Virginia Data Center Sales Tax Exemption: Thresholds, 2035 Expiry, and What It Means for a Project

Virginia's data center sales and use tax exemption in full: the $150M and 50-job thresholds, the $70M distressed-locality discount, the mandatory VEDP agreement with repayment obligations, the 2035 expiry, and the $928.6 million it saved the industry in FY23.

Northern Virginia is the largest data center market in the world — 13% of all reported data center operational capacity globally, by the Commonwealth's own legislative auditors (JLARC, *Data Centers in Virginia*, 9 December 2024). A single state tax exemption sits underneath a large part of that, and if a sponsor's model assumes it, the model has assumed the project clears a threshold most private deals do not come close to.

This page sets out the exemption as published: who qualifies, what it is worth, what happens if the conditions are missed, and the date it expires.

The rule in one table

Source: Va. Code § 58.1-609.3(18) (Virginia LIS).

Compare that with the state next door in our other worked example: Georgia sets a threshold per county, and 99 of its 159 counties sit at $25 million (worked through here). Virginia sets one figure for the whole Commonwealth, and it is six times Georgia's commonest threshold.

What is actually exempt, and what is not

The exemption covers "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" — and, usefully, "including chillers and backup generators used or to be used in the operation of the equipment exempted".

It does not apply to:

• computer software "sold or leased separately from the computer equipment", or
• "general building improvements or other fixtures" (same section).

So the shell, the structure and the fit-out of the building are taxable; the compute, the networking, and the chillers and generators serving them are not. On a nine-figure equipment order that distinction is worth millions, and it is also why the exemption does comparatively little for a developer whose spend is mostly concrete and steel.

Who qualifies — including tenants

Two features matter if you are reading a colocation deal.

The test is met collectively. The 50 jobs must be created "by the data center operator and the tenants of the data center, collectively", and "this exemption applies to the data center operator and the tenants of the data center if they collectively meet the requirements" (same section). A tenant need not itself invest $150 million; it can claim the exemption under the operator's qualification.

It extends across a campus. A qualifying data center "includes any data center facilities located in the same locality as the data center that are under common ownership or affiliation of the data center operator".

The practical reading: a sponsor saying "our tenants benefit from Virginia's exemption" may be perfectly accurate — and it tells you the benefit may be landing with the tenant rather than with the landlord you are investing alongside. Who captures a tax benefit depends on who buys the equipment, which depends on the lease. See what a hyperscaler lease contains.

"Distressed locality" is a two-part test, recalculated every year

From 1 July 2023, a distressed locality is one that has both:

1. an annual unemployment rate, for the most recent year available, greater than the final statewide average for that year; and
2. a poverty rate, for the most recent year available, exceeding the statewide average for that year.

Both, not either — and both against a moving statewide benchmark (same section). A locality that qualifies this year may not next year, which means "the site is in a distressed locality" is a statement with a date on it, not a permanent attribute. If a projection depends on the $70 million tier, it depends on a classification that is recomputed annually.

The agreement, and the repayment obligation

This is where Virginia is stricter than most published programmes, and it is the part an investor should actually want to read.

Before claiming the exemption, the operator "must enter into a memorandum of understanding with the Virginia Economic Development Partnership Authority" which at a minimum sets out:

• how the capital investment and the number of new jobs will be determined;
• the timeline for achieving the investment and job goals;
• "the repayment obligations should those goals not be achieved"; and
• the conditions under which repayment may be required (same section).

A programme that writes repayment terms into the entry document is telling you plainly that some participants will miss their targets. Georgia's equivalent signal is softer — its Department of Revenue "may require the applicant to obtain a bond" (discussed here). Virginia's is a mandatory, negotiated repayment schedule.

Question for a sponsor, then: has the MOU been signed, what are its investment and jobs milestones, what are the repayment terms, and who bears a repayment — the issuer, the sponsor, or the investors? That last one is rarely volunteered. The full diligence list is in questions to ask a sponsor.

