Rulings of the Tax Commissioner

June 20, 2025

Re: Retail Sales & Use Tax: Ruling Request

Dear *****:

This letter is in reply to your request for a ruling on behalf of ***** (the “Taxpayer”) regarding the Virginia retail sales and use tax treatment for specialized tools and dies.

This ruling is based on the facts presented as summarized below. Any change in facts or the introduction of new facts may lead to a different result.

FACTS

The Taxpayer is a manufacturer of packaging products for other manufacturers, wholesalers, and retailers. As part of its normal operations, the Taxpayer purchases tooling, such as cutting dies and printing plates for use in its operations exempt from the Virginia retail sales and use tax in accordance with the manufacturing exemption. Occasionally, the Taxpayer purchases tooling and dies specific to a customer’s packaging requirements and charges the customer for the cost of the specific tool or die at which time title passes to the customer. The specific tool or die is stored at the Taxpayer’s facility and used in its manufacturing process. Either after the useful life of the tool or die or upon request by the customer, the Taxpayer ships the specific tool or die to the customer. The Taxpayer seeks guidance on the application of the Virginia sales and use tax to its tools and dies purchased and transferred to specific customers.

RULING

Strict Construction of Exemptions

The Department has the authority to interpret and enforce the laws of the Commonwealth governing taxes in accordance with Virginia Code § 58.1-203. With regard to such interpretations, the settled case law requires strict construction of sales and use tax exemptions. Where there is any doubt as to the application of an exemption, the doubt is resolved against the one claiming the exemption. See Commonwealth v. Community MotorBus, 214 Va. 155 (1973); Commonwealth v. Research Analysis Corporation, 214 Va. 161 (1973); and Golden Skillet Corp. v. Commonwealth, 214 Va. 276 (1973).

Resale of Tangible Property Used in Manufacturing

In general, Virginia Code § 58.1-609.3 2 iii provides an exemption from the retail sales and use tax for “machinery or tools or repair parts therefor or replacements thereof…used directly in processing, manufacturing…products for sale or resale.” Under this manufacturing exemption, businesses engaged in manufacturing products for sale are permitted to buy eligible property exempt from the tax.

In certain industries, particularly packaging manufacturing, customers may desire specific labeling that includes coloring, trademarks, tradenames, advertising, and other intellectual content. In these situations, customers may wish or demand to maintain control of the equipment or tools used to produce such labeling. However, because such customers would not be using the specialized equipment or tools to manufacture the packaging, they would not be eligible for the manufacturing exemption.

In recognition of the fact that, except for the content of the resulting label, such tools would be used directly in an exempt manufacturing process, Virginia has included an exclusion for the resale of tooling to customers in its definition of “retail sale.” Specifically, Virginia Code § 58.1-602 excludes from the definition of “retail sale” the following:

a transfer of title to tangible personal property after its use as tools, tooling, machinery or equipment, including dies, molds, and patterns, if (i) at the time of purchase, the purchaser is obligated, under the terms of a written contract, to make the transfer and (ii) the transfer is made for the same or a greater consideration to the person for whom the purchaser manufactures goods.

Under this definitional exclusion, a transaction will not be considered to be a retail sale if:

1. The purchaser uses the tangible personal property directly in manufacturing;
2. The purchaser is obliged at the time of purchase to transfer the tangible personal property to the entity for which the purchaser is manufacturing the goods; and
3. The purchaser charges the entity an amount equal to or greater than the cost of the tangible personal property.

Based on the facts as presented, the Taxpayer’s scenario appears to meet the requisite criteria as set out above. As such, the Taxpayer could purchase the specific tooling exempt from the Virginia retail sales and use tax because it would be directly using the tooling in an industrial manufacturing process. Further, the subsequent transfer to the customer would not be subject to retail sales and use tax as long as the Taxpayer would be contractually required to transfer the tooling to the customer at the time of purchase and the Taxpayer invoices the customer for the cost of the tooling. This exclusion would apply whether the customer is a manufacturer, wholesaler, or retailer. 

The Code of Virginia sections cited are available online at law.lis.virginia.gov. If you have any questions regarding this ruling, you may contact ***** in the Office of Tax Policy and Legal Affairs, Tax Adjudication and Resolution Division, at ***** or *****@tax.virginia.gov.

Sincerely,

James J. Alex
Tax Commissioner
Commonwealth of Virginia

AR/4032.F