Was destructive testing of computer chips for manufacturers a taxable Texas service?

Plain-English summary

A testing company received batches of computer chips at no charge from manufacturers or suppliers, destroyed some chips during testing, returned any unused chips, and received $5,000 annually for the service.

The Comptroller said the testing service was not taxable. Destroying chips during testing did not make the service processing or part of the manufacturing process, and the testing company incurred no sales or use tax liability from the described transaction.

The parties had also agreed that one company would assume the other's sales and use tax liability. The letter warned that if the service had been taxable, the testing provider would have been a seller or retailer prohibited by Tax Code Section 151.704 from making that agreement.

What this means for you

The conclusion was tied to independent destructive testing of chips supplied by the customer. The letter did not classify testing embedded in the customer's own manufacturing process.

Common questions

Was the annual testing charge taxable? No.

Did destroying chips make the work taxable processing? No.

Did the testing company owe sales or use tax from this transaction? No.

Could a seller agree to absorb another party's tax if the service were taxable? The letter said Section 151.704 would prohibit that agreement.

Citations and references

• Tex. Tax Code § 151.704 (seller agreements to assume sales or use tax)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9011L1058F12

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

November 20, 1990

Dear ****:

Thank you for your request for a letter ruling on the tax consequences
of testing services.

You present a situation in which your client ("*") tests comput-
er chips for manufacturers and suppliers of chips ("*").

* provides or gives * a batch of computer chips for no
charge. ** performs a destructive test on the chips. Any chips
that are left over after testing are returned to *. For this
service * pays ** $5000 annually.

You are correct. The testing service is not taxable. The destruction
of the chips during testing is not processing or part of the manufac-
turing process. *** will not incur a sales or use tax liability
as a result of this transaction.

You state that * has agreed to assume any sales and use tax lia-
bility of * relating to the transactions. If the service was a
taxable service, *** would be a "seller" or "retailer" under the
law and would be prohibited from entering into such an agreement under
Section 151.704.

This opinion is based on the facts presented. Other facts though simi-
lar may provide a different result. If you have other questions or need
more information please call or write. The toll- free number is 1-800-
531-5441; my extension is 3-4675. The regular number is (512)463-4675.

Sincerely
Tom Soto
Taxability,
Legal Services Division