As a manufacturer, can I buy tooling made for a specific customer without paying Virginia sales tax, and then hand that tooling over to the customer tax-free?

Plain-English summary

A Virginia packaging manufacturer asked the Department how the sales and use tax applies to customer-specific tooling and dies — cutting dies and printing plates it buys, uses in its own production, and later hands over to the customer. The Tax Commissioner's advisory ruling: both the purchase and the later transfer are tax-free, as long as the arrangement is documented up front.

The manufacturing exemption on the front end. Virginia exempts machinery, tools, and repair parts used directly in manufacturing or processing products for sale or resale (Va. Code § 58.1-609.3 2 iii). Because the manufacturer uses the tooling directly in its own production line, it can buy that tooling exempt — even tooling made to a specific customer's specifications.

The problem the law solves. Customers often want to own the tooling that carries their trademarks, artwork, or other content. But a customer that merely holds the tooling isn't itself manufacturing anything, so the customer couldn't claim the manufacturing exemption. If the manufacturer's later transfer of the tooling to that customer were treated as a taxable retail sale, tax would attach to equipment that was, in substance, used entirely in an exempt manufacturing process.

The "retail sale" exclusion on the back end. Virginia's definition of "retail sale" (Va. Code § 58.1-602) carves out a transfer of title to tools, tooling, machinery, or equipment — including dies, molds, and patterns — after their use, when (i) at the time of purchase the purchaser is obligated under a written contract to make the transfer, and (ii) the transfer is for the same or greater consideration to the person for whom the purchaser manufactures the goods. Put plainly, three conditions:

1. the purchaser uses the property directly in manufacturing;
2. the purchaser is obligated at the time of purchase to transfer it to the party it manufactures goods for; and
3. the purchaser charges that party an amount equal to or greater than the cost of the property.

The result. On the facts presented, the manufacturer's arrangement meets all three conditions, so it can buy the specific tooling exempt (direct use in manufacturing) and the later transfer to the customer is not a taxable retail sale — provided the manufacturer is contractually obligated at purchase to transfer the tooling and invoices the customer for at least its cost. This holds whether the customer is a manufacturer, wholesaler, or retailer. Because this is an advisory ruling based on the stated facts, a change in the facts could change the answer.

What this means for you

Packaging and custom manufacturers who buy customer-specific tooling

You can buy dies, plates, molds, and patterns exempt as machinery used directly in your manufacturing, and pass ownership of that tooling to your customer without charging sales tax — but only if you lock in the arrangement before you buy. Two things make or break it: a written contract, in place at the time of purchase, obligating you to transfer the tooling; and invoicing the customer at or above your cost for it. Get those wrong (agree to transfer only later, or bill the customer below cost) and the transfer can fall outside the exclusion.

Customers who want to own their tooling

You can end up owning the dies and plates that carry your branding without a Virginia sales tax hit on the handover — as long as your manufacturer structures it under this exclusion. It doesn't matter whether you're a manufacturer, wholesaler, or retailer.

Tax professionals

This is a definitional exclusion from "retail sale," not a claimed exemption certificate — but the Department still reads it against the strict-construction backdrop that governs exemptions. The written-contract-at-purchase and equal-or-greater-consideration elements are the operative facts; confirm both appear in the paperwork, and that the tooling is genuinely used directly in the manufacturer's own process.

Common questions

Q: Can a Virginia manufacturer buy customer-specific tooling without paying sales tax?
A: Yes — dies, plates, and similar tooling used directly in the manufacturer's own production qualify for the manufacturing exemption (Va. Code § 58.1-609.3 2 iii), even when made to a specific customer's specifications.

Q: When the manufacturer later gives that tooling to the customer, is that a taxable sale?
A: No, if it fits the "retail sale" exclusion in Va. Code § 58.1-602: the manufacturer must be obligated under a written contract at the time of purchase to transfer the tooling, and must transfer it for the same or greater consideration to the party it manufactures goods for.

Q: Does it matter whether the customer is a manufacturer, wholesaler, or retailer?
A: No. The Department's ruling says the exclusion applies regardless of what the customer is.

Q: What if we agree to transfer the tooling only after the fact, or bill the customer below our cost?
A: Then the arrangement may not meet the exclusion's conditions. The obligation must exist at the time of purchase (in writing), and the consideration must be equal to or greater than the tooling's cost.

Citations and references

Statutes:

• Va. Code § 58.1-203 — Department's authority to interpret and enforce the Commonwealth's tax laws
• Va. Code § 58.1-609.3 2 iii — manufacturing exemption for machinery and tools used directly in manufacturing/processing for sale or resale
• Va. Code § 58.1-602 — definition of "retail sale," excluding a qualifying post-use transfer of tools, tooling, dies, molds, and patterns

Authorities the Commissioner relied on (described here, not linked): the strict-construction cases Commonwealth v. Community Motor Bus, 214 Va. 155 (1973), Commonwealth v. Research Analysis Corp., 214 Va. 161 (1973), and Golden Skillet Corp. v. Commonwealth, 214 Va. 276 (1973); and prior Department guidance P.D. 21-152.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 25-84

Original ruling text

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

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21-152