The Virginia data center tax exemption waives the state’s retail sales and use tax, which runs from 5.3% to 7% depending on locality, on servers, networking gear, cooling and power infrastructure, and enabling software bought or leased for a qualifying facility. To use it, the operator signs a memorandum of understanding with the Virginia Economic Development Partnership committing to minimum capital investment and job creation targets, and the Virginia Department of Taxation then issues an exemption certificate the operator presents to vendors. Miss the targets and every dollar of tax saved comes back with interest.
What the Exemption Covers
The exemption applies to computer equipment and enabling software purchased or leased for processing, storing, retrieving, or communicating data, including servers, routers, network connections, and other hardware directly involved in data operations.1Virginia Legislative Information System. Biennial Data Center Retail Sales and Use Tax Exemption Report Upgrades, supplements, and replacements for equipment that was part of the original investment also qualify.
A ruling from the Virginia Tax Commissioner confirmed that support equipment used to operate exempt data center equipment qualifies as well.2Virginia Tax. Rulings of the Tax Commissioner 10-121 That covers cooling infrastructure such as chillers, computer room air conditioners, HVAC systems, cooling towers, piping, pumps, and water storage tanks; power infrastructure including backup generators, radiators, exhaust fans, fuel storage tanks, electrical substations, power distribution equipment, cogeneration equipment, and batteries; enabling hardware like cabling, switches, directors, wiring, equipment cabinets, battery racks, cable trays, and remote monitoring systems; and computer software used for data processing, storage, retrieval, or communication when sold or leased with exempt equipment.
The tax being avoided is 5.3% in most of the state, 6% in Northern Virginia, Hampton Roads, and Central Virginia, and up to 7% in a few localities such as James City County and Williamsburg.3Virginia Tax. Retail Sales and Use Tax
Who Qualifies
Not every data center makes the cut. The exemption requires an executed MOU with VEDP and enforceable commitments on capital investment and jobs.
Standard Thresholds
In most Virginia localities, the operator must invest at least $150 million in new capital and create at least 50 new jobs tied to operating or maintaining the data center. Each of those positions must pay at least 150% of the prevailing annual average wage in the locality where the facility sits, excluding fringe benefits.4Virginia Economic Development Partnership. Data Center Retail Sales and Use Tax Exemption
Distressed Locality Thresholds
In localities where unemployment and poverty rates exceed the state average, the capital investment minimum drops to $70 million and the job requirement to 10 new positions. The 150%-of-prevailing-wage rule still applies. The reduced threshold has been available for qualifying localities since July 1, 2023.4Virginia Economic Development Partnership. Data Center Retail Sales and Use Tax Exemption
Operators can start using the exemption before actually meeting those targets. The MOU sets a performance date, and the company has until then to hit its numbers.
Tenants and Colocation
Since July 2012, tenants in multi-tenant data centers can use the operator’s exemption. The operator’s MOU with VEDP allows both the data center and its tenants to qualify, and a tenant’s equipment purchases and job creation can count toward the facility-wide thresholds.5Virginia Tax. Virginia Sales and Use Tax Exemptions
Tenants don’t inherit the exemption automatically. Each tenant executes a separate Participation Certificate and Agreement with the colocation data center that spells out performance targets, reporting obligations, and repayment responsibilities, binding the tenant to the same MOU terms as if it had signed the original agreement.6Virginia Economic Development Partnership. Virginia Data Center Sales and Use Tax Exemption
Once the operator provides the signed Participation Certificate to VEDP, the agency forwards it to the Virginia Department of Taxation, which issues a separate exemption certificate directly to the tenant, typically within about two weeks. Tenants can claim refunds of sales tax paid on qualifying equipment back to the date of the data center’s MOU, regardless of when the tenant actually signed its Participation Certificate.6Virginia Economic Development Partnership. Virginia Data Center Sales and Use Tax Exemption
How To Apply
The process starts with VEDP’s Division of Incentives, not the Department of Taxation. The operator and the Division negotiate and execute an MOU that details the facility’s location, projected capital expenditures, physical address, federal employer identification number, and job creation targets.4Virginia Economic Development Partnership. Data Center Retail Sales and Use Tax Exemption
After the MOU is signed, VEDP sends it to the Virginia Department of Taxation for review. Tax then issues an exemption certificate directly to the data center. No tax-exempt purchases can occur until that certificate is in hand.4Virginia Economic Development Partnership. Data Center Retail Sales and Use Tax Exemption The operator presents the certificate to vendors at the point of sale, and the vendor skips collecting sales tax on qualifying items.
For qualifying equipment purchased between the MOU’s effective date and the issuance of the exemption certificate, the operator can file a refund claim with the Department of Taxation to recover sales tax already paid.
Annual Reporting
Qualifying data centers file every year. Operators submit annual reports to VEDP covering employment levels, capital investments, average wages, qualifying expenses, and the tax benefits they’ve claimed. Every data center in the program owes this filing, regardless of when the facility began operating.1Virginia Legislative Information System. Biennial Data Center Retail Sales and Use Tax Exemption Report
Clawback if Targets Are Missed
If the final compliance report shows a data center failed to hit its investment or job creation targets by the performance date, the operator must immediately stop using the exemption and repay the full value of every tax benefit received, plus interest.4Virginia Economic Development Partnership. Data Center Retail Sales and Use Tax Exemption
The trigger doesn’t require waiting for the performance date. If the operator or VEDP determines at any point that the data center won’t meet its targets, the exemption ends immediately and repayment is due. When the operator’s exemption is revoked, its tenants lose theirs too and must independently repay the value of the tax benefits they received.6Virginia Economic Development Partnership. Virginia Data Center Sales and Use Tax Exemption
A single large facility can accumulate hundreds of millions of dollars in exempted taxes over several years, so the MOU commitments function as binding financial obligations, not aspirational goals.
Local Personal Property Tax Still Applies
The state exemption does not touch local taxes. Virginia localities separately levy a tangible personal property tax on data center equipment, and state law specifically authorizes them to set a distinct rate for computer equipment and peripherals in data centers. Rates vary by county, apply annually rather than only at purchase, and use depreciation schedules that reduce assessed value over time. For Loudoun County’s 2026 schedule, first-year data center computer equipment is assessed at 60% of original cost and steps down to a 5% floor at six or more years old, with “original cost” meaning the total capitalized cost including shipping, freight, installation, and sales tax.7Loudoun County, VA. Business Personal Property Tax Assessment Schedules Because data centers typically cycle through hardware every five years or so, a facility almost always carries a substantial base of recently purchased, highly assessed equipment. The state exemption does nothing to reduce this bill.
Pending Legislative Changes
The exemption is not politically settled. As of 2026, it remains contested in Virginia’s budget negotiations. The House of Delegates budget proposal has included a provision tying the exemption to clean energy conditions: banning fossil fuels as a primary power source, matching energy consumption with clean energy, transitioning from diesel backup generators to battery systems, and meeting energy efficiency standards. Operators that continued relying on fossil fuels would lose the exemption.8Virginia Mercury. Data Center Tax Exemption Changes Still Holding Up Virginia Budget Whether those conditions become law or the program continues in its current form is unresolved, and operators planning multi-year Virginia investments should track the outcome, because mandatory clean energy conditions would change the economics of qualifying.