In short
Virginia has a 5.3 percent combined state and local sales tax. The state exempts computer equipment and enabling software bought or leased for a qualifying AI data center from that tax. Va. Code § 58.1-609.3(18), (19) The general threshold is $150 million in new capital investment and 50 new jobs that each pay at least 1.5 times the local average wage. VEDP Data Center Retail Sales & Use Tax Exemption Lower thresholds apply in distressed areas. The exemption, called the Data Center Retail Sales and Use Tax Exemption, is the state’s largest incentive. In fiscal year 2025 it brought a reported tax benefit of $1.94 billion. Biennial Report It runs through June 30, 2035, but a 2026 budget fight could end it early.
Virginia also allows an enterprise data center operator that owns and uses its own facility to use single sales factor apportionment for corporate income tax after a separate $150 million investment. Va. Code § 58.1-422.2 The state corporate income tax rate is a flat 6 percent. Va. Code § 58.1-400 Local governments charge their own business tangible personal property tax on AI data centers. Loudoun County’s 2026 rate is $4.15 per $100 of assessed value. Loudoun County
What is the Virginia AI data center sales and use tax exemption?
The DCRSUT exemption removes the Virginia sales and use tax from certain purchases. It applies to computer equipment and enabling software. The items must be used to process, store, retrieve, or communicate data inside a qualifying AI data center. VEDP Data Center Retail Sales & Use Tax Exemption The exemption covers both the state’s 4.3 percent tax and the 1 percent local portion, so the purchaser avoids the full 5.3 percent. Va. Code § 58.1-609.3(18), Virginia Tax Sales Tax Exemptions
A colocation facility and its tenants can use the exemption if they collectively meet the program’s capital investment and job targets. Virginia Economic Development Partnership, VEDP DCRSUT exemption guide, VEDP DCRSUT exemption page, VEDP Data Center Retail Sales and Use Tax Exemption
The exemption has been available since July 1, 2010, and is set to expire June 30, 2035. VEDP data center tax exemption guidance In FY2024 and FY2025 together, operators reported $80.6 billion in total investment and $3.23 billion in exempted tax. Biennial Report The program accounts for nearly 80 percent of all Virginia economic development incentive spending. Governing
What property qualifies for the exemption, and what does not?
The Virginia Tax Commissioner has listed the items that qualify. Ruling 10-121 An item qualifies if it supports the computing mission of the AI data center, now or in the future.
| Category | Qualifying | Not qualifying |
|---|---|---|
| Computing hardware | Servers, mainframes, data storage hardware, routers, switches, cabling, directors, wiring | |
| Power systems | Generators, radiators, exhaust fans, fuel storage tanks, electrical substations, power distribution equipment, cogeneration equipment, batteries | The fuel itself |
| Cooling systems | Chillers, CRACs, HVAC systems, cooling towers, water storage tanks, pumps, piping | |
| Monitoring and control | Systems that monitor power and distribution, and that remote control exempt equipment | |
| Physical support | Cabinets, battery racks, cable trays designed to keep exempt equipment working | |
| Software | Custom non prewritten software, or software sold or leased together with exempt equipment and used for data processing, storage, retrieval, or communication | Separately sold software, even if used for data processing |
| Building shell | Roofs, lighting, fencing, fire and burglar alarms, external surveillance, general building improvements |
Later purchases to upgrade, supplement, or replace existing exempt gear also qualify. Va. Code § 58.1-609.3(18), VEDP Data Center Sales and Use Tax Exemption Information Packet, VEDP Data Center Retail Sales and Use Tax Exemption
A 2023 Tax Commissioner ruling says you can store exempt equipment in a Virginia warehouse before moving it to the AI data center and still claim the exemption. The statute covers equipment used or to be used in the facility. Ruling 23-67
What are the investment job and wage thresholds?
You must meet three kinds of thresholds. All of them must be satisfied within a single Virginia locality.
Investment thresholds
New capital investment includes the cost of qualifying equipment and other buildout expenses. It does not include the cost of land or existing buildings, unless the land or building was bought from a government entity and placed back on the tax rolls. VEDP Information Packet You can add together investment across several AI data center facilities inside the same locality.
