Data centers have become a major focus of state and local tax policy. For years, states and localities have used sales tax exemptions, property tax abatements, infrastructure incentives, and other economic development tools to attract data center investment. Those incentives remain important, particularly as demand for cloud computing and artificial intelligence infrastructure continues to grow. Recent developments, however, show that some states are reassessing whether and how to encourage data center investment, including whether data center incentives should remain available in their current form.
The concern is no longer limited to whether data centers create sufficient jobs or capital investments. Lawmakers are also considering the fiscal cost of sales and use tax exemptions, the effect of large data centers on electricity demand and grid reliability, the use of water and local infrastructure, and whether incentives should be conditioned on additional energy, reporting, or community impact requirements. Here is an overview of what is happening in several states with existing data center incentives.
Virginia Remains the Key State to Watch
Virginia has long been one of the most important jurisdictions for data center development, in part because of its Data Center Retail Sales and Use Tax Exemption. The exemption generally applies to qualifying computer equipment and enabling software purchased or leased for use in qualifying data centers that meet statutory investment and employment requirements.[1] In the colocation context, Virginia's economic development materials state that a colocation data center may enter into a memorandum of understanding (MOU) permitting both the data center and its tenants, together, to qualify for and use the exemption, with tenants separately required to enter into a participation certificate and agreement to receive their own exemption certificates.[2]
Under current law, the Virginia exemption generally runs through June 30, 2035.[3] Certain data center operators may qualify for extensions if they satisfy additional investment, job creation, and MOU requirements, including potential extensions through June 30, 2040, or June 30, 2050, for projects meeting the statutory thresholds.[4]
The exemption, however, remains a central issue in Virginia's 2026 budget negotiations. Lawmakers have not yet finalized whether the exemption will be preserved, narrowed, conditioned, or repealed before its current statutory sunset. The General Assembly remains in budget negotiations ahead of the June 30 deadline, with the Virginia House's previously scheduled June 18 session now canceled and the Virginia Senate still scheduled to reconvene on June 22. Although Virginia's updated revenue forecast projects an additional $1.5 billion over the next three fiscal years, disputes over data center tax incentives remain part of the unresolved budget negotiations.[5] A June 2026 House budget proposal would leave the data center sales and use tax exemption in place, remove previously proposed environmental standards, and create a data center commission, while Senate leaders continue to support ending the exemption before its current statutory sunset.[6]
This makes Virginia a key near-term development for data center operators, colocation tenants, cloud providers, and companies planning significant equipment purchases in Virginia. If the exemption is narrowed or repealed, taxpayers may need to revisit procurement timing, exemption certificate procedures, MOU terms, tenant participation agreements, contract pricing, and capital expenditure forecasts. Taxpayers with existing MOUs or approved exemption arrangements should also consider whether any proposed change would affect existing commitments differently from future projects or purchases.
Ohio Pauses New Data Center Tax Exemption Requests
Ohio recently took a more immediate step. Ohio law authorizes the Tax Credit Authority to completely or partially exempt qualifying computer data center equipment from Ohio sales and use tax for eligible computer data centers, subject to statutory requirements, including capital investment and payroll thresholds.[7]
Governor Mike DeWine announced on May 27, 2026, that the Ohio Tax Credit Authority will stop considering new data center exemption applications after its scheduled May 2026 meeting while the state studies the impact of data center growth in Ohio.[8] This development is notable because it shows that states may respond not only by repealing incentives, but also by pausing new approvals while they evaluate whether existing programs should be modified. For taxpayers, this type of pause can create uncertainty for projects that are not already approved, particularly where projected returns assume the availability of sales and use tax exemptions for equipment purchases.
Washington Narrows Data Center Sales Tax Exemption
Washington has taken a more targeted approach. In April 2026, Washington enacted legislation removing certain retail sales and use tax exemptions for replacement server equipment and limiting exemptions for data centers that qualify, or would otherwise qualify, through refurbishment.[9] Beginning July 1, 2026, Washington's Department of Revenue may no longer issue exemption certificates to data centers that qualify through refurbishment, the exemption granted to data centers that qualify through refurbishment expires, and replacement server equipment is removed from the definition of eligible server equipment.[10]
Washington's approach is noteworthy because it shows how states may limit data center incentives without eliminating them entirely. Rather than repealing an exemption wholesale, a state may preserve incentives for new investment while denying or limiting the exemption for replacement equipment, refurbishment, or other categories of purchases that lawmakers view as less likely to drive new economic development.
