Virginia property and equipment tax for AI data centers

In short

Virginia does not impose a state property tax. Instead, three local taxes apply to AI data centers. First, real property and fixtures are taxed by counties and cities. A 2022 law says fixtures must be assessed using the cost approach. Second, computer equipment and peripherals are taxed as business tangible personal property at rates each locality sets. Third, a state sales tax exemption, the Data Center Retail Sales and Use Tax Exemption (DCRSUT), removes the 5.3 percent state sales tax on qualifying equipment purchases when the project meets certain investment and job thresholds. That exemption is a valuable incentive for Virginia data center operators, and it applies equally to AI workloads. Va. Code § 58.1-609.3(18), JLARC, Data Centers in Virginia (2024), JLARC, Data Centers in Virginia, Va. Dept of Taxation, Biennial DCRSUT Report, VEDP, Google AI data center qualifies for exemption, JLARC, Data Centers in Virginia (Dec. 2024). In 2025 and 2026, the General Assembly debated major changes, including a repeal attempt and a bill linking the exemption to clean energy requirements, but no resolution passed as of May 2026. The exemption is set to expire on June 30, 2035, with possible extensions to 2040 or 2050 for mega projects.

What is the Virginia Data Center Retail Sales and Use Tax Exemption?

The Data Center Retail Sales and Use Tax Exemption, or DCRSUT, lets a qualifying data center operator buy computer equipment and enabling software without paying Virginia’s state retail sales and use tax. The state rate is 4.3 percent, plus a 1.0 percent local add on for a total of 5.3 percent in most of the state. In Northern Virginia and Hampton Roads, an additional 0.7 percent brings the total to 6.0 percent. The exemption is claimed at the time of purchase or lease using Form ST-11A, not as a refund after the fact. Virginia Tax, VEDP FAQ.

To get the exemption, a data center operator must first sign a memorandum of understanding (MOU) with the Virginia Economic Development Partnership (VEDP). The MOU sets out the investment amount, job creation targets, and wage levels the operator must hit within a performance period that is usually three years. If the targets are not met, the exemption stops and the operator must pay back the tax it saved plus interest. VEDP DCRSUT Exemption FAQ.

The law covers a data center operator and its tenants if they collectively meet the requirements. A data center operator enters a memorandum of understanding on behalf of itself and its tenants. Va. Code § 58.1-609.3(18).

What property is exempt?

The exemption applies to computer equipment or enabling software purchased or leased for processing, storage, retrieval, or communication of data. That includes servers, routers, connections, chillers, and backup generators. The Virginia Tax Commissioner has given a detailed list of qualifying items. The list covers servers, mainframes, network infrastructure, cabling, switches, generators, electrical substations, chillers, computer room air conditioners (CRACs), HVAC systems, water storage tanks, monitoring equipment, cabinets, battery racks, cable trays, and software sold or leased with the hardware. Ruling 10-121.

The exemption does not cover general building improvements, other fixtures, or software sold separately from the computer equipment. Va. Code § 58.1-609.3(18)(a).

What are the eligibility thresholds?

The DCRSUT has different thresholds depending on the locality’s economic conditions. The general rule requires at least $150 million in new capital investment and 50 new jobs paying at least 1.5 times the prevailing local average annual wage. The job threshold drops to 25 if the data center is in an enterprise zone or a locality with an unemployment rate at least 150 percent of the statewide average. After July 1, 2023, a distressed locality with annual unemployment and poverty rates above the state average qualifies with only $70 million in investment and 10 new jobs, still at 1.5 times the prevailing average wage in that locality. Va. Code § 58.1-609.3(18).

Can the exemption last longer than 2035?

Yes. The base exemption runs from July 1, 2010 through June 30, 2035. An operator that enters an MOU on or after January 1, 2023 can extend the exemption to June 30, 2040 if it achieves $35 billion in new capital investment across identified localities and creates 1,000 direct new jobs, with at least 100 of those jobs at 1.5 times the prevailing average wage in the Commonwealth. An extension to June 30, 2050 requires $100 billion in new capital investment and 2,500 new full time jobs, again with at least 100 at 1.5 times the prevailing average wage in the Commonwealth. Va. Code § 58.1-609.3(19).

What reporting is required?

An operator claiming the exemption must file an annual report with VEDP that includes employment levels, capital investments, average annual wages, qualifying expenses, and the tax benefit received. Va. Code § 58.1-609.3(18)(c). The data is self reported and not independently validated. 2026 Biennial DCRSUT Report.

How large is the exemption in dollar terms?

