Is a manufacturer's own aluminum casting mold taxable, and does it matter whether the mold is separately billed or the customer owns it on paper?

Plain-English summary

A manufacturer makes cast metal component parts for customers, who in turn use them to manufacture their own end products. The manufacturer "tools" a reusable aluminum mold from the customer's design specs, then uses that mold repeatedly (via a wax-pattern, ceramic-mold, molten-metal casting process) to produce the parts over the life of the mold, which can be years. The manufacturer bills customers a separate charge for the tooling/mold and has collected sales tax on that charge, but customers have complained, and the manufacturer's law firm asked the Comptroller to revisit a 1995 opinion on the topic, believing new details might change the answer.

The Comptroller's response is essentially a timeline of four different legal periods, because Tex. Tax Code Sec. 151.318's manufacturing exemption changed repeatedly between 1993 and 1997 (and was reinterpreted by the Sharp v. Tyler Pipe Industries court decision):

• Oct. 1, 1993 – Dec. 31, 1994: Manufacturing equipment with a useful life over six months, used in and necessary/essential to manufacturing, got a 75% sales tax reduction.
• Jan. 1, 1995 – Sept. 30, 1997: Such equipment was fully exempt if used in the actual manufacturing process and necessary/essential to it.
• Effective Oct. 1, 1997: The Legislature (responding to the Tyler Pipe decision) narrowed the exemption to property used directly in manufacturing that is necessary/essential AND causes a chemical or physical change in the product being manufactured for sale (or an intermediate product that becomes part of it).

Under this narrower current-law standard, the manufacturer's mold does not qualify for exemption: the mold changes the wax pattern, the wax pattern change creates the ceramic mold, and the ceramic mold changes the final casting — but the mold itself doesn't directly change the casting. So the manufacturer owes tax on the materials and equipment it uses to make the mold.

A second, independent variable threads through every period: whether there's a written agreement clearly transferring title of the mold to the customer (Rule 3.300(b)(3)). If there is, the mold is treated as sold to the customer, and depending on the period, the customer might get a tax reduction, exemption, or refund on it (if the customer resells the parts made with it). If there's no written title-transfer agreement, the separately stated mold charge is just folded into the taxable/nontaxable selling price of the manufactured parts, and the customer can give the manufacturer a resale certificate to get a refund of tax collected on that portion (since the customer resells the parts).

Any refund claims are limited by Rule 3.325's four-year statute of limitations, which is why the Comptroller's analysis only goes back four years from this 1998 letter.

What this means for you

Manufacturers using molds, dies, patterns, or tooling to make parts for customers

Whether your molds/tooling qualify for a Texas manufacturing tax exemption or reduction depends on (1) which period you're asking about (the rules changed substantially in 1994, 1995, and 1997) and (2) whether you have a written agreement clearly transferring title of the mold to your customer. As of Oct. 1, 1997, the exemption is narrower — the mold or tooling must cause a direct chemical or physical change in the actual product sold, not just an intermediate step in the process.

Accountants and tax professionals

This letter is a useful worked example of applying Sec. 151.318 across its multiple pre-/post-Tyler Pipe amendment periods, and of the write-vs-no-written-agreement fork under Rule 3.300(b)(3) for mold sales. Refund exposure is capped by Rule 3.325's four-year lookback.

Common questions

Q: Are manufacturing molds and tooling always tax-exempt in Texas?
A: Not automatically, and the rules changed several times in the 1990s — per this letter, as of Oct. 1, 1997, a mold only qualifies if it directly causes a chemical or physical change in the final product manufactured for sale, not just an intermediate step.

Q: Does it matter if I bill my customer separately for the mold?
A: Yes — per this letter (Rule 3.300(b)(3)), a separate mold charge is only treated as a "sale" of the mold to the customer if there's a written agreement clearly transferring title; otherwise it's just part of the taxable/nontaxable price of the parts made with it.

Q: How far back can I claim a refund if I paid too much tax on a mold?
A: Rule 3.325 imposes a four-year statute of limitations on refunds, per this letter.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.318 (manufacturing exemption, amended multiple times 1993–1997)
• 34 Tex. Admin. Code Rule 3.300(b)(3) (Manufacturing — mold sale requires written title-transfer agreement)
• 34 Tex. Admin. Code Rule 3.325 (refunds — four-year statute of limitations)
• Sharp v. Tyler Pipe Industries, Inc. (Tex. Ct. App. 1996) (mold-making equipment qualification, prompting the 1997 statutory narrowing)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9806595L

Original ruling text

June 29, 1998

Dear Mr. **:

Thank you for your letter to John Fitzgibbons concerning the taxability of
tooling and molds your client, **, uses in manufacturing castings.
I apologize for the delay while we researched this issue and prepared our
response. I have restated the information you provided below, followed by the
response.

