Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2017

Sales and Use Tax Annotations

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Annotation 435.0144


435.0144 Repair vs. Fabrication. A manufacturer of integrated circuits purchases silicon wafers which are etched with micro-circuitry to produce integrated circuits for sale. Each batch of wafers is tested to assure proper manufacturing by withdrawing a sample wafer and testing it. Some percentage of wafers fail to meet quality control standards and are rejected. Most rejected wafers are scrapped. Some are shipped to vendors who back-lap them. Back-lapping consists of cleaning and coating. Back-lapped wafers do not meet the manufacturer's quality standards for manufacturing integrated circuits for resale and are used to test various manufacturing processes. These test wafers are processed through the individual manufacturing processes separately from production wafers as a verification that the process is operating properly. If the process is operating properly, new production wafers are fed through the process as part of the normal manufacturing operation.

In order for an activity to be regarded as the performance of repairs, the product must be returned to its original condition or function. If a transaction consists solely of furnishing repair labor, it is regarded as a service activity which is not subject to tax. In the above situation, the back-lapped wafers are not regarded by the manufacturer as acceptable for use in its manufactured product and the back-lapped wafers are not being repaired. The manufacturer's vendors are producing a product which the manufacturer uses to test its manufacturing process. section 6006(b) define sales to include processing of property furnished by another for a consideration. That is what occurs in this situation. Accordingly, tax applies to the amount charged to the manufacturer by back-lap vendors. 10/20/88. (Am. 2000–1).