on data centers rather than repeal existing sales and use tax exemptions.7 The enacted budget legislation creates a new “Data Center Electricity Consumption Tax.”8 From July 1, 2026 to June 30, 2028, every data center operator is subject to a tax equal to $0.011 per kWh of all electricity consumed at each Virginia data center per month.9 The tax is imposed in addition to all other taxes and fees otherwise imposed under Virginia law.
The legislation defines a “data center” broadly to include facilities whose primary purpose is the storage, management and processing of digital data and that house servers, networking equipment, power distribution infrastructure, cooling systems, telecommunications equipment, environmental controls and security systems. However, the definition excludes facilities whose primary function is to provide internet access, a communication service, or any combination thereof.10 Data center operators generally include persons that own, operate, or occupy a data center in Virginia, as well as persons operating facilities utilizing self-supplied electricity generation.
The Data Center Electricity Consumption Tax is collected monthly and will be administered by the State Corporation Commission.11 Although not clearly stated within the legislative text, an electric utility, an electric cooperative, or a competitive service provider that provides a data center with electricity is responsible for collecting and remitting the tax.12 However, data centers that self-supply electricity must report their usage and directly remit the tax to the State Corporation Commission on a monthly basis.
Additionally, self-supplied data centers must submit quarterly usage reports to the Department of Environmental Quality.13 Notably, the legislation directs the State Corporation Commission to issue guidance within 60 days after enactment that should address reporting, payment and refund procedures.14
Commentary
The Virginia and North Carolina enactments reflect a growing national reassessment of tax incentives and other policies designed to encourage data center investment. For much of the last decade, states competed aggressively for data center projects by offering broad sales and use tax exemptions on equipment, electricity and other qualifying property. However, the rapid growth of artificial intelligence, cloud computing and hyperscale facilities has sparked additional focus on the fiscal costs of these incentives as well as the significant demands that large data centers place on electrical grids, water resources and local infrastructure.
Although both states acted in response to these concerns, they adopted materially different approaches. North Carolina repealed the sales and use tax exemption for electricity consumed by eligible internet data centers, directly reducing a significant operating-cost benefit previously available to qualifying facilities. Accordingly, investors with recent North Carolina data center or data center-adjacent projects should consider reviewing their financial models and future run-rate assumptions to account for the additional sales tax cost on electricity purchases given the 7% effective tax rate.
In contrast, Virginia retained its longstanding sales and use tax exemption regime while imposing a temporary tax on electricity consumed by data center operators. The Virginia legislation also directs the Joint Subcommittee on Tax Policy to study the Commonwealth’s data center exemption program and evaluate the economic benefits and fiscal impacts of the industry, signaling that further legislative changes remain possible.
Not all data centers consume electricity at the same level, and projected tax liability will vary depending on facility size, utilization, efficiency and other operating factors. For example, assuming all electricity consumed at a Virginia data center is subject to the tax for a full year, the tax would equal approximately $110,000 for a small facility consuming 10 million kWh annually, $550,000 for a medium facility consuming 50 million kWh annually, and $1.1 million for a large facility consuming 100 million kWh annually. These examples correspond to approximate average loads of 1.1 MW, 5.7 MW, and 11.4 MW, respectively.15
Virginia and North Carolina are not the only states reevaluating data center incentives. In 2025, Minnesota repealed its sales tax exemption for electricity consumed by qualified data centers.16 Minnesota also enacted legislation in 2025 imposing additional fees on data centers based upon a data center’s peak electric service demand.17 Likewise, Washington repealed its sales and use tax exemption for qualifying data center replacement equipment for purchases on or after July 1, 2026.18
While these states stopped short of eliminating all data center incentives, these actions demonstrate a willingness among state legislatures to scale back exemptions previously viewed as important to spur economic development for a critical industry.
States are also increasingly considering measures outside the tax arena to address data center growth. For example, Texas policymakers and utility regulators in recent months have devoted substantial attention to the effect that large-load facilities, including data centers, may have on electric reliability and transmission infrastructure.19
Similar debates have emerged in other jurisdictions, where policymakers are studying additional reporting requirements, utility cost-allocation mechanisms, zoning restrictions, environmental reviews and other regulatory measures intended to manage the pace and location of future development.20 These initiatives suggest that concerns regarding energy consumption and infrastructure capacity are becoming as significant as traditional tax incentive considerations when states evaluate data center projects.
Equally important is the role that local governments play in determining whether data center projects move forward. While state tax incentives often receive the greatest attention, local governments frequently control zoning approvals, permitting decisions and property tax incentive programs that can significantly affect project economics.
Throughout 2026, local officials and residents across counties and localities have increasingly scrutinized proposed data center developments due to concerns regarding noise, land use, water consumption and growing electricity demands. These concerns have led some communities to oppose new projects and prompted others to reconsider available incentives or impose additional conditions on project approvals. As a result, developers and investors evaluating data center investments should consider not only evolving state tax policies, but also local zoning, permitting and property tax policies that may significantly influence project economics.
Viewed in this broader context, Virginia’s electricity consumption tax appears to represent a middle-ground approach. Rather than immediately repealing or materially reducing existing sales and use tax incentives, Virginia elected to generate near-term revenue from one of its fastest-growing industries while preserving the overall incentive framework that helped make the Commonwealth a leading data center market. Nevertheless, the temporary nature of the tax and the mandated legislative study indicate that Virginia’s data center tax regime remains under active review.
As states continue to balance economic development objectives against revenue needs, energy demands and infrastructure concerns, taxpayers should expect continued scrutiny of data center tax preferences and additional legislative activity directed toward data centers.
1 S.B. 257, Laws 2026, § 44.4(a) amending N.C. GEN. STAT. § 105-164.13(55).
2 N.C. GEN. STAT. § 105-164.3(201).
3 S.B. 257, § 44.4(b).
4 H.B. 56, Laws 2026.
5 H.B. 56, § 11.3.(c), amending S.B. 257, § 44.4(b).
6 N.C. GEN. STAT. § 105-164.4(a)(9).
7 H.B. 30, Laws, 2026.
8 Id. at § 3-5.24.
9 Id. at § 3-5.24.A.1.
10 The term “communication service” has the same meaning as provided under Va. Code Ann. § 58.1-647, which incorporates the definition used for Virginia’s Communications Sales and Use Tax.
11 H.B. 30, Laws, 2026, at § 3-5.24.B.
12 Id. at § 3-5.24.D.
13 Id. at § 3-5.24.A.2.
14 Id. at § 3-5.24.E.
15 See Arman Shehab Et Al., 2024 United States Data Center Energy Usage Report (2024).
16 H.F. 9, Laws 2025.
17 H.F. 16, Laws 2025.
18 S.B. 6231, Laws 2026.
19 Office of The Texas Governor, Governor Abbott Directs Comprehensive Data Center Audit (Aug. 3, 2026).
20 Office of The Massachusetts Governor Healey Halts Data Center tax Incentive and Calls for Strict Guardrails to Protect Ratepayers, Environmental and Public Health (June 25, 2026).
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