Virginia State Data Center Tax Incentives

Virginia is home to the largest data center market in the world, hosting nearly 150 hyperscale facilities — about 35% of the global total. Data centers in the state benefit from dense fiber infrastructure, low electricity costs with expanding renewable options, competitive construction expenses, and a favorable tax climate.

Overview of Virginia Data Center Incentives

Virginia offers two key tax incentives to support data center development:

1. The Data Center Retail Sales and Use Tax Exemption (DCRSUT), which reduces upfront costs by exempting qualifying equipment and software purchases from sales tax.
2. And Single Sales Factor Apportionment, which lowers corporate income tax liability by basing it solely on in-state sales for eligible enterprise data centers. Additionally, several localities have reduced business property tax rates on data center equipment, further enhancing Virginia’s appeal for data center development.

For more on Virginia’s data center market and incentives, the Viriginia Economic Development Partnership offers a vast amount of information and contact links for domestic and international businesses.

Key Incentives Available to Virginia Data Center Developments

1. Data Center Retail Sales and Use Tax Exemption (DCRSUT): Virginia’s Data Center Retail Sales and Use Tax Exemption (DCRSUT) is a targeted incentive designed to attract and support data center development by reducing the cost of qualifying equipment and software. Virginia was the first state to extend this benefit to colocation tenants.

Here are the key requirements and benefits:

Requirements

• The data center must enter into a Memorandum of Understanding (MOU) with the Virginia Economic Development Partnership (VEDP).
• The facility must be located in Virginia and may be either an enterprise or colocation data center.
• General eligibility thresholds:
  • $150 million in new capital investment.
  • 50 new jobs located at the data center, each paying at least 150% of the local average wage (excluding benefits).
• Distressed locality thresholds (as of July 1, 2023):
• $70 million in capital investment.
• 10 new jobs meeting the same wage criteria.
• Extensions of the exemption are available:
• To 2040: $35 billion investment and 1,000 new jobs.
• To 2050: $100 billion investment and 2,500 new jobs.
• Performance targets must be met within three years of signing the MOU, or the exemption must be repaid.
• Annual and final reporting to VEDP and the Virginia Department of Taxation is required.

Benefits

• Exemption from retail sales and use tax on qualifying purchases.
• Tenants of colocation data centers may also qualify through a Participation Certificate and Agreement.
• The exemption applies to purchases made after the effective date of the MOU.
• Helps reduce upfront capital costs and improve ROI for data center developers.

Qualifying Purchases

Items that qualify for Virginia’s Data Center Retail Sales and Use Tax Exemption (DCRSUT) include:

• Servers, mainframes, network infrastructure, and data storage hardware
• Cabling, switches, directors, wiring, and similar items used in exempt equipment
• Generators, radiators, exhaust fans, and fuel storage tanks used to provide electricity
• Electrical substations, power distribution equipment, cogeneration equipment, and batteries
• Chillers, computer room air conditioners (CRACs), HVAC systems, and cooling towers
• Water storage tanks, pumps, piping, and related cooling system components
• Monitoring systems for power generation and distribution equipment
• Cabinets, battery racks, and cable trays designed for exempt equipment
• Software sold or leased with exempt equipment for data processing, storage, or communication
• Custom software developed specifically for one customer

General building improvements (e.g., lighting, roofing, fencing) and separately sold software do not qualify.

2. Single Sales Factor Apportionment: Virginia offers Single Sales Factor Apportionment for qualifying data center enterprises, which can significantly reduce corporate income tax liability. You can read the full legal details in § 58.1-422.2 of the Code of Virginia. Here’s how it works:

• Eligibility: To qualify, a company must enter into a Memorandum of Understanding (MOU) with the Virginia Economic Development Partnership (VEDP) and commit to a minimum capital investment of $150 million in an enterprise data center in the state.
• Definition of Enterprise Data Center Operations: These operations must involve housing IT equipment (like servers and routers), managing digital data, and providing services such as web hosting or telecommunications. The facility must be developed and owned by the taxpayer and operated primarily for its own use or that of its affiliates.
• Tax Calculation Method:

• • From July 1, 2017, onward, qualifying companies apportion their Virginia taxable income based solely on sales within the state, rather than a combination of property, payroll, and sales factors.
  • This method benefits companies with significant property and payroll in Virginia but sales elsewhere, as it reduces the portion of income subject to Virginia tax.

Why Virginia is an Ideal State for Data Center Development

Virginia, the world’s largest data center market, is an ideal state for data center development. It offers extensive fiber-optic connectivity, reliable and scalable power, attractive tax incentives, a skilled tech workforce, low natural disaster risk, and a well-established data center ecosystem.

• Virginia hosts the largest data center market in the world and is home to 35% (almost 150) of all known hyperscale data centers worldwide.
• The state has a very strong, supported data center development program.
• Virginia has extensive fiber-optic infrastructure and is a major internet traffic hub.
• The state offers reliable and scalable power with growing access to renewable energy.
• Business incentives include tax exemptions and streamlined permitting for data centers.
• A skilled tech workforce is supported by nearby universities and federal agencies.
• The region has low risk of natural disasters, ensuring operational stability.
• A mature data center ecosystem attracts major cloud providers and support industries.