In fiscal year 2025, 56 data center operators reported receiving a tax benefit, which totaled approximately $1.9 billion. That equals roughly 2 percent of Virginia’s entire state budget. The exempt equipment and software those operators purchased or leased in that year was worth approximately $33.2 billion. 2026 Biennial DCRSUT Report.

For the two year period FY2024 to FY2025, VEDP estimated that for every $1 of tax benefit, state and local governments received an estimated $1.70 in tax revenue from the AI data centers, yielding a positive return on investment. 2026 Biennial DCRSUT Report.

How does Virginia tax the real property and fixtures of an AI data center?

Virginia does not have a state property tax. Each county and city taxes real property separately. For an AI data center, real property includes the land, the building shell, and fixtures. Fixtures are items that are permanently attached to the building, such as generators, chillers, electrical substations, fuel storage tanks, piping, and cooling towers. Computer equipment and peripherals are not fixtures under this law. Va. Code § 58.1-3295.3(A).

In 2022, the General Assembly enacted a law that requires counties and cities to assess data center fixtures using the cost approach when those fixtures are taxed as real property. The cost approach means the assessor must estimate what it would cost to build a replacement today, which is called reproduction or suitable replacement cost, and then subtract physical, functional, and economic depreciation. Va. Code § 58.1-3295.3(A), (B). Before this law, localities used different methods, including the income approach and the market approach, which created uncertainty for owners. The cost approach gives a more predictable and uniform value.

The statute lists the fixtures it covers in detail. It includes generators, radiators, exhaust fans, fuel storage tanks, electrical substations, power distribution equipment, cogeneration equipment, batteries, chillers, CRAC units, cool towers, HVAC systems, water storage tanks, water pumps, piping, monitoring systems, and transmission and distribution equipment. It excludes computer equipment and peripherals, external surveillance and security equipment, and fire and burglar alarm systems. Va. Code § 58.1-3295.3(A).

Localities may still use other approaches for the land and the building shell. Prince William County, for example, uses the income approach to value the land and shell, and the cost approach for fixtures. The county classifies AI data centers into three categories for assessment. The first is turnkey, meaning fully built and equipped. The second is powered shell, meaning a shell with power and connectivity where a tenant finishes the interior. The third is under construction. For turnkey facilities, the power capacity measured in megawatts is the main factor driving assessed value. Prince William County 2024 Data Center Revenue Report.

Real property tax rates vary. In Loudoun County, the adopted FY2026 real property tax rate is $0.805 per $100 of assessed value, a sharp drop from $1.145 in FY2016. That reduction was helped by rising AI data center tax revenue. Loudoun County Data Centers. In Prince William County, AI data center real property tax revenue reached $144.2 million in tax year 2024. Prince William County 2024 Data Center Revenue Report.

How does Virginia tax AI data center computer equipment at the local level?

Computer equipment and peripherals used in an AI data center are taxed as business tangible personal property (BTPP), not as real property. They are a separate class for local taxation under Va. Code § 58.1-3506(A)(43). Va. Code § 58.1-3506. This separation lets a county or city set a different tax rate for AI data center computer equipment than the rate it applies to other business personal property, like office furniture. The assessed value is based on a percentage or percentages of original cost, or by such other method as may reasonably be expected to determine the actual fair market value. Va. Code § 58.1-3503(A)(17).

Because the tax is imposed by counties and cities, the rates and depreciation schedules vary. Loudoun County taxes AI data center computer equipment at its general BTPP rate of $4.15 per $100 of assessed value. It has not adopted a separate, lower data center rate. Effective tax year 2026, Loudoun updated its depreciation schedule for AI data center equipment. Under the new schedule, a server in its first year is assessed at 60 percent of its original cost, up from 50 percent. In year two, 45 percent, up from 40 percent. Year three remains at 30 percent. Year four drops to 15 percent from 20 percent. Year five stays at 10 percent. For business equipment and computer equipment in AI data centers, year six and beyond are now assessed at 5 percent, a new floor that replaced the previous 10 percent floor. Loudoun County BTPP Assessment.

For example, a $10 million server cluster in Loudoun County would be assessed at $6 million in year one, and the tax owed would be $6,000,000 × 0.0415 = $249,000. In year six, the assessed value would be $500,000, and the tax would drop to $20,750.

Prince William County had a computer equipment tax rate of $3.70 per $100 in tax year 2024, and the Board of County Supervisors raised it to $4.15 for tax year 2025. Prince William County 2024 Data Center Revenue Report. AI data centers accounted for $123.9 million of the county’s computer equipment and peripherals tax revenue in tax year 2024, out of $128.7 million total. [same report].

Henrico County offers a separate, lower tax rate for AI data center computer equipment and peripherals. The rate is $2.60 per $100 of assessed value for a facility that has at least one megawatt of electrical power capacity. The county’s general BTPP rate is $3.35 per $100. Henrico County Business Personal Property Tax.