Information provided: You explained that your client manufactures and sells
component parts to its customers. The customers are also manufacturers who use
the components in manufacturing an end product for sale to consumers. The
customer presents your client with design and material specifications for the
component parts. Based on the specifications, your client "tools" an aluminum
mold that houses a hollow pattern for the designed part. The customer is
charged for the tooling and for the mold. Your client retains possession of
the mold for use in manufacturing the component parts.

When a customer places an order for a number of parts, your client inserts wax
into the mold, that when cooled creates a wax pattern of the part. A number of
wax patterns are produced. These are ultimately placed in a "cluster" and
covered with ceramic to create a ceramic mold. The wax patterns are melted out
of the ceramic mold, and hot metal (composition according to the specifications
provided by the customer) is poured into the ceramic mold. When the hot metal
has cooled, the ceramic mold is broken away, leaving only the component parts,
or "castings." The process is then repeated for the requisite number of parts.
The aluminum molds are often used for years as repeat orders are placed for
component parts.

In the past, your client has collected sales tax on the tooling and sale of the
molds, but not on the component parts. Since September 1995, it has done so
according to the guidance provided in an opinion letter your firm received from
the Comptroller's office. Your client's customers have again complained about
being charged for sales tax in connection with the purchase of the aluminum
molds.

In your letter, you stated that your review of John Fitzgibbons' letter of
September 18, 1995 led you to the conclusion that our opinion might have been
different had we been aware of the additional information provided in this
letter. Because your client's business has not changed over the years, you
believe that the previous opinion, based on the information available to this
office at that time, should be withdrawn or superceded.

In our telephone conversation, you stated that your client sometimes has a
written agreement that transfers title of the molds to the customer.

Answer: The manufacturing exemption in the sales tax law (Tax Code Section
151.318) has been amended several times and has been the subject of court cases
that have changed the Comptroller's interpretation of the exemption over the
last four years. During that time the molds may have qualified for a tax
reduction or exemption under Section 151.318. (Because there is a four-year
statute of limitations on refunds, I am limiting my response to this time
period.)

The taxability of the molds may also depend on whether your client had a
written agreement to sell the molds to its clients. Subsection (b)(3) of Rule
3.300 on manufacturing provides the following information on molds:

A manufacturer that charges its customer a separate amount for the mold is
considered to be selling the mold to its customer only if there is a written
agreement between the manufacturer and the customer that clearly makes the
customer the owner of the mold. If your client had a written agreement
transferring title to the molds to the customers and your client's customers
resold the products produced with the molds, the customers may have qualified
for a tax reduction or exemption on their purchase of the molds during certain
periods over the last four years.

When there is no such written agreement between the manufacturer and the
customer, the manufacturer is not considered to be selling the mold to the
customer even if the manufacturer separates the charge for the mold from the
charge for the items produced by means of the mold. The combined charges for
the mold and the items manufactured using the mold constitute the selling price
of the manufactured item. (That is, the charge for the mold plus the charge
for items produced equals the selling price of items.) The total charge is
taxable or nontaxable depending on the taxability of the items produced.

Because your client did not always have a written agreement to sell the molds
to its customers, I have addressed both situations under the manufacturing
exemption as it applied over the last four years. My response is based on the
information you provided that the molds have a useful life in excess of six
months and that your client's customers use the component parts to manufacture
a product for sale.

October 1, 1993-December 31, 1994
From October 1, 1993 through December 31, 1994, Section 151.318 provided for a
reduction in the sales tax due on a manufacturer's purchases of equipment with
a useful life in excess of six months if the equipment was used in the actual
manufacturing process and was necessary and essential to the manufacturing
process. For example, for qualifying equipment purchased during 1994, the
amount of sales tax imposed on the purchase was reduced by 75 percent. The
Texas Court of Appeals ruled in 1996 in Sharp v. Tyler Pipe Industries, Inc .
that mold-making equipment similar to that used by your client met these
qualifications.

Written Agreement
If your client charged its customers a separate amount for the mold and had a
written agreement clearly making the customer the owner of the mold, your
client may accept an exemption certificate from its customer and refund a
portion of the sales tax collected on the mold. (In 1994, the sales tax
imposed on qualifying equipment was reduced by 75 percent.)

