Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2018

Sales and Use Tax Annotations

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Annotation 570.0328


570.0328 Rejected Property Not Returned to Resale Inventory Used in Testing. A manufacturer of integrated circuits purchases silicon wafers under resale certificates. These wafers 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 back-lapped by the integrated circuit manufacturer. Back-lapping consists of cleaning and coating. Back-lapped wafers do not meet the manufacturer's quality standards for manufacturing integrated circuits for resale. The manufacturer uses the back-lapped wafers 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.

If property was purchased for resale and is withdrawn from the resale inventory for research and development use, tax will apply to the cost of the property at the time it is withdrawn from resale inventory. In the above situation, the conditions are different in that the back-lapped wafers are not returned to the manufacturer's resale inventory. The quality level of those wafers is not acceptable for use in the manufactured products which are resold. Further, the back-lapped wafers are not used in research and development. In this situation, the rejected wafers are treated as scrap and should be regarded as having been purchased for resale and tax does not apply to its sales price to the integrated circuit manufacturer. 12/20/88. (Am. 2000–1).