When Company A sells a mold to Company B under a written agreement, is the sale of the mold taxable, and does it matter whether Company B itself manufactures the end product?

Plain-English summary

This letter, signed by David Somerville of the Tax Administration Division, responds to a May 23, 1995 inquiry about the taxability of molds used in manufacturing, and confirms the requester's analysis across three factual scenarios involving Company A (which buys a mold and uses it to manufacture goods) and Company B (which buys goods, and sometimes the mold itself, from Company A).

• Scenario One: Company A buys a mold (useful life over six months) and, under a written agreement, transfers ownership of the mold to Company B. A uses the mold to manufacture component parts and sells them to B, who uses those parts to manufacture its own end product. Both A and B are manufacturers of tangible personal property. Result: A's purchase of the mold from its supplier is exempt under the resale exemption (A can give the supplier a resale certificate). B's purchase of the mold from A is exempt (or partially exempt) under the manufacturing exemption of Tex. Tax Code Sec. 151.318(h), because B is manufacturing tangible personal property and the mold is necessary and essential to that manufacturing — B may give A an exemption certificate depending on the purchase date.
• Scenario Two: Same setup, except Company B does not manufacture — B merely resells the product A makes with the mold to the general public. Result: A's purchase of the mold is still exempt for resale. But B's purchase of the mold from A is not exempt under the manufacturing exemption, so B owes sales tax on that purchase, because B is not manufacturing tangible personal property for sale. The letter also addresses what happens if there is no written agreement transferring the mold from A to B: in that case, there is no taxable sale between A and B, but A's own purchase of the mold from its supplier is no longer exempt as a resale — instead it is exempt under the manufacturing exemption (since A itself is manufacturing TPP for sale using the mold). B, buying only the finished product for resale, may give A a resale certificate covering the total sales price of the product, including any separately stated charge for the cost of the mold.
• Scenario Three: Identical to Scenario One, except Company B does not manufacture the end product itself — B instead uses the component part A made (with the mold) to manufacture another component part, which a third entity ultimately uses to manufacture the end product. Result: the analysis is unchanged from Scenario One — because B is still manufacturing tangible personal property for sale, A's purchase of the mold is exempt for resale, and B's purchase of the mold from A is exempt (or partially exempt) under the manufacturing exemption, with B able to issue an exemption certificate to A depending on the purchase date.

The letter closes by noting it is based on the facts submitted and that other, similar facts could yield different results.

What this means for you

Manufacturers selling molds, dies, patterns, or tooling to another manufacturer

Whether your sale of a mold to a customer is taxable turns on two things: (1) whether there is a written agreement transferring ownership of the mold, and (2) whether your customer is itself manufacturing tangible personal property for sale using that mold (directly, or indirectly through a component that feeds into a larger manufactured product). If both are true, your customer's purchase of the mold can qualify for the manufacturing exemption under Tex. Tax Code Sec. 151.318(h), and your own purchase of the mold from your supplier is exempt as a sale for resale.

Manufacturers buying a mold from a supplier who used it to make your components

If you are a manufacturer buying components made with a mold, and a written agreement also transfers the mold itself to you, your purchase of that mold can be exempt (or partially exempt) under the manufacturing exemption — give your supplier an exemption certificate (the extent of exemption may depend on the purchase date under Sec. 151.318(h)).

Buyers who resell rather than manufacture

If you buy a product made with a mold but you do not manufacture — you simply resell the finished goods — and a written agreement transfers the mold itself to you as part of the deal, you owe sales tax on your purchase of the mold, because you are not using it in manufacturing. Your supplier's purchase of the mold, however, remains exempt for resale.

Businesses without a written mold-transfer agreement

If there is no written agreement transferring the mold to your customer, there is no separate taxable sale of the mold between you and the customer. But this changes how your own purchase of the mold is treated: instead of being exempt for resale, it becomes exempt only under the manufacturing exemption (assuming you are the one manufacturing TPP for sale with it). Your customer, buying only the finished product, can still give you a resale certificate covering the full price of that product, including any separately stated mold cost you pass through.

Common questions

Q: If I sell a mold to another manufacturer under a written agreement, is my own purchase of that mold taxable?
A: No — your purchase of the mold from your supplier is exempt under the resale exemption, since you're reselling it to your customer under the written agreement.

Q: Does my customer's purchase of the mold from me qualify for a tax exemption?
A: Yes, if your customer is itself manufacturing tangible personal property for sale (even indirectly, by making a component that feeds another product) and the mold is necessary and essential to that manufacturing — the purchase qualifies for exemption or partial exemption under Tex. Tax Code Sec. 151.318(h).

Q: What if my customer just resells the finished goods and doesn't manufacture anything?
A: Then your customer owes sales tax on its purchase of the mold from you, because the manufacturing exemption doesn't apply to a business that isn't manufacturing tangible personal property for sale.

Q: What happens if there's no written agreement transferring the mold to my customer?
A: There's no taxable sale of the mold between you and your customer. But your own purchase of the mold from your supplier is then exempt under the manufacturing exemption rather than the resale exemption (assuming you use it to manufacture TPP for sale). Your customer can still issue you a resale certificate for the full price of the product it buys from you, including any separately stated mold cost.

