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input.scss

$blue: #0000ff;
.parent {
    .child {
        background: $blue;
    }
}

output.css

.parent .child {
  background: #0000ff;
}

settings.json

{
  "sass": {
    "compiler": "dart-sass/1.26.11",
    "extensions": {},
    "syntax": "SCSS",
    "outputStyle": "expanded"
  },
  "autoprefixer": false
}