If a company keeps a resale inventory of replacement parts and later writes some of them down or scraps them because they're obsolete, is sales tax due on those parts?

Plain-English summary

A company (referred to here as ABC Company) sells scanner equipment to another company (XYZ Company) and keeps an inventory of replacement parts on hand at XYZ Company's headquarters so that parts are available when a breakdown occurs. From time to time, ABC Company writes down some of these inventory parts when they become obsolete.

ABC Company asked the Comptroller two things: (1) are these inventory parts subject to sales tax when purchased for resale, and (2) how are the parts treated for tax purposes when they're written down due to obsolescence?

The Comptroller's answer had three parts:

• Purchasing for resale: A resale certificate can be issued in lieu of paying tax on items purchased for resale — so buying the parts tax-free with a resale certificate is fine, as long as they're genuinely held for resale.
• Marked-down inventory that is sold: If inventory items are marked down (written down in value) and then sold, sales tax is still due — on the actual (lower) selling price of those items.
• Scrapped or destroyed inventory: If inventory items are instead destroyed, scrapped, or otherwise disposed of ("written off") because of obsolescence, no sales or use tax is due at all — but only if the seller hasn't made any use of the items beyond retaining, displaying, or demonstrating them while holding them for sale in the regular course of business.

What this means for you

Businesses holding resale inventory (parts, equipment, etc.)

You can buy inventory tax-free with a resale certificate. If you later have to discount and sell obsolete or slow-moving stock, you still owe sales tax — just on the reduced selling price, not the original cost. But if instead you scrap, destroy, or otherwise write off obsolete inventory without ever using it (beyond display or demonstration), that disposal itself doesn't trigger sales or use tax.

Accountants and tax professionals

This letter draws a clean line between two different fates for written-down resale inventory: a markdown-then-sale is a taxable sale (tax on the discounted price), while a markdown