Q: Does it matter if my customer's manufactured component is used by yet another company to make the final end product?
A: No — as illustrated in the letter's third scenario, the analysis is the same as when the customer directly manufactures the end product, as long as the customer is manufacturing tangible personal property for sale somewhere in the chain.

Citations and references

Statutes:

• Tex. Tax Code Sec. 151.318(h) (manufacturing exemption / partial exemption for equipment such as molds)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9506L1350G06

Original ruling text

June 2, 1995

Dear ****:

Thank you for your May 23, 1995, letter concerning the taxability of
molds used in manufacturing.

Factual Scenario One:

1) Company A buys a mold for resale to Company B pursuant to a written
agreement transferring ownership of the mold to Company B.

2) The mold has a useful life of more than six months.

3) A and B are both engaged in the manufacturing of tangible personal
property.

4) A uses the mold to manufacture component parts of an end product
and sells the component parts to B.

5) B uses the component part purchased from A to manufacture the end
product.

6) The mold is necessary and essential in manufacturing the component
parts created by A, which parts are essential to the manufacturing of
the end products created by B.

7) The mold is not purchased under a lump-sum contract to improve
real property or under a lump-sum real property repair or remodeling
contract.

It is our understanding that in the foregoing factual scenario, A's
purchase of the mold is exempt from taxation under the resale exemption.
It is our further understanding that B's purchase of the mold from A is
exempt under the manufacturing exemption because B is engaged in the
manufacturing of tangible personal property and because the mold is
necessary and essential in the manufacturing the property. Is this
analysis correct?

Response: That is correct. Company A may give a resale certificate to
the supplier of the mold. Company B, depending on the date of purchase,
may give an exemption certificate to Company A for the purchase of the
mold qualifying for exemption or partial exemption under Texas Tax Code
Sec. 151.318(h).

Factual Scenario Two:

1) Company A buys a mold for resale to Company B pursuant to a written
agreement transferring ownership of the mold to Company B.

2) The mold has a useful life of more than six months.

3) A is engaged in the manufacturing of tangible personal property,
while B merely resells the property it receives from A.

4) A uses the mold to manufacture a product and sells that product to B.

5) B sells the product purchased from A to the general public.

6) The mold is necessary and essential to the manufacturing of the
product created by A and sold by B.

7) The mold is not purchased under a lump-sum contract to improve real
property or under a lump-sum real property repair or remodeling
contract.

It is our understanding that in this situation, A's purchase of the
mold is still exempt under the resale exemption. However, B's purchase
of the mold from A is not exempt under the manufacturing exemption and
B must therefore pay sales tax on its purchase of the mold. Is this
analysis correct?

Response: That is correct. Company A may give a resale certificate to
the supplier of the mold. Company B owes tax on the purchase of the
mold because Company B is not manufacturing tangible personal property
for sale.

It is our further understanding that if no written agreement existed
transferring the mold from A to B, then the transaction between A and
B would not be a taxable transaction, but the transaction whereby A
purchased the mold would no longer be exempt under the resale exemption.
In such a situation, however, A's purchase of the mold would be exempt
under the manufacturing exemption because A is engaged in manufacturing,
the mold will be used in the actual manufacturing of tangible personal
property to be sold, and the use of the mold is necessary and essential
to the manufacturing of same. Is thisanalysis correct?

Response: That is correct. Without a written agreement between A and B
clearly transferring title to the mold, the circumstances change.
Company A, depending on the date of purchase, may give an exemption
certificate to the supplier of the mold for the purchase of the mold
qualifying for exemption or partial exemption under Texas Tax Code Sec.
151.318(h). Company B is purchasing a product for resale and may give a
resale certificate to Company A for the total sales price of the product
Company B resells including the separately stated charge by Company A
for the cost of the mold used to make the product.

Factual Scenario Three:

This scenario is identical to Factual Scenario One except that Company B
does not manufacture the end product; rather, Company B uses the
component part created by A in the manufacturing of another component part
of the end product, which product is manufactured by another entity.

Does the analysis for Factual Scenario One differ in this situation?
It is our understanding that the analysis does not differ and that
neither of the transactions regarding the mold are taxable. Are we
correct?

Response: Yes. The facts are different, but the results are the same
as the response given in Factual Scenario One because Company B is still
manufacturing tangible personal property for sale. Company A may give a
resale certificate to the supplier of the mold. Company B, depending on
the date of purchase, may give an exemption certificate to Company A for
the purchase of the mold qualifying for exemption or partial exemption
under Texas Tax Code Sec. 151.318(h).

This opinion is based on the facts you submitted. Other facts, though
similar, may yield different results.

You may call me toll free at 1-800-531-5441, ext. 5-0030. The direct
line is 512/475-0030. You may also write to Tax Administration,
Comptroller of Public Accounts.

Sincerely,

David Somerville
Tax Administration Division

NOTE: Previous Accession Number 9506138L