The commonwealth of Virginia plans to reset how data center equipment, fixtures and supporting supplies are taxed throughout the state. Given that Northern Virginia, also known as Data Center Alley, is home to the largest collection of data centers in the United States, and around the world, this policy change will have an impact on data center organizations operating in Virginia, as well as tax revenues for local municipalities.
According to the March 2022 Northern Virginia Technology Council (NVTC) data centers report, “Northern Virginia has the largest data center market in the United States. As of 2021, the data center inventory in Northern Virginia exceeds that of the next 5 largest markets combined. From 2018 to 2021, the total data center capacity in Northern Virginia more than doubled.”
So what impacts will organizations operating in the data center industry feel from these policy changes? For starters, they will bring predictability for companies operating in this space and a reduced tax burden; for communities, they will bring potentially local adjustments in municipality revenues.
According to a recent Washington Business Journal article, “ HB791 and SB513 pertain to data center ‘fixtures,’ which include most equipment inside a data center other than computer equipment — that is, generators, power distribution equipment, chillers, HVAC systems, pumps and pipes, and the like. Currently, Virginia municipalities may assess the value of such fixtures by various methods. This in turn lead to differences in how the same kind of equipment is taxed, depending on whether it’s owned by a data center landlord or tenant. These bills would provide that, going forward, all data center fixtures would be valued for taxation purposes using the same method — depreciated replacement cost.” The article adds that “the new law wouldn’t force a revenue reduction on municipalities. If a county or city wants to keep its revenues from data center fixtures intact, it can adjust its tax rates to make up the difference.”
The overarching focus of these new legislative policies is predictability for the data center business community. This predictability is a major area of attention for the business community and can provide continued development benefits and community engagement efforts from data center companies that want to continue to be based in Virginia. Data center organizations want to work side-by-side with communities and municipalities, and this policy update provides them an additional good-faith investment from the state and local levels into the data center industry.
The March 2022 NVTC data centers report highlighted the mutually beneficial success: “Data centers are the major drivers of investment in Virginia. According to information from the Virginia Economic Development Partnership (VEDP), in 2021, 62% ($6.8 billion) of all the new investment announced by VEDP was from new and expanding data centers.” With the new policies in place for predictable taxing of data center fixtures, the data center business community has a reliable path and continued reliable partner in the commonwealth of Virginia, building out the data center business community that has become synonymous with Northern Virginia and, increasingly, the commonwealth as a whole.
According to the same report, it is estimated that in 2021 alone, data centers were directly and indirectly responsible for generating $174 million in state revenue and $1 billion in local tax revenue in Virginia. Those tax figures, even with the predictability tax on data center fixtures, should only increase with continued development and growth of the data center industry in Virginia.
As a firm, McGuireWoods provides data centers and other clients that operate in the data center industry with integrated service through the collaboration of attorneys across practice areas. The firm has the requisite knowledge and in-house experience to address all areas of legal need in the data center industry — such as complex tax concerns, community cooperation, real estate, high-stakes litigation, and global data privacy and security compliance. McGuireWoods’ lawyers and consultants are deeply immersed in the Virginia data center industry and provide guidance on best practices to companies across industries on how to manage the legal risks, government policies and business goals associated with data centers.