Former Sen. Chap Petersen, D-Fairfax, remembers being "the lone wolf" in opposing a lucrative state tax exemption for the data center industry in the Virginia Senate.
Petersen, a trial attorney in Fairfax City and a Civil War history buff, also had fought an uphill legal battle against the Prince William Digital Gateway, a massive data center project proposed on thousands of acres of agriculturally zoned land next to the Manassas National Battlefield Park in western Prince William County.
But this week, the former senator sees his longtime adversary in retreat after the Virginia Court of Appeals threw out the Prince William rezoning approval for the construction of 37 data centers covering more than 22 million square feet. The appeals court on Tuesday reversed one lower court ruling against his clients — including the American Battlefield Trust — and upheld another that had voided the project's approval by a lame-duck board of supervisors after a contentious 27-hour public hearing in late 2023.
Northern Virginia 'ground zero' for living with data centers
Meanwhile, the Virginia Senate, in which Petersen served for 16 years before losing a Democratic primary three years ago, is holding firm on its budget proposal to end the state sales and use tax exemption on data center equipment that has helped make Virginia the center of the global data center industry.
"The bottom line is that the data center industry got everything it wanted ... and now the tide has turned," Petersen said in an interview after the appeals court ruling Tuesday.
The data center developers, QTS and Compass, did not comment publicly on the ruling, which they may appeal to the Virginia Supreme Court. It's not clear whether Prince William will stay in a battle that already has cost the county $1.7 million in legal fees and more than two years of effort.
The Data Center Coalition, an industry group based in Leesburg, didn't comment on the court ruling but made clear it is watching closely for changes in the business environment.
“Virginia has historically been a good place for investment by data centers and other industries, thanks in large part to its reputation for thoughtful policymaking and leadership that provides businesses with certainty, stability and predictability," said Dan Diorio, vice president of state policy for the coalition. "If those dynamics change, it could certainly affect the way that markets and businesses view potential investment in the commonwealth."
"As we have during the session and throughout the year, the Data Center Coalition and our members continue to serve as a resource for information and insight about digital infrastructure investment, economic impact, operations and market competition," Diorio said. "We are encouraging policymakers to adopt policies and budgets that ensure the commonwealth will remain a competitive market for responsible investment, growth and operations in the years ahead.”
The industry is immediately focused on preserving the state tax exemption — which saved data centers $1.9 billion in sales taxes last year — by offering alternative sources of state revenue to Senate Finance Chair Louise Lucas, D-Portsmouth, who says she thinks the public broadly supports the Senate proposal to end the tax break.
"It's something that resonates across the commonwealth and across the country," she said in an interview this week.
Lucas confirmed that she had received a new proposal from the data center industry last Friday to break the budget impasse between the Senate and House of Delegates, which opposes repealing the tax exemption, as does Gov. Abigail Spanberger.
"It was, in my opinion, not a serious proposal," she said.
House Appropriations Chairman Luke Torian, D-Prince William, confirmed Wednesday that Lucas had rejected the industry's latest proposal, which he said included options "for additional revenue that exclude the sales and use tax" exemption.
"We're waiting for them to come back to her with an improved proposal," Torian said.
The legal and political setbacks bring the data center industry to a crossroads in a state that has benefited greatly from the local and state tax revenues generated by data centers. A January report by the state tax department and economic development agency estimated that data centers provided a net benefit of $2.1 billion more than they cost in sales tax exemptions over a five-year period. Data centers accounted for 79% of the $156 billion in new capital investment in Virginia that then-Gov. Glenn Youngkin touted in his four-year term.
In Northern Virginia, the industry has enabled Loudoun County to lower its real estate tax rate to 80.5 cents per $100 in value — almost 32 cents per $100 lower than the real estate tax rate in neighboring Fairfax County. Prince William, with the second-highest concentration of data centers in the region, has a tax rate of 90.6 cents per $100 in value.
Terry Clower, director of the Center for Regional Analysis at George Mason University, said data centers provide invaluable support to the Northern Virginia economy, which has been hit hard by deep cuts in federal government employment and spending under President Donald Trump in his first 14 months back in the White House. Data centers require relatively few full-time employees to operate, but they're a major employer during construction, especially for electricians and other specialty trades.
"What message are we sending to the broader business community about how we grow our economy, at a time when we need to grow our economy beyond relying on the federal government?" Clower asked.
But data centers face an intensifying backlash, not only in Northern Virginia but in more rural localities across the state, because of concerns about noise, pollution, water use and an enormous demand for electricity that requires new electric transmission lines and substations to deliver it.
"From this point forward, the data center industry is not going to get everything it wants from local government," Petersen said.
The appeals court ruling, written by former Virginia Solicitor General Stuart Raphael, turned on a crucial technical defect in Prince William's public advertising of the Board of Supervisors hearing on the Digital Gateway rezoning requests.
The court found that the county had failed to ensure advertisement of the hearing in the Washington Post within the time limits required by state law. The circuit court judge in the lawsuit that Petersen brought on behalf of landowners and the American Battlefield Trust dismissed the case in late 2024, blaming the error on the newspaper, but another judge ruled last year that the county had violated the law and invalidated the three rezoning actions for the development of 2,100 acres, pending appeal.
Raphael wrote that a resident "who alleges and proves standing may enforce the mandatory public advertising requirements, even if the plaintiff knew about and actively participated in the public hearing."
The ruling came as vindication for Prince William residents who have fought the Digital Gateway rezonings for four years.
"The Digital Gateway represents everything that is broken with the data center industry," said Elena Schlossberg, executive director of the Coalition to Protect Prince William County. "From the distortion of local governance to the complete abdication of oversight on an industry that is taking too much — power, water and land — this community never relented."
Mac Haddow, president of the Oak Valley Homeowners Association, called the ruling "a complete and unequivocal victory for the rule of law, for transparent government, and for every citizen of Prince William County who expects their elected officials to follow the law, not bend it to accommodate powerful development interests."
Mark Rozell, dean of the Schar School of Policy and Government at George Mason, said "the citizens know that the courts can be a viable check" on data center projects.
"The opponents are going to be especially emboldened," said Rozell, who sees public sentiment turning against the industry.
"That's where the momentum is," he said, "and it's not going away."
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Read the stories from the Richmond Times-Dispatch's three-day series on data centers and the key issues they pose.
