We replaced ours last year. The original one was from 1993 and I was afraid that it was about to fail. We got a more energy efficient one from Sears. They came and installed it two days after we bought it. They also installed an expansion tank on ours as DC requires it under code.
I am a plumbing contractor, fwiw. (although about 70% of what we do is HVAC)
Depending where you live $985 is a reasonable price for a standard 40 gallon water heater. I’m in SW Ohio and prices range from $700ish to $1200 for the highest priced plumbers. (like Roto-Rooter)
Expansion tanks for WHs are somewhat common and getting more common. It wouldn’t surprise me that they would be part of code where you are. They are here—in some places.
While replacing the gas valve shouldn’t/wouldn’t cost $985, I can see why they might push for a new WH. Depending on the age, I wouldn’t be surprised if it costs $400+ to replace the valve.
Could you price shop and get a better price? Probably. But $985 is not an outrageous price.