A Major Shift in Local Tax Authority
The 2026 Virginia General Assembly session brought a significant expansion of local taxing authority that will affect businesses and consumers across the Commonwealth. Under the new law, localities may now impose an additional 1% sales tax if approved by voters in a referendum . This represents a major shift in how local governments can fund infrastructure projects—particularly school construction and renovation.
For businesses operating in Virginia, this change creates both compliance obligations and strategic considerations. Understanding the new law is essential for accurate tax collection, pricing decisions, and long-term planning.
What the New Law Allows
Under the legislation enacted in 2026, any Virginia locality may increase its sales tax rate by 1% if approved in a local referendum . Previously, only nine cities and counties had the authority to place such a measure on the ballot.
How Funds Must Be Used
The additional revenue must be dedicated to specific purposes:
School construction or renovation (the primary authorized use)
Public transportation (for certain localities that qualify)
The dedicated funding source cannot be applied to existing debt service for projects that began before the tax takes effect. However, it can help accelerate payment on new debt, strengthening local governments’ financial position.
Important Exemptions
The 1% local option increase does not apply to:
Food purchased for home consumption (groceries will continue to be taxed at the reduced rate of 1% statewide)
Essential personal hygiene products
This exemption structure means that approximately 20% of all retail spending remains at the lower rate, shielding essential household purchases from the additional tax burden.
Implications for Virginia Businesses
Point-of-Sale System Updates
Businesses operating in localities that approve the tax will need to update their point-of-sale systems to reflect the new rate. This is particularly important for:
Retailers with multiple locations across different localities
Online sellers shipping to addresses in affected localities
Service providers subject to sales tax
Compliance and Reporting
Businesses must ensure they are collecting and remitting the correct amount of sales tax based on the locality where the sale occurs. Virginia’s sales tax return process will reflect the new rates for affected jurisdictions.
Competitive Considerations
Businesses in border areas may face competitive pressure if neighboring localities do not adopt the tax. Consumers may shift purchasing behavior to avoid the additional 1% tax, particularly for large-ticket items.
Timeline and Next Steps
The first referendums under the new law are expected to appear on ballots as early as November 2026 . Localities that approve the tax will coordinate with the Virginia Department of Taxation to implement the new rate.
Businesses should monitor referendum results in their localities and prepare to update systems accordingly. The Virginia Department of Taxation will provide guidance on implementation timelines and filing requirements.
How Nova Tax & Accounting Services Can Help
At Nova Tax & Accounting Services, we help Virginia businesses navigate changes in tax law and ensure compliance with state and local requirements. Our team can assist with sales tax registration, filing, and strategic planning to minimize the impact of rate changes. For more information, visit https://novataxservices.com/ or schedule a consultation.
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