Virginia sales and use tax exemption for AI data centers

In short

Virginia exempts purchases of qualifying computer equipment and enabling software for AI data centers from its 5.3 percent state and local sales and use tax. The exemption, often called the Data Center Retail Sales and Use Tax exemption or DCRSUT, started in 2010 and is scheduled to expire June 30, 2035. Va. Code Ann. § 58.1-609.3(18) It covers all computer equipment used for data processing, which includes servers, networking gear, and AI hardware such as GPUs and accelerators. The exemption saved operators approximately $1.9 billion in the most recent fiscal year. Biennial Report, Va. Dep’t of Taxation, Jan. 2, 2026 A 2026 budget fight between the Senate and House threatens to end the exemption as early as January 1, 2027, eight years ahead of the current sunset. As of May 23, 2026, no budget agreement had been reached.

How the exemption works

The DCRSUT exemption removes the sales and use tax on computer equipment and enabling software that a data center purchases or leases for the processing, storage, retrieval, or communication of data. That description comes from the statute. Va. Code Ann. § 58.1-609.3(18)(a) The equipment must be bought or leased for use in an AI data center located in a Virginia locality.

The exemption took effect July 1, 2010. Its original sunset was June 30, 2020. The legislature pushed it to June 30, 2035. Va. Code Ann. § 58.1-609.3(18)(a) In 2023, lawmakers added extension pathways to 2040 and 2050 for the largest operators. 2023 Legislative Summary, Va. Dep’t of Taxation

AI hardware is covered under the same rules

The statute does not mention AI, machine learning, or GPUs. It covers computer equipment for processing, storage, retrieval, or communication of data, without regard to the specific workload. So GPUs, AI accelerators, and the networking equipment that connects them fall within the plain terms of the exemption. Va. Code Ann. § 58.1-609.3(18) No separate AI carve out is required. There is no published Virginia Tax ruling that singles out GPUs by name, but their function as data processing hardware means they are qualifying equipment.

What are the investment and job requirements?

A data center must meet capital investment and job creation targets to qualify. The investment and jobs can be aggregated across facilities in the same locality if they are under common ownership or affiliation of the operator. Va. Code Ann. § 58.1-609.3(18)(a) A long term lease of at least ten years counts as ownership for this purpose. Tenants inside a colocation facility can also qualify if the facility and its tenants together meet the thresholds. VEDP Information Packet

The table below shows the three eligibility tiers.

Sources include Va. Code Ann. § 58.1-609.3(18) and (19)

A new job is full time work of indefinite duration, at least 35 hours per week for a normal year of 48 weeks, or 1,680 hours per year. The job must pay at least 1.5 times the prevailing local annual average wage and include standard fringe benefits. Each individual job must independently meet the wage threshold, not an average across all new jobs. Construction contractors, customers, and suppliers do not count. VEDP Information Packet

Capital investment can include real property improvements and equipment. The cost of land and existing buildings does not count, unless the land or building was bought from a governmental entity and returned to the tax rolls. Used property generally does not count either, with one narrow exception. Property moved from outside Virginia can count if it represents no more than half of the total qualifying investment. VEDP Information Packet

What equipment qualifies?

A foundational tax ruling, Ruling 10-121, provides the most detailed list of qualifying property. The exemption covers the following equipment.

• Servers, mainframes, network infrastructure, data storage hardware used for data processing, storage, retrieval, or communication.
• Cabling, switches, directors, and wiring used in operating the exempt equipment. General building improvements are not covered.
• Generators, radiators, exhaust fans, and fuel storage tanks used to provide electricity. The fuel itself is not exempt.
• Electrical substations, power distribution equipment, cogeneration equipment, and batteries.
• Chillers, computer room air conditioners, HVAC equipment, and cooling towers for temperature and humidity control.
• Water storage tanks, pumps, and piping for cooling.
• Monitoring systems for power generation, transmission, and distribution.
• Cabinets, battery racks, and cable trays designed for exempt equipment.
• Custom non prewritten software.
• Prewritten software sold or leased with exempt equipment.