During this time period, your client qualified to purchase tax free for resale
the materials that became a component part of the mold which it sold to its
customers. It could purchase at a reduced tax rate (reduced by 75 percent in
1994) equipment with a useful life in excess of six months that was used in the
actual manufacturing process and was necessary and essential to make the mold.
Your client was also allowed to purchase tax free tangible personal property
with a useful life of six months or less that was necessary and essential to
and used in the process of manufacturing the mold for sale.

No Written Agreement
If there was no written agreement clearly making the customer the owner of the
mold, the separately stated charge for the mold was part of the sales price
your client charged for the component parts it manufactured for its customers.
Because the customers resold the component parts as part of an item they
manufactured for sale, the customers may give your client a resale certificate
and request a refund of the total amount of sales tax your client collected on
the separately stated charge for the mold.

During this time period, your client qualified to purchase at a reduced tax
rate (reduced by 75 percent in 1994) materials and equipment with a useful life
in excess of six months that were used in the actual manufacturing process and
were necessary and essential to make the mold. Your client was also allowed to
purchase tax free tangible personal property with a useful life of six months
or less that was necessary and essential to and used in the process of
manufacturing the mold.

January 1, 1995-September 30, 1997
Effective January 1, 1995, Section 151.318 exempted from sales tax a
manufacturer's purchases of equipment with a useful life in excess of six
months if the equipment was used in the actual manufacturing process and was
necessary and essential to the manufacturing process.

Written Agreement
If your client charged its customers a separate amount for the mold and had a
written agreement clearly making the customer the owner of the mold, your
client may accept an exemption certificate from its customer and refund the
sales tax collected on the mold.

During this time period, your client qualified to purchase tax free for resale
the materials that became a component part of the mold which it sold to its
customers. Your client was also allowed to purchase tax free tangible personal
property and equipment (regardless of its useful life) that was necessary and
essential to and used in the process of manufacturing the mold for sale.

No Written Agreement
If there was no written agreement clearly making the customer the owner of the
mold, your client may accept a resale certificate from its customer and refund
the sales tax collected on the mold (for the reasons explained above).

During this time period, your client qualified to purchase tax free materials
that became a part of the mold and tangible personal property and equipment
(regardless of its useful life) that was necessary and essential to and used in
the process of manufacturing the mold.

Effective October 1, 1997
Effective October 1, 1997, the Texas Legislature amended Section 151.318 to
limit the exemption for tangible personal property used in the manufacturing
process to property used directly in the process and that is necessary and
essential and makes a chemical or physical change in the product being
manufactured for sale or in an intermediate product that becomes a part of the
product manufactured for sale. As a result of this legislation, exemptions are
not granted to equipment solely because it is necessary and essential and used
during the manufacturing process. The Legislature made this change as a result
of the court's decision in the Tyler Pipe case.

Written Agreement
If your client charged its customers a separate amount for the mold and had a
written agreement clearly making the customer the owner of the mold, your
client may not accept an exemption certificate from its customer nor refund the
sales tax collected on the mold.

Effective October 1, 1997, the mold no longer qualifies for exemption under
Section 151.318 because it does not cause a physical or chemical change in the
component part that is manufactured for sale. The mold causes a change in the
wax patterns, which cause a change in the ceramic mold. The ceramic mold
causes a change in the castings (the component parts that are manufactured for
sale).

However, because your client is manufacturing the mold for sale, your client
may purchase tax free for resale the materials that become a component part of
the mold. Your client may also purchase tax free tangible personal property
and equipment that is used directly in the manufacturing process and is
necessary and essential and makes a chemical or physical change in the mold
being manufactured for sale.

No Written Agreement
If there is no written agreement clearly making the customer the owner of the
mold, the separately stated charge for the mold is part of the sales price your
client charges for the component parts it manufactures for its customers.
Because the customers resell the component parts as part of an item they
manufacture for sale, the customers may give your client a resale certificate
and request a refund of the sales tax your client collected on the separately
stated charge for the mold.

In this case, your client does not sell the mold to its customer; it uses the
mold to manufacture the component parts it sells to its customers. Because the
mold and the items used to manufacture the mold do not cause a change in the
product manufactured for sales to the customer, they do not qualify for
exemption under Section 151.318. Your client owes tax on the materials and
equipment used to make the mold.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change.

I am enclosing a copy of Rule 3.325 on refunds, which explains the statute of
limitations and the procedures for refunds, and a resale and exemption
certificate for your client's use. I hope this information is helpful. Please
call me at 463-4683 if you have any questions or need more information.

Sincerely,

Eddie C. Washington
Tax Policy Division