Maine and Illinois Reflect Broader Scrutiny
Other states are also reassessing data center development, even where the immediate issue is not a complete sales tax repeal. In Maine, Governor Janet Mills recently vetoed legislation that would have created a data center coordination council and placed a temporary limit on certain large data centers.[11] The legislature sustained the veto. Governor Mills subsequently signed an executive order establishing the Maine Data Center Advisory Council, which is charged with making recommendations on large-scale data center opportunities and related benefits and risks in Maine.[12]
Illinois also remains relevant for companies tracking data center incentives. Illinois currently provides qualifying data center owners and operators with exemptions from certain state and local taxes and a credit equal to 20% of wages paid to construction workers for projects located in underserved areas. The program generally requires qualifying data centers and their tenants collectively to make at least $250 million in capital investment over a 60-month period and create at least 20 full-time or full-time equivalent jobs associated with operation or maintenance of the data center.[13]
At the same time, Illinois policymakers have discussed a potential pause on data center tax credits and exemptions, and separate legislative proposals have focused on energy and water reporting obligations for data centers. For example, SB 2181 would create an Illinois Data Center Energy and Water Reporting Act, which would require data centers to report energy and water consumption.[14] A broader data center regulatory proposal, the POWER Act, did not advance before the end of the spring 2026 legislative session, although lawmakers have indicated that negotiations may continue.[15] Illinois has now taken a more immediate step. On June 5, 2026, Governor Pritzker announced that, following inaction by the Illinois General Assembly, he was directing the Illinois Department of Commerce and Economic Opportunity to pause processing agreements for the Data Center Investment Program beginning July 1, 2026. That development brings Illinois closer to Ohio's approach and further reinforces the broader trend of states pausing, narrowing, or conditioning data center incentives while they reassess fiscal, energy, water, and community impacts.[16]
What Taxpayers Should Watch
The recent activity in Virginia, Ohio, Washington, Maine, and Illinois suggests that data center tax incentives are becoming more conditional and more politically contested. Recent Arizona budget negotiations also reportedly include a three-year moratorium on new data center sales tax exemption certificates, further underscoring that the trend is not limited to the states discussed above. Companies should not assume that existing data center incentives will remain available in their current form through scheduled statutory sunset dates.
Taxpayers with existing or planned data center projects should consider reviewing whether their incentives are already approved or still pending, whether purchases must be made before a specific effective date to qualify, whether exemption certificates or participation agreements remain valid, and whether tenants and operators have separately satisfied program requirements. If approval of an incentive or execution of an incentive agreement remains pending, taxpayers should consider whether steps can be taken to finalize the approval or agreement before any effective date that could limit or eliminate the incentive. Companies should also review whether contracts address changes in tax law, including who bears the cost if an expected sales tax exemption is narrowed, repealed, paused, or delayed.
For colocation arrangements, the allocation of tax benefits between operators and tenants may require particular attention. If a state changes the rules for equipment purchases, replacement servers, software, refurbishment, or tenant participation, both the operator and the tenant may need to revisit pricing, documentation, and compliance procedures.
How We Can Help
We are closely monitoring state and local developments affecting data center tax incentives, including Virginia's ongoing budget negotiations and other state efforts to pause, narrow, or condition data center exemptions. Our Transactional Tax team can assist with reviewing existing incentive agreements, exemption certificates, MOU terms, tenant participation documents, and contract provisions addressing changes in tax law. We can also help evaluate the potential tax impact of proposed or enacted changes on planned data center investments, expansions, and colocation arrangements.
[1] Va. Code Ann. Sec. 58.1-609.3(18)(a).
[2] Virginia Econ. Dev. P'ship, Data Center Retail Sales & Use Tax Exemption, https://www.vedp.org/incentive/data-center-retail-sales-use-tax-exemption.
[3] Va. Code Ann. Sec. 58.1-609.3(18)(a).
[4] Id. Sec. 58.1-609.3(19)(b)-(d).
[5] Markus Schmidt, Virginia Revenue Forecast Jumps by $1.5 Billion as Budget Talks Continue, Va. Mercury (June 2, 2026), https://virginiamercury.com/2026/06/02/virginia-revenue-forecast-jumps-by-1-5-billion-as-budget-talks-continue/.
[6] Shannon Heckt, New House Budget Strips Environmental Standards for Data Centers, Creates Commission Instead, Va. Mercury (June 12, 2026), https://virginiamercury.com/2026/06/12/new-house-budget-strips-environmental-standards-for-data-centers-creates-commission-instead/.
[7] Ohio Rev. Code Ann. Sec. 122.175(A)(5), (B).
[8] Press Release, Office of Ohio Governor Mike DeWine, Governor DeWine Announces Pause of Data Center Tax Exemption (May 27, 2026), https://governor.ohio.gov/media/news-and-media/governor-dewine-announces-pause-of-data-center-tax-exemption.
[9] Engrossed Substitute S.B. 6231, 69th Leg., Reg. Sess., ch. 266, Secs. 2-3 (Wash. 2026).
[10] Id.
[11] Press Release, Office of Maine Governor Janet T. Mills, Governor Mills Announces Decision on LD 307 (Apr. 24, 2026), https://www.maine.gov/governor/mills/news/governor-mills-announces-decision-ld-307-2026-04-24.
[12] Me. Exec. Order No. 5 FY 25/26, An Order Establishing the Maine Data Center Advisory Council (Apr. 29, 2026), https://www.maine.gov/governor/mills/official_documents/executive-orders/2026-04-executive-order-5-order-establishing-maine-data-center.
[13] Ill. Dep't of Com. & Econ. Opportunity, Data Center Investment Tax Exemptions and Credits, https://dceo.illinois.gov/expandrelocate/incentives/datacenters.html.
[14] S.B. 2181, 104th Gen. Assemb., Reg. Sess. (Ill. 2025).
[15] Nikoel Hytrek, POWER Act Data Center Regulation Won't Move Forward This Spring, Capitol News Ill. (May 30, 2026), https://capitolnewsillinois.com/news/power-act-data-center-regulation-wont-move-forward-this-spring/.
[16] Press Release, Office of Ill. Governor JB Pritzker, Gov. Pritzker Pauses New Data Center Tax Incentives (June 5, 2026), https://gov-pritzker-newsroom.prezly.com/gov-pritzker-pauses-new-data-center-tax-incentives