Va. Tax Comm’r Ruling 10-121

The exemption also applies when you buy equipment to upgrade, supplement, or replace the original exempt equipment. Va. Code Ann. § 58.1-609.3(18)(a)

Equipment stored off site still counts

If you deliver equipment to an off site storage location before installing it at the AI data center, the exemption is not lost. The statute covers equipment used or to be used in the AI data center. Two tax rulings, 21-126 and 23-67, confirm that off-site storage does not disqualify the equipment. Va. Tax Comm’r Ruling 21-126, Va. Tax Comm’r Ruling 23-67

Operating a data center near Ashburn, Google bought equipment months before its Loudoun County buildings were ready. The equipment was stored at a nearby warehouse. Under Virginia’s rule, those purchases remained exempt because the equipment was destined for the Virginia AI data center.

You must prove the equipment was used in Virginia

The taxpayer bears the burden of proof. You must show, by clear and cogent evidence, that the equipment on which you claim tax was accrued was actually used in the Virginia data center at the time the accrual was made. Va. Tax Comm’r Ruling 25-30 In practice, this means keeping thorough records, serial numbers, delivery documents, and installation plans.

How the MOU and performance period work

Before you can claim the exemption, the AI data center operator must enter into a Memorandum of Understanding with the Virginia Economic Development Partnership, or VEDP. The MOU spells out how capital investment and new jobs will be calculated, the timeline for reaching them, and what happens if the targets are not met. Va. Code Ann. § 58.1-609.3(18)(a), Va. Code § 58.1-609.3(18)(a), Va. Code § 58.1-609.3(18)(a)

The performance period is typically three years. If at the end of that period the investment or job numbers fall short, the operator must repay the full value of the tax benefit received, plus interest. VEDP DCRSUT page, Va. Code § 58.1-609.3(18)(a), Va. Code § 58.1-609.3(18)

Colocation tenants can also receive the exemption. A tenant signs a Participation Certificate and Agreement with the facility operator. The tenant’s exemption is retroactive to the date of the facility’s MOU, even if the tenant signs the certificate later. VEDP Information Packet

An operator must file an annual report with VEDP while claiming the exemption. The report covers employment levels, capital investments, average annual wages, qualifying expenses, and the tax benefit. Va. Code Ann. § 58.1-609.3(18)

Extending the sunset past 2035

The 2023 amendments added two extension milestones for operators that reach very high investment and job numbers. The table below summarizes them.

Va. Code Ann. § 58.1-609.3(19), 2023 Legislative Summary

These extensions are for a small number of hyperscale operators. In practice, the largest AI data center builders, Amazon Web Services, Google, Meta, and Microsoft, are the only entities likely to meet those numbers.

Why the exemption faces early termination in the 2026 budget

The DCRSUT exemption has grown far beyond what lawmakers projected when they created it. When legislators created the data center sales tax exemption in 2008, they were told it would cost up to $1.54 million a year. Virginia Mercury, Feb. 24, 2026 In fiscal year 2025, the reported tax benefit reached $1.94 billion. Over the two-year period covering fiscal 2024 and 2025, operators reported $80.57 billion in total investment and a combined tax benefit of $3.23 billion. Biennial Report The state’s Joint Legislative Audit and Review Commission found that the exemption accounted for nearly 80 percent of all economic incentive spending in Virginia in fiscal 2024. JLARC, Economic Development Incentives 2025 JLARC also found that about 90 percent of the AI data center investment that benefits from the exemption would not have occurred in Virginia without it.

The rapid increase in forgone revenue, along with concerns about energy demand, water use, and land use, led to a sharp legislative debate in the 2026 General Assembly session. More than 60 bills related to AI data centers were introduced. Fifteen passed and were sent to the Governor. MultiState, Mar. 30, 2026 But the central fight is over the sales tax exemption, and it is unfolding in the budget.