The table below shows the five eligibility levels.
| Eligibility tier | Minimum capital investment | Minimum new jobs |
|---|---|---|
| General | $150 million | 50 |
| Enterprise zone or high unemployment locality | $150 million | 25 |
| Distressed locality (since July 1, 2023) | $70 million | 10 |
| Extension to 2040 (MOU signed after 2022) | $35 billion total, across all facilities | 1,000, at least 100 at 1.5× wage |
| Extension to 2050 | $100 billion total, across all facilities | 2,500, at least 100 at 1.5× wage |
The general and distressed locality eligibility tiers come from Va. Code § 58.1-609.3(18). The 2040 and 2050 extensions are described on VEDP’s website and are codified at Va. Code § 58.1-609.3(19)(c) and (d)
Job thresholds
A new job must be full time. That means at least 35 hours a week for 48 weeks a year, or 1,680 hours a year, with standard employee benefits. VEDP Information Packet Dedicated contractor employees who work full time on site operations and maintenance, for example security or maintenance staff, can count. Construction contractors do not count toward the job threshold. A new job does not have to be physically located at the AI data center but must be in the same locality and associated with the operation or maintenance of the AI data center. VEDP Information Packet
Wage requirement
Every single job you count must pay at least 1.5 times the prevailing average wage in that locality. You cannot average wages across several jobs. VEDP Information Packet
How do operators claim and keep the exemption?
The MOU is a contract between the AI data center operator (on behalf of itself and its tenants) and the Virginia Economic Development Partnership. It details how to determine capital investment and job numbers, the performance period (normally three years), and the repayment terms. Va. Code § 58.1-609.3(18)(a), VEDP DCRSUT exemption page
The exemption is front loaded. You can start buying equipment tax free right after the MOU is signed. But if you fail to meet the targets by the deadline, you will owe back all the sales tax that was waived, plus interest. So keep close track of your progress.
A real property contractor who buys exempt equipment for the AI data center can use Form ST-11A with a copy of the exemption letter from Virginia Tax. Ruling 10-121
Every year you must send a report to VEDP with your headcount, total investment, average wages, and qualifying expenses and the tax benefit received. Va. Code § 58.1-609.3(18)(c) The state publishes a biennial summary, and your company data stays confidential. Biennial Report
How does single sales factor apportionment work for enterprise data centers?
Apportionment is how a state decides what share of a multistate corporation’s income it can tax. Virginia normally uses three factors, including the firm’s property in the state, its payroll in the state, and its sales in the state, with the sales factor counted twice. Va. Code § 58.1-408, Virginia Schedule 500A Instructions
A separate law lets an enterprise data center operator use only the sales factor. That means Virginia taxes only the share of the company’s total sales that go to Virginia customers. Va. Code § 58.1-422.2
To qualify, the taxpayer must own and run the AI data center substantially for its own use. A colocation provider does not qualify. Va. Code § 58.1-422.2(B) It must also sign a separate MOU with VEDP, committing to at least $150 million in new capital investment on or after July 1, 2015. Va. Code § 58.1-422.2(C) The election starts in the year VEDP certifies the investment is done.
For the first seven years of eligibility, the operator can also subtract its Virginia sales from the sales factor numerator. That makes the apportionment factor zero, meaning no Virginia corporate income tax on apportioned income during those years. Va. Code § 58.1-422.2(E)
This election is powerful, but it is unclear how many companies use it. A 2019 state study found no enterprise data center had yet switched to single sales factor at that time. JLARC Whether any have adopted it since is not publicly known.
The capital investment part of the law is non-severable. If a court struck it down, the whole enterprise data center apportionment option would fall. Va. Code § 58.1-422.2(D)
What is the Virginia corporate income tax rate and how does it affect AI data centers?
Virginia charges a flat 6 percent tax on the taxable income of every corporation organized under the laws of the Commonwealth and every foreign corporation having income from Virginia sources. Va. Code § 58.1-400 The starting number is federal taxable income, adjusted by Virginia modifications.
Virginia now uses a fixed-date IRC conformity, locked to December 31, 2025. It has decoupled from several federal provisions, including bonus depreciation and increased section 179 expensing. Tax alert So an AI data center owner must add back those federal deductions and compute depreciation under Virginia’s own rules.
Virginia also limits the deduction for business interest that the federal code disallows. For tax years starting on or after January 1, 2025, only 20 percent of the disallowed amount can be deducted for state purposes, down from 50 percent. EY Tax News This can raise Virginia taxable income for leveraged projects.
Multistate corporations apportion income using the standard three-factor formula unless they qualify for the single sales factor election. Colocation providers, which do not own and use the facility solely for themselves, generally must use the standard formula. 2024 Schedule 500A Instructions, Va. Code § 58.1-422.2
What local taxes apply to AI data centers in Virginia?
Virginia localities can impose several business taxes. The two most relevant for AI data centers are the business tangible personal property tax and the Business Professional Occupational License tax.
