Does Virginia's data center sales tax exemption cover power distribution equipment and environmental control systems, not just the servers themselves?

Plain-English summary

An electrical contractor working on a Virginia data center project paid sales tax on its purchases and, unable to get a refund directly from its vendors, filed a refund request with the Department, arguing the items qualified for Virginia's data center exemption. The Department initially denied the claim on two grounds: it couldn't confirm the purchases actually qualified for the exemption, and the property hadn't been shipped directly to the data center.

On appeal, the contractor won on both points. First, the Department confirmed — consistent with prior guidance — that the exemption doesn't require direct shipment to the data center site; how the property got there isn't the test, whether it functionally supports the exempt computer equipment is. Second, on the merits, the contractor's purchases fell into two categories that both qualified: a power distribution system delivering electricity to the server racks (letting the exempt computer/server equipment actually run), and a "hot aisle containment system" that helps maintain the proper temperature and humidity for the equipment to function. Virginia's data center exemption statute already exempts not just servers and computers but also equipment "used or to be used in the operation" of that computer equipment, and prior guidance had already established that power distribution gear and HVAC/cooling systems maintaining a data center's environment both fall within that scope. Because the contractor's specific purchases fit both categories, the Department found the exemption applied and sent the case back to process the refund.

What this means for you

Electrical contractors and other data center subcontractors

If you're supplying power distribution, HVAC, cooling, or similar infrastructure equipment for a qualifying Virginia data center project — not just the servers themselves — those purchases can also be exempt from Virginia sales tax, and you don't need to worry about whether the equipment was shipped directly to the data center site.

Data center developers and operators

When structuring a large data center build with multiple contractors and vendors, make sure every subcontractor understands that the exemption reaches well beyond the computer hardware itself, to include power and environmental control infrastructure — this can meaningfully affect overall project tax cost if properly claimed.

Accountants and tax professionals

This ruling reinforces the functional test established in P.D. 10-121: equipment qualifies for the data center exemption if it delivers power to, or maintains the proper environment for, exempt computer equipment — regardless of shipping logistics (P.D. 21-126). Keep the two-category framework (power delivery; environmental control) handy when evaluating a mixed data-center construction invoice for exemption eligibility.

Common questions

Q: Does the data center exemption cover more than just the servers?
A: Yes — it also covers power distribution equipment, chillers, HVAC systems, cooling towers, and similar equipment used to operate or maintain the proper environment for the exempt computer equipment.

Q: Does exempt equipment have to be shipped directly to the data center?
A: No. Prior Department guidance (P.D. 21-126) already established that direct shipment to the data center site is not required for the exemption to apply.

Q: What underlying data center has to qualify for this exemption to be available at all?
A: Under Va. Code § 58.1-609.3(18), the data center must be located in a Virginia locality, result in at least $150 million in new capital investment (after January 1, 2009), and create at least 50 new jobs paying at least 1.5 times the local prevailing average wage (after July 1, 2009).

Q: Does this ruling apply to my project?
A: Not automatically. This is a published ruling based on this contractor's specific facts and the underlying data center's qualification; your own project's eligibility depends on meeting the statutory investment and job-creation thresholds.

Citations and references

• Va. Code § 58.1-609.3(18) (data center exemption)
• P.D. 10-121 (power distribution and environmental-control equipment both qualify)
• P.D. 13-183; P.D. 19-64 (further exemption application)
• P.D. 21-126 (no direct-shipment requirement)

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 23-92

Original ruling text

August 3, 2023

Re: § 58.1-1821 Refund Application: Retail Sales and Use Tax

Dear * :

This will reply to your letter in which you protest the Department’s denial of a refund of sales and use tax submitted by * (the “Taxpayer”) for the period September 2018 through April 2019. I apologize for the delay in responding to your request.

FACTS

The Taxpayer, an electrical contractor, provided support to build a data center in Virginia. The Taxpayer paid sales tax on its purchases made during the audit period and was unable to receive a refund from the vendors. The Taxpayer filed a refund request with the Department, claiming that the purchases were exempt as they were used in a qualifying data center. After reviewing the information provided with the request, the Department denied the Taxpayer’s refund claim because it could not be determined if the purchases qualified for exemption. In addition, the refund was also denied because the property was not shipped directly to the data center. The Taxpayer appeals, contending the property was not required to be delivered directly to the data center in order to qualify for the exemption.

DETERMINATION

Virginia Code § 58.1-609.3 18 provides, in pertinent part, that beginning July 1, 2010, and ending June 30, 2035, retail sales and use tax does not apply to:

…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 the equipment exempted in this paragraph, provided that such computer equipment or enabling software is purchased or leased for use in a data center…that (i) is located in a Virginia locality; (ii) results in a new capital investment on or after January 1, 2009, of at least $150 million; and (iii) results in the creation on or after July 1, 2009, of at least 50 new jobs by the data center operator and the tenants of the data center, collectively, associated with the operation or maintenance of the data center provided that such jobs pay at least one and one-half times the prevailing average wage in that locality…

The Taxpayer cites Public Document (P.D.) 10-121 (6/29/2010), P.D. 13-183 (10/18/2013), and P.D. 19-64 (6/21/2019) to support the claim that the purchases at issue qualify for exemption from the tax. Further, the Taxpayer correctly notes that Virginia Code § 58.1-609.3 18 does not require that the property be delivered directly to the data center in order to qualify for the exemption. See P.D. 21-126 (9/21/2021). Therefore, at issue in this instance is whether the property used in the project qualifies for exemption pursuant to the statute.

Certain property included in the Taxpayer’s request was used to construct a power distribution system to deliver power to the server rack. This allows the data center to power and operate exempt computer and server equipment. In addition, the contract required the Taxpayer to configure a hot aisle containment system to provide the proper environment for the data center to operate equipment, such as computers.

Pursuant to P.D. 10-121, power distribution and other electrical equipment used to provide electricity to exempt equipment in data centers are exempt from the tax. In addition, the determination also concludes that: “[t]o the extent that chillers, computer room air conditioners (CRACs), heating, ventilating, and air conditioning (HVAC) systems, cooling towers, and similar items are used to provide the proper environment in the data center, e.g., temperature and humidity, such equipment would qualify for the data center exemption.” Based on the information provided by the Taxpayer with its appeal, the property included in the Universal (“Vendor 1”) invoices provide power, electricity, and the proper environment to exempt equipment in the data center. The property included in the NJ Sullivan (“Vendor 2”) invoices also qualify as “…specialized pieces of equipment that are specifically designed to ensure that the servers and other exempt equipment function properly.” P.D. 10-121. Accordingly, I find that the data center exemption applies to the property at issue.

CONCLUSION

Based on this determination, the Taxpayer’s refund request will be returned to the appropriate refund audit staff. The Taxpayer will be contacted regarding the documentation needed to process the refund. If any additional documentation is required, the Taxpayer must provide such documentation to the audit staff within 60 days of contact with the auditor.

The Code of Virginia section and public documents cited are available online at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s website. If you have any questions regarding the refund process, please contact the auditor. If you have any questions about this response, you may contact * in the Department’s Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/3725.G

Related Documents

10-121

13-183

19-64

21-126