It is reported on, every year and every two years

While claiming the exemption, an operator must file an annual report to VEDP covering "employment levels, capital investments, average annual wages, qualifying expenses, and tax benefit" for itself and its participating tenants. VEDP shares all of it with the Department of Taxation, and the two must publish a biennial report including aggregate qualifying expenses, the total value of the tax benefit, and "a return on investment analysis that includes direct and indirect jobs created by data center investment, state and local tax revenues generated" — delivered to the chairs of Senate Finance and Appropriations and the House Appropriations and Finance committees (same section).

Figures are aggregated, so you will not find a named project's benefit. But the programme's cost and claimed return are a matter of public record on a fixed schedule, which is more than can be said for most incentives.

What it is worth: $928.6 million in one year

From the legislative audit, not from a press release:

All from JLARC, *Data Centers in Virginia*, 9 December 2024.

Two things stand out. First, at $683 million of state revenue against a next-closest incentive of $74 million, this is not one incentive among many — JLARC calls it "by far the state's largest economic development incentive". Second, the median is $5.4 million while the total is $928.6 million, which tells you the distribution is extremely top-heavy: most of the money goes to a few very large claimants, exactly as the thresholds would predict.

The tax being avoided is itself layered: Virginia's retail sales and use tax comprises "a 4.3 percent state share, a 1 percent local option share, and additional 0.7 percent to 1.7 percent regional share, depending on the region" (same report). So the headline saving includes money that would have gone to localities, not only to Richmond.

The 2035 expiry, and the tiers written for giants

The exemption is scheduled to expire on 30 June 2035. That is inside the hold period of almost any data center equity investment made today.

JLARC put the industry's own view on the record: data center representatives "unanimously reported that expiration of the exemption would have a negative impact", and companies "typically consider the costs of data center ownership over a 15- to 20-year period when making location decisions". The report's Policy Option 8 is for the General Assembly to extend the expiry, and it suggests 2050 as the reasonable new date — while insisting the exemption "should continue to have an expiration date, because this is considered an effective practice to ensure periodic scrutiny of its need and effectiveness".

A separate extension already exists in the statute, and its thresholds are worth seeing written down. For an operator that signed an MOU on or after 1 January 2023:

Source: Va. Code § 58.1-609.3(19) (Virginia LIS).

Thirty-five billion dollars. One hundred billion dollars. These are not tiers a project qualifies for; they are tiers a company qualifies for, and only a handful of companies on earth could. Set beside Georgia's top tier of $250 million, they are the clearest statement available of who state data center incentives are now written for — and a useful corrective to any pitch implying that a single small building sits in the same policy category as the campus down the road.

Virginia in context: an exemption is the norm, not an edge

JLARC counted it: 34 states have a data center sales tax exemption and a further 4 have no sales tax at all, and every state bordering Virginia provides one. Virginia became the seventh state to adopt one, in 2008.

So the exemption is not what makes Virginia competitive — it is the entry fee for being considered. The differentiators are power, fiber, land and permitting, which is the argument made in why power is the constraint and data center markets. A sponsor presenting a tax exemption as the reason a site will win has the causation backwards.

Six checks on a Virginia project

1. Which threshold does it claim — $150M or $70M? And if $70M, which locality, and does that locality meet both the unemployment and poverty tests this year?
2. Has the VEDP memorandum of understanding been signed? Assumed, in negotiation and signed are three different states.
3. What are the repayment terms in it, and who bears a repayment?
4. Who buys the exempt equipment — landlord or tenant? That is who captures the benefit, and the lease decides it.
5. Does the model assume the exemption past 30 June 2035? If the hold runs beyond that, the model is assuming a future act of the General Assembly.
6. Is the equipment actually exempt? Compute, networking, chillers and backup generators serving them, yes. Separately sold software, building improvements and fixtures, no.

Next: Georgia's data center sales tax exemption for the same analysis where the thresholds are a sixth the size, and data center tax incentives for how these programmes are built in general.

For the engineering side of how a developer uses an exemption like this in siting and fiscal structuring, the vendor-neutral reference is *The Definitive Guide to AI Data Centers*, chapter 3.10.

Nothing here is investment advice, and nothing here is tax advice. See how this site is funded.