Business tangible personal property tax
The state code creates a separate classification for computer equipment and peripherals used in an AI data center. This lets a locality set a distinct tax rate just for that equipment. Va. Code § 58.1-3506(A)(43)
Loudoun County shows how this works. Its 2026 rate is $4.15 per $100 of assessed value. Loudoun County The assessment follows a declining schedule based on the equipment’s age.
| Year of equipment | Assessment ratio (of original capitalized cost) |
|---|---|
| 1 (bought prior year) | 60% |
| 2 | 45% |
| 3 | 30% |
| 4 | 15% |
| 5 | 10% |
| 6 and later | 5% |
Before 2026, equipment in year 5 and later was assessed at a flat 10 percent. The new schedule drops the rate on the oldest equipment (2020 and prior) from 10 percent to 5 percent but raises rates on newer assets. Loudoun County
Loudoun’s AI data centers brought in about $895 million in tax revenue in FY2025, and the computer equipment tax alone is projected to reach $1.37 billion in FY2026. LinkedIn/Data Center Frontier, NetChoice/Washington Business Journal Northern Virginia AI data centers paid roughly $1.3 billion in direct property tax in 2024. Chamber of Progress
Other counties offer reduced rates to attract AI data centers. Chesterfield and Stafford have cut their AI data center tax rates, and Louisa has cut its residential personal property tax rate. DC Byte, Chesterfield County, Stafford County, Louisa County Louisa County, for instance, signed a long-term agreement with AWS that lowers rates through 2050. DC Byte
BPOL tax
Many Virginia localities also levy a BPOL tax on gross receipts. Loudoun County imposes it on AI data centers and collected about $2.6 million from the sector in FY2020. NetChoice/Washington Business Journal Rates vary by locality and by business classification. A full county-by-county table is beyond this article’s scope, so check each county’s current BPOL ordinance.
Why is the DCRSUT exemption at risk and what could change in 2026?
The exemption has become the central dispute in Virginia’s 2026 budget. That leaves its future uncertain.
Why did the cost grow so fast?
When the exemption passed in 2008, the state’s fiscal note estimated an General Fund revenue loss of $1.54 million in Fiscal Year 2009. HB 1388 Fiscal Impact Statement By FY2025 the foregone revenue hit $1.94 billion, more than 1,200 times the original projection. Virginia Department of Taxation, Virginia Mercury The exemption now accounts for about 79 percent of all state incentive spending. Governing
Critics note that this foregone revenue reduces funding for public services. One estimate says it cost K-12 schools about $267 million in FY2024. Good Jobs First
What the Senate proposes?
The Senate budget, led by Senator Louise Lucas, would repeal the DCRSUT exemption on January 1, 2027. It would send the roughly $1.6 billion in annual savings to transportation, education, and local priorities. Virginia Mercury, Virginia Mercury
What the House proposes?
The House budget would keep the exemption but attach new environmental conditions. Operators would have to purchase renewable energy certificates, use carbon free backup generation, and pledge to be as energy efficient as possible. Virginia Mercury
The budget stalemate as of May 2026
A special session on April 23, 2026, adjourned in hours with no deal. The constitutional budget deadline is June 30, 2026. HB 1393 summary Governor Spanberger has said she will sign whatever agreement the two chambers reach, but she has not endorsed either position. Virginia Mercury
The Data Center Coalition proposed two alternatives that would raise revenue without repeal. The latest would generate $1.1 billion over the biennium. Both were turned down. Law firm analysis
Other 2026 AI data center laws already signed
Two significant bills became law despite the budget impasse.
HB 1393 makes Dominion Energy seek State Corporation Commission approval for rates that pass the cost of new generation to large-demand customers of 25 MW or more. The law carves out manufacturing, industrial, and consumer goods warehousing and distribution activities other than data storage, so the extra cost will fall mainly on AI data centers. Client alert
HB 153 creates a permit process for any facility consuming 100 MW or more. It requires site assessments of noise impacts within 500 feet of homes and schools, and it lets localities demand studies of water, agricultural, and historic impacts. Client alert
How the uncertainty is hitting development
The fight is already changing plans. Compass Datacenters reportedly pulled out of a Northern Virginia project in 2026, with Bloomberg reporting that uncertainty over the tax debate was a key factor. WUSA9 The company itself has not confirmed the reason, so the causal link is unconfirmed. Separately, Gigaland in Fauquier County withdrew an 800 MW proposal and now plans a much smaller facility. The developers withdrew their pitch and expect to submit plans for a smaller AI data center less than half that size. Inside Climate News
The competing arguments
Supporters point to huge local tax contributions. AI data centers directly supported 9,395 jobs in FY2025 and another 22,107 jobs across the state. Biennial Report The industry adds roughly $9.1 billion a year to Virginia’s economy. JLARC In Loudoun County, without AI data center property tax revenue, the residential real property tax rate would need to nearly double, adding about $5,856 to the annual bill on a median-value home. Chamber of Progress Henrico County used AI data center revenue to seed a $60 million affordable housing trust fund. Chamber of Progress
Opponents argue that the state-level cost is too high, that each AI data center creates relatively few permanent jobs (a typical 250,000 square foot building employs about 50 full-time workers, half of them contractors), and that the exemption fuels energy demand while returning only 48 cents in state revenue for every dollar of exemption cost (the exemption does not pay for itself). JLARC, JLARC report, JLARC incentives report
The outcome will determine whether Virginia stays the nation’s most active AI data center market or whether operators move more quickly to other states.
