Data Center Tax Policy Issues
The information below discusses Virginia’s local (city/county) and state-level tax policies related to data centers.
Data Center Taxes in Virginia
Virginia taxes “computer equipment and peripherals” as local business personal property (separate from real estate). As shared in the next section, local tax rates vary widely, and many counties create a special, reduced class for data-center gear (CX).
The state also exempts qualifying data-center equipment from retail sales and use tax through 2035 (separate from local personal property), unless the General Assembly votes to extend the Sunset Law provision.
Examples of Virginia Jurisdictions’ Local Data Center Taxes
Local tax rates on data center equipment vary widely:
Northern Virginia: Northern Virginia counties generate major revenue by taxing data center equipment at rates from $2–$4 per $100.
Prince William County: Prince William County has rapidly increased its “computer & peripherals” tax rate over the past decade, climbing from $1.25 per $100 of value in 2012–2019, to $2.15 by 2023, to $3.70 for 2024, and then to $4.15 for 2025. pwcva.gov
Loudoun County: Similarly, Loudoun County applies a rate of $4.15 per $100 to computer equipment in a data center, the same base as general business personal property, which funds a major share of county operations. loudoun.gov
Henrico County: Henrico County’s approach illustrates how localities can use deep temporary incentives to seed a new industry, then adjust rates as the tax base grows. In 2017, it created a special tax category for data center computer equipment, decreasing the rate by 88% from $3.50 to 40 cents per $100 to attract investment. As the county successfully established itself as a data center hub, it has since raised the rate to $2.60 per $100 for new projects as of July 2025, balancing competitiveness with increased revenue needs. henrico.gov
Chesterfield County: Chesterfield County is notable for entering into long-term Economic Development Authority (EDA) agreements that lock the data center equipment rate at 24 cents per $100 for 30 years, protecting companies from future countywide increases. chesterfieldfits.com
Hampton Roads: In the Hampton Roads region of Virginia, only the City of Virginia Beach posts a formal, nationally promoted “data center equipment” rate, and it’s highly competitive at 40 cents per $100 assessed value, along with generous accelerated depreciation allowances. The rest of the region’s 17 jurisdictions use the generic business personal property rate for server/computer infrastructure. yesvirginiabeach.com
Outside Major Metro Areas: Outside the state's major metros, data center tax strategy diverges sharply. Pittsylvania County applies its general personal property tax rate — $9 per $100 — to data center equipment, highlighting the cost disparities and the absence of a specialized category that metropolitan counties use to compete for development. pittsylvaniacountyva.gov
In summary, Virginia local rates on data-center equipment span sub-25 cents to $4–$5-plus per $100 of assessed value, with depreciation schedules (assessment ratios over years 1–5+) just as important to the effective tax bill.
Virginia’s Data Center 2035 Sunset Tax Law
Overview
Currently, qualifying data center equipment and enabling software are exempt from the state retail sales and use tax through June 30, 2035 under Code § 58.1-609.3(18).
The exemption applies to equipment used for data processing, storage, communication, and related cooling/backup systems, subject to capital investment and job creation requirements.
This exemption will expire on June 30, 2035, unless the statute is extended or modified. law.lis.virginia.gov
As of now, there is no fixed “data center tax rate” that the Commonwealth will automatically charge after the 2035 sunset. If the exemption lapses, data center equipment would revert to being taxable under Virginia’s standard retail sales and use tax rates. tax.virginia.gov
So, the future “tax” would be whatever Virginia’s general sales and use tax is at that time, unless the exemption is renewed or replaced by a new statute.
Proposed Changes to the Sunset Law (Based on Legislative Proposals and Analysis)
There is an increasing level of discussion and even proposed legislation in the 2026 General Assembly to amend the exemption. Based on proposed bills and stated positions, three scenarios are emerging:
Allow Full Expiration
Without legislative action, the exemption would simply lapse, and data centers would become subject to the full state sales and use tax on the affected equipment. vedp.org
Some proposals (e.g., SB 800 amendments) have gone further and sought to accelerate that expiration to July 1, 2025.