The Senate wants early repeal

The Senate budget, carried in SB30, would end the DCRSUT exemption on January 1, 2027. That is eight years before the statutory sunset. Law firm analysis Senate Finance Chair Louise Lucas stated that her position on ending the exemption is firm as concrete. Inside Climate News, Feb. 23, 2026 Legislative leaders rejected two compromise offers from the Data Center Coalition, including one that would have generated $1.1 billion in new state revenue over the two year budget period. Cardinal News, Apr. 23, 2026

The House wants conditions, not repeal

The House budget, carried in HB30, would keep the 2035 sunset. But it would add new environmental and energy efficiency conditions that operators must meet to keep the exemption. The Data Center Coalition called those conditions unattainable. Law firm analysis House Speaker Don Scott has focused on preserving union construction jobs tied to AI data center building. Virginia Mercury

The Governor has signaled she would honor contracts

Governor Abigail Spanberger has said publicly that the Commonwealth should maintain a stable business environment for companies. That statement reflects her position that the Commonwealth should uphold contracts it has made with businesses in the state. WDBJ7 report But no enacted law protects those MOUs if the legislature votes to end the exemption early.

The special session is ongoing, with no deal yet

The regular 2026 session adjourned March 14 without adopting a budget. A special budget session convened on April 23, 2026. As of May 22, 2026, the Senate and House remained far apart on the AI data center tax break. Cardinal News As of the date of this article, May 23, 2026, no budget agreement had been publicly announced. The compromise, if one comes, could range from full repeal to conditioned extension to something in between.

What the 2026 proposals mean for existing and future projects?

If the Senate’s proposed January 1, 2027 termination date becomes law, equipment bought or leased on or after that date would be subject to Virginia’s 5.3 percent sales and use tax, plus any regional add-ons. Northern Virginia, for example, adds an extra 0.7 percent. That would raise the cost of outfitting an AI data center by millions or tens of millions of dollars on a single large equipment purchase.

Several developers have already signaled that the uncertainty is affecting decisions. Compass Datacenters pulled out of a major Northern Virginia project, the Prince William Digital Gateway, in 2026. The withdrawal was driven mainly by local opposition, though sources also cited the tax exemption debate as a contributing factor. WUSA9, May 2026

No statutory grandfathering for existing MOUs

The biggest open legal question is whether the legislature would protect the exemption for operators that already signed MOUs. Delegate Luke Torian, the House Finance Chair, has said he believes signed MOUs should be honored. But that is a policy position, not a law. The DCRSUT statute does not say what happens if the exemption is repealed before its sunset date. Virginia’s constitutional prohibition on impairing contracts could provide a basis for operators to sue, but that argument has never been tested in a Virginia court in this context.

Until a budget passes with language that addresses existing agreements, every operator with an MOU faces uncertainty. The prudent step for counsel is to review each MOU’s terms. The MOU may include clauses that speak to what happens if the statutory exemption is removed. If it is silent, the risk of losing the exemption mid-stream is real.

Other data center bills that passed

While the tax exemption remains in limbo, several other data center bills did pass during the regular session and are now law. They illustrate the broader regulatory shift.

• Permit process for large projects. A new law establishes a site assessment and permit process for high energy use facilities, defined as those using 100 megawatts or more. The assessment must examine the facility’s sound profile on homes and schools within 500 feet, and localities may also require assessment of impacts on water, agriculture, and historic resources. MultiState
• Cost recovery for grid upgrades. In biennial review proceedings, the State Corporation Commission must take all measures to reasonably ensure that costs associated with customers having 25 MW or more of electric demand and a 75 percent or greater annual load factor are not subsidized by other customers and do not adversely impact other customers’ rates. Va. Acts of Assembly Ch. 1123, Law firm analysis
• Water reporting. Water utilities must report the total volume of water provided to data centers each month. MultiState

These changes, combined with the possible end of the sales tax exemption, mean the operating and regulatory environment for Virginia data centers is shifting in several ways at once.