Key takeaways
- The DCRSUT exemption is still law as of May 2026, but a budget fight could end it on January 1, 2027. If you are planning a project, sign an MOU and begin qualifying purchases while the law is certain.
- Aggregate investment and jobs only within a single locality. Mixing across counties voids the aggregation.
- Each new job must individually beat the 1.5× wage threshold. Use reliable local wage data, and do not count construction workers.
- Use Form ST-11A and the exemption letter to buy equipment tax free even before you prove you met targets. But track progress closely, because missing targets triggers full repayment with interest.
- Enterprise data center operators that own and use their own hyperscale facilities should evaluate whether single sales factor apportionment can cut their Virginia corporate income tax. The election needs its own $150 million MOU with VEDP.
- Virginia’s corporate income tax rate is 6 percent, but addbacks for bonus depreciation and the reduced interest deduction will increase state taxable income versus federal. Build that into your financial model.
- Local BPPT rates vary widely. In Loudoun County, the rate is $4.15 per $100 of assessed value, with a declining assessment schedule. In other counties, negotiate a rate reduction through a performance agreement.
- The BPOL tax on gross receipts applies in many counties. Check each locality’s ordinance.
- Monitor the 2026 budget proceedings. A Senate repeal would cut the exemption for purchases starting in 2027. The House environmental conditions, if passed, would not repeal the exemption but would add compliance costs.
- The new Dominion rate structures and 100 MW permitting law are already in effect and will affect the cost and timeline of large projects, budget fight or not.
Frequently asked questions
Q:What is the sales tax rate on AI data center equipment without the exemption?
A:Without the DCRSUT exemption, the purchase is subject to the general Virginia state and local sales tax, which is usually 5.3 percent. Some localities may charge a slightly higher combined rate. Virginia Tax
Q:Can a colocation tenant claim the exemption on its own?
A:No. The colocation operator must sign the MOU for the facility and its tenants as a group. A tenant then separately signs a Participation Certificate and Agreement with the operator. Va. Code § 58.1-609.3(18)
Q:How long does it take to get an MOU approved from VEDP?
A:VEDP does not publish a standard processing time. The agency negotiates the MOU with each data center, and TAX processing typically takes about two weeks but may take longer. VEDP, VEDP Information Packet
Q:What happens if my project misses the job target by a small margin?
A:The MOU is a contract, and VEDP can require full repayment of all exempted tax plus interest if any target is not met. There is no published de minimis exception. VEDP Early and close communication with VEDP is essential.
Q:Does the single sales factor apportionment apply to colocation providers like Equinix?
A:No. The law defines an enterprise data center as one developed and owned by the taxpayer and operated mainly for its own use. Colocation providers do not qualify. Va. Code § 58.1-422.2(B)
Q:Are there other state-level tax incentives for AI data centers beyond DCRSUT and apportionment?
A:Virginia has general incentives like the Major Business Facility Job Tax Credit, but no other statewide programs written specifically for data centers.
Q:How does the 2026 budget fight affect my project if I have already signed an MOU?
A:If the Senate repeal passes, the exemption would end for purchases made on or after January 1, 2027, regardless of an existing MOU. Your MOU obligations to VEDP would remain, but new purchases would be taxed. Whether existing contracts would be grandfathered is not clear from the current proposals.
Q:Will the DCRSUT exemption apply to purchases I made before my MOU was signed?
A:No. The exemption covers only purchases made after the MOU is executed and while it remains in effect. Va. Code § 58.1-609.3(18)
Q:What is the BPOL tax rate for AI data centers in Loudoun County?
A:Loudoun County levies a BPOL tax on AI data centers at its general business services rate. The general Business Service BPOL rate is $0.17 per $100 of gross receipts and may change annually, so check the current county tax schedule for the classification that applies to your business. Loudoun County In FY2020 the county collected $2.6 million from that source. NetChoice/Washington Business Journal
Q:Where can I find the current BPPT assessment schedule for AI data center equipment in a specific county?
A:Assessment schedules are set by each locality’s commissioner of revenue. The schedule for Loudoun County is posted on the county’s business personal property tax page. Loudoun County For other counties, contact the commissioner’s office directly.
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Junde Liu, JD, LL.M. (Taxation) candidate at UF Law. Originally published on Compute Law Blog. This article is general information and does not constitute legal advice. Reading it does not create an attorney client relationship. The reader should not act on the basis of any content here without first consulting a licensed attorney in the relevant state. Last reviewed for accuracy May 23, 2026.