Partial or Phased Exemption
The Joint Legislative Audit & Review Commission (JLARC) in its December 2024 Report 598, recommends another option: allow the full exemption to expire in 2035, but maintain a partial (reduced rate) exemption through 2050, balancing revenue needs with competitiveness. JLARC 2024 report
Under the current statute, there is a pathway to extend the exemption beyond 2035 by entering into Memorandums of Understandings with the Virginia Economic Development Partnership (VEDP), but only for data centers meeting very high thresholds: vedp.org
- To extend to 2040: approximately $35 billion new capital investment and 1,000 new jobs.
- To extend to 2050: approximately $100 billion investment and 2,500 new jobs.
Legislative Repeal / Negotiated Sunset
SB 1425 (2025) proposed that the data center sales and use tax exemption (and any extensions of it) expire on July 1, 2025, with revenues redirected toward schools, roads, and bridges. No action was taken during the 2025 General Assembly session.
There was also HB 1600 Amendment 3‑5.25 #2h introduced to extend the sunset from 2035 to June 30, 2050 for equipment used in data centers.
Biennial Data Center Reporting Requirement
State law requires all data centers claiming the exemption to report certain information to VEDP annually. Such information includes employment levels, capital investments, average annual wages, qualifying expenses, and tax benefits, and such other information as VEDP determines is relevant. Data center operators must submit the annual report to VEDP regardless of when such operators locate a new data center in the Commonwealth. Accordingly, VEDP received 56 annual reports from data center operators for Fiscal Year 2024 (June 30, 2024), of which 48 reported receiving a tax benefit, and 62 reports for Fiscal Year 2025 (June 30, 2025), of which 56 reported receiving a tax benefit.
The latest report, filed by the state tax commissioner, was dated Jan. 2, 2026. Information from that report is below.
Jobs, Investment, and Tax Benefit Information Reported by Data Center Operators
During Fiscal Year 2024, data center operators reported to VEDP 1,197 net new jobs and investment of approximately $32.0 billion, of which approximately $21.7 billion was equipment or software that was exempt from the sales tax. For Fiscal Year 2025, data center operators reported to VEDP 1,610 net new jobs and an investment of approximately $48.6 billion, of which approximately $33.2 billion was exempt from sales tax.
Tax Exemption
Data center operators reported to VEDP an aggregate exempt equipment and software investment of approximately $21.7 billion in Fiscal Year 2024, for an aggregate reported tax benefit of approximately $1.3 billion. For Fiscal Year 2025, data center operators reported to VEDP an aggregate exempt equipment and software investment of approximately $33.2 billion and an aggregate reported tax benefit of approximately $1.9 billion.
The estimated tax benefit reported by data center operators reflects the total tax savings to the data center operators and the corresponding negative revenue impact to the Commonwealth, including the General Fund, nonGeneral Fund, and local revenue impact.
Virginia’s Data Center Retail Sales and Use Tax (DCRSUT) exemption program is essential for maintaining Virginia's lead in data center development, given the broad adoption of this sort of incentive by competitor states, according to VEDP. Specifically, JLARC has estimated that more than 90% of data center investment would not have taken place but for the tax exemption.
Applying this assumption to the latest reported data, VEDP estimates that eliminating the tax exemption on data centers would reduce net revenues by nearly $1.3 billion over five years, based on investments and employment reported in FY 2024 and FY 2025. In other words, the absence of the tax exemption would cause a reduction of almost $1..3 billion in net. bottom-line state and local revenues over this period compared to the status quo.
Jason El Koubi, VEDP’s president and CEO, wrote: “These findings underscore that, if Virginia seeks to maintain its leadership in this sector, we must offer competitive, predictable policies that enable companies to forecast long-term costs with confidence, including the net impact of incentives. Incentive programs should keep pace with emerging trends and remain comparable to offerings in competitor markets. With competition intensifying, Virginia could risk forfeiting the substantial growth and tax revenues this industry and its supplier ecosystem are projected to deliver unless these considerations remain central to future policy decisions,”
Considerations for Localities in Formulating a Data Center Tax Strategy
Best practices for localities of any size to consider in formulating their data center tax policies:
Start with the end in mind.