Key takeaways

• The DCRSUT exemption covers all computer equipment for data processing, including GPUs and AI accelerators. No separate AI test exists.
• The standard thresholds are $150 million in new capital and 50 new jobs paying 1.5 times the local wage. Distressed locality thresholds are lower at $70 million and 10 jobs.
• Equipment delivered to off-site storage remains exempt while awaiting installation.
• The taxpayer must prove equipment was used in the Virginia data center, so thorough documentation is essential.
• The exemption currently runs through June 30, 2035 with extension pathways to 2040 and 2050 for very large operators.
• The 2026 Senate budget would end the exemption on January 1, 2027, while the House budget would add environmental conditions. As of May 23, 2026, no budget deal has been reached.
• Existing MOUs do not have statutory protection from early repeal. Review each MOU’s terms for what happens if the exemption is removed.
• Even if the exemption survives, new permitting, cost recovery, and water reporting laws are now in effect and will affect operations.

Frequently asked questions

Q:Does the exemption cover NVIDIA H100 GPUs?

A:Yes. The exemption covers computer equipment for data processing, which includes GPUs. No separate ruling names a specific GPU model, but the statutory language is broad enough to cover them. Va. Code Ann. § 58.1-609.3(18)(a)

Q:Can a colocation tenant claim the exemption if the landlord has an MOU?

A:Yes. Tenants can sign a Participation Certificate and Agreement, and their exemption is retroactive to the date of the facility MOU. The tenant and the facility must collectively meet the investment and job thresholds. VEDP Information Packet

Q:What happens if we miss the investment or job target?

A:You must repay the full value of the tax benefit you received, plus interest. The MOU governs the repayment terms. VEDP DCRSUT page

Q:Can we combine investment and jobs across two buildings in different counties?

A:No. Capital investment and jobs can be aggregated only within a single locality. You cannot combine two facilities in different counties to meet the threshold. VEDP Information Packet

Q:What is the sales tax rate that we avoid?

A:The combined state and local rate is 5.3 percent. Some regions add a regional levy. For example, Northern Virginia adds 0.7 percent, making the total 6.0 percent. Va. Tax Bulletin 20-8

Q:When must we enter into an MOU?

A:You must sign the MOU with VEDP before you claim the exemption. There is no statutory deadline, but VEDP and Virginia Tax will expect the MOU to be in place before exempt purchases begin. Contact VEDP early in project development. VEDP DCRSUT page

Q:What equipment is not exempt?

A:General building improvements, fixtures, separately sold taxable software, fuel, the cost of land, and used property generally do not qualify. The exemption is for computer equipment and enabling software purchased or leased for the processing, storage, retrieval, or communication of data, including enabling hardware such as chillers and backup generators. Va. Tax Comm’r Ruling 10-121, Va. Code Ann. § 58.1-609.3(18)(a)

Q:How do we document the exemption at purchase?

A:A real property contractor provides the seller a Virginia Form ST-11A and a copy of the exemption letter that Virginia Tax issued to the qualifying data center. Va. Tax Comm’r Ruling 10-121

Q:What is the current status of the 2026 budget fight?

A:The regular session ended without a budget. A special budget session began April 23, 2026. As of May 23, 2026, the Senate and House had not reached an agreement on whether to end or condition the exemption. Cardinal News, Cardinal News

Q:Can we rely on the exemption for a project starting in 2027?

A:If the Senate proposal passes and the exemption ends January 1, 2027, equipment bought on or after that date would be taxable. Until a budget is enacted, you cannot rely on the exemption beyond 2026. If the House position prevails, the 2035 sunset would remain, but you would need to meet any new environmental conditions that the final budget imposes.

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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.