In Southwest Virginia, the Lonesome Pine Regional Industrial Facilities Authority, covering Dickenson, Lee, Scott, Wise counties, and the City of Norton, adopted a unified AI data center equipment tax rate of $0.24 per $100. That is the lowest regional rate in the Commonwealth. Energy DELTA Lab. Chesterfield County also uses a $0.24 rate. NVTC/Mangum Economics 2020 report.

Virginia also has a machinery and tools tax under Va. Code § 58.1-3507, but it applies only to specific industries like manufacturing and mining. AI data center operations are not listed, so the machinery and tools tax does not apply. Va. Code § 58.1-3507.

Does the sales tax exemption apply to AI equipment?

Yes. The DCRSUT exemption makes no distinction between traditional cloud workloads and AI workloads. The law covers any computer equipment or enabling software purchased or leased for processing, storage, retrieval, or communication of data. That includes computer equipment or enabling software purchased or leased for the processing, storage, retrieval, or communication of data, including but not limited to servers, routers, connections, and other enabling hardware, including chillers and backup generators used or to be used in the operation of such equipment, as long as the equipment is part of a qualifying data center. Va. Code § 58.1-609.3(18). The exemption is technology neutral.

A 2024 study by the Joint Legislative Audit and Review Commission (JLARC) noted that distressed localities in Southwest Virginia may be able to attract AI data centers running certain AI workloads, such as training, because the lower $70 million investment and 10-job threshold makes entry easier. The study also found that modern AI data centers, including those for AI, consume far more electricity than typical commercial buildings. JLARC 2024.

What other state and local taxes apply to AI data centers in Virginia?

Local BPOL tax

Many Virginia localities impose a Business, Professional, and Occupational License (BPOL) tax on gross receipts. A data center operator that has a definite place of business in such a locality must obtain a license and pay the tax. A definite place of business exists when a company has a regular and continuous course of dealing at a location for 30 consecutive days or more. A staffed data center qualifies. However, the mere presence of servers and unmanned racks does not, by itself, create a definite place of business. Virginia Tax Ruling 14-193. So an operator with on site employees will owe BPOL based on its gross receipts from that location, typically at the business services rate. A colocation tenant that simply leases space and has no employees on site may not owe BPOL.

State corporate income tax

A data center operator that meets the $150 million capital investment threshold and signs an MOU with VEDP can elect single sales factor apportionment for Virginia corporate income tax purposes. Under the standard formula, a multistate corporation’s Virginia taxable income is calculated using a three factor formula consisting of property, payroll, and double weighted sales. Under the election, the formula uses only the sales factor, meaning Virginia sales as a share of total sales. This often reduces tax liability for qualifying enterprise data center operators with large Virginia property and payroll but relatively few Virginia sales. Va. Code § 58.1-422.2.

Bank tenants and the franchise tax exemption

Banks and other financial institutions in Virginia pay the state bank franchise tax instead of local business tangible personal property tax and BPOL. A data center tenant that is a bank will not pay local tax on its computer equipment. This exemption came to light in Manassas in April 2025 when the tenant at 9905 Godwin Drive, the Brickyard data center operated by Digital Realty Trust, filed paperwork identifying itself as a bank. The Manassas Commissioner of the Revenue confirmed that the tenant would owe no computer tax, a surprise to local officials who had anticipated considerable revenue. InsideNoVa. The statewide revenue impact of bank tenants claiming this exemption is not publicly known. Virginia Department of Taxation fiscal impact statement for SB 93.

What is the 2025-2026 legislative debate over the data center tax exemption?

The DCRSUT exemption, despite its economic impact, became the central sticking point in Virginia’s 2025 budget negotiations. The General Assembly adjourned without passing a budget, largely because the House and Senate could not agree on the exemption’s future. The exemption’s annual cost to the state is estimated at roughly $1.6 billion. MultiState.

A budget amendment by Senator Stuart proposed to repeal the exemption entirely, effective July 1, 2025. The amendment would have diverted $157.4 million to the School Construction Fund and $157.4 million to the Commonwealth Transportation Fund. That effort did not pass. LIS Budget Amendment 3-5.25 #2s, LIS SB800 Bill History. Another committee approved amendment would have added energy procurement and use reporting requirements to the annual DCRSUT report. LIS Budget Amendment 4-14 #7S.

In February 2026, the House of Delegates passed HB 897, sponsored by Delegate Rip Sullivan. This bill would tie continued DCRSUT eligibility to energy and environmental conditions for new AI data centers that enter an MOU after July 1, 2027. These conditions include not using dedicated fossil fuel generation as primary power, matching electricity needs with clean energy, transitioning away from diesel backup generators, and improving energy efficiency. Existing AI data centers would have one year to comply or lose the exemption on December 31, 2034. The Data Center Coalition opposed the bill, arguing it changes the rules for projects already built or under development. The Senate companion bill failed to advance, so by May 2026 both HB 897 and its Senate companion SB 465 had been defeated. HB 897 LIS, SB 465 LIS, Virginia Conservation Network.

The underlying exemption sunsets on June 30, 2035. The JLARC 2024 study presented a policy option under which, instead of a full or extended exemption, lawmakers could adopt a partial sales tax exemption after 2035 to continue some incentive while addressing energy use and revenue concerns. JLARC 2024.

Key takeaways

• The DCRSUT provides a state sales tax exemption for qualifying equipment, saving operators 5.3 percent to 6.0 percent upfront. Eligibility depends on signing an MOU and meeting investment and job targets within three years.
• Local real property tax on fixtures is now governed by a uniform cost approach, giving more predictability but still varying rates across counties.
• Computer equipment is taxed separately as business tangible personal property at local rates that range from $0.24 to $4.15 per $100 of assessed value. The depreciation schedule used can materially affect the tax bill.
• AI equipment receives the same treatment as traditional cloud hardware under all these provisions.
• A bank tenant can be exempt from local BTPP tax, which may surprise a locality counting on that revenue. Developers and tenants should account for this in leases.
• The future of the DCRSUT is politically charged. The exemption is scheduled to expire in 2035, but legislative fights over repeal, energy conditions, and mega project extensions are ongoing. Operators should monitor the General Assembly’s next moves closely.

Frequently asked questions

Q:What is the Virginia Data Center Retail Sales and Use Tax Exemption?

A:It is a state sales tax exemption that lets a qualifying data center operator buy computer equipment and enabling software without paying the 5.3 percent (or 6.0 percent) state sales tax. The operator must sign an MOU with VEDP and meet investment and job targets. Va. Code § 58.1-609.3(18).

Q:Who qualifies for the DCRSUT exemption?

A:A data center operator that makes at least $150 million in new capital investment and creates 50 new jobs at 1.5 times the local average wage. Lower thresholds apply in distressed localities. Va. Code § 58.1-609.3(18)(a).

Q:How do I claim the exemption?

A:You claim it at the time of purchase or lease by giving the seller a completed Form ST-11A. You must already have an MOU in place with VEDP. You claim the exemption at purchase by presenting the DCRSUT Exemption Certificate to the vendor. A refund is available for qualifying purchases made between the MOU date and the date you receive the certificate. VEDP Information Packet.

Q:Does the exemption cover AI specific hardware like GPUs?

A:Yes. The law covers any computer equipment used for processing, storage, retrieval, or communication of data, which includes GPU clusters for AI training and inference. There is no separate AI category. Va. Code § 58.1-609.3(18).

Q:How are data center fixtures taxed for real property?

A:Fixtures like generators, chillers, and electrical substations are taxed as real property. A 2022 law requires assessors to use the cost approach, replacement cost minus depreciation, when valuing these fixtures. Va. Code § 58.1-3295.3.

Q:How are servers and computer equipment taxed by localities?

A:They are taxed as business tangible personal property. Each locality sets its own tax rate per $100 of assessed value and its own depreciation schedule. Henry County’s general business tangible personal property rate is $1.55 per $100 of assessed value, while Loudoun County taxes computer equipment in a data center at $4.15 per $100. Virginia Tax, Loudoun County.

Q:Is the DCRSUT exemption going away soon?

A:The exemption is set to expire on June 30, 2035. The General Assembly debated repeal and condition bills in 2025 and 2026 but has not passed any changes. Mega projects can extend the exemption to 2040 or 2050 by meeting very high investment and job thresholds. Va. Code § 58.1-609.3(18) and (19).

Q:What other taxes should a data center operator plan for?

A:In addition to the sales tax exemption and local property taxes, an operator may owe local BPOL tax on gross receipts if it has a staffed office in a BPOL locality. For corporate income tax, a qualifying operator can elect single sales factor apportionment. Banks are exempt from BPOL and local tangible personal property tax on their own equipment. Va. Code § 58.1-3703, Va. Code § 58.1-1202.

Q:Why did the Manassas data center tenant avoid local computer tax?

A:The tenant at 9905 Godwin Drive identified itself as a bank. Banks pay the state bank franchise tax instead of local business tangible personal property tax, so the tenant owed no local tax on its servers. This is a notable exemption for banking tenants. InsideNoVa.

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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.