A strategic data center tax policy is more than just winning projects without giving away the base. Do you want to:
become home to a growing number of multiple data centers of all types?
just target large hyper-scalers?
be in position to welcome one or two given your site availability?
The answer shapes how you optimize policies for certainty, competitiveness, and sustainability, not just the “lowest possible rate.”
Publish a clear, bankable schedule (no surprises).
Predictability is key. For example, offer a competitive intro rate (for examplee, the region’s 25th–50th percentile) and pair it with a known step-up over 5–10 years or a performance-triggered step-up (MW online, capex, payroll).
Another “no-surprises” approach is to spell out the depreciation table (assessment ratios by year) up front; this often matters more than the nominal rate.
Separate the levers.
Consider keeping a special class for “computer and peripherals used in a data center” distinct from general personal property; consider a lower rate for long-lived power/cooling gear where permitted (some localities classify differently)
Use project-specific service/performance agreements with EDA “true-up” grants to keep a data center’s net rate at the negotiated baseline even if the county later raises the countywide rate.
Tie benefits to community protections and benefits.
Make the reduced rate contingent on things like design standards, noise/water limits, local hiring/credentialing, grid upgrades, and CBAs (community benefits).
Add claw backs if MW, jobs, or investment don’t materialize.
Consider and promote the ways data center taxes from could help improve the community.
Reward scale and staying power.
Consider rate tiers tied to sustained load (e.g., ≥50 MW, ≥100 MW) and long-term contracts, aligning with utility planning and PSC expectations. (VA PSC context matters for reliability and major-customer frameworks.)
Pair tax policy with certainty on speed.
Many wins hinge on predictable permitting and site readiness as much as tax. Package the rate with fast-track zoning/permitting SLAs, pre-served sites, and published power/water timelines.
Consider a start low and raise later approach.
This is how NOVA and Henrico built their data center business.
To do so, disclose your approach on Day 1. A published, predictable escalator (for example., an increase of 10 cents per $100 each 2–3 years) is far better than ad-hoc, surprise hikes. Chesterfield is applying this today.
Avoid bait-and-switch – embrace total transparency.
Midstream, unexpected changes in taxes or “by right” status may erode trust and can chill the pipeline. So, if future increases are likely, guarantee stability for the term (e.g., 10–30 years) via performance-based grants that offset any countywide rate changes.
Recognize the Uncertainty of the Sunset Law.
All data center investors with their eyes on Virginia locations are aware of the 2035 Sunset Law. An increasing number of discussions and even proposed, but not passed legislation, around this law has now introduced uncertainty around long-term capital planning. Potential tax policy considerations that help data center investors hedge the Sunset risk while also protecting localities may be a way to differentiate a location in being data center-ready.
Expect and Plan for Change.
The sheer pace of innovation with digital infrastructure means that your tax policies must be reviewed and discussed annually. One example: Henrico-based Hyper Solutions are designing for next-generation data center rack densities and improved energy/cooling efficiency. Industry sources show similar technologies support 1 MW-per-rack loads and major reductions in footprint and water use.
Arrive at a “Win-win” Data Center Tax Strategy
The optimal data center tax policies arrive at a “win-win” model, one that hedges against policy uncertainty (e.g., Sunset Law) and anchors responsible local growth. What this means:
For investors, create certainty through:
Long-term agreements or MOUs that lock in your eligibility for incentives over a defined investment and performance period, providing predictability even if the state modifies or ends the exemption.
Escalator or step-down provisions that ensure any future changes are phased, not abrupt, maintaining stable cost forecasts.
Complementary local incentives (e.g., streamlined permitting, fee offsets, local tax credits) that remain in place regardless of state actions, keeping your total cost of operation competitive.
For the locality, these same mechanisms:
Protect the local tax base by tying benefits to measurable outcomes like capital investment, local hiring, and energy efficiency.
Balance fiscal exposure. If state incentives shift, the locality retains flexibility to adjust local tools without destabilizing existing agreements.
Reinforce community benefit by ensuring projects deliver long-term infrastructure, workforce, and sustainability value.
This layered, performance-based structure gives data center investors the confidence in a financial environment while giving localities control and resilience — a true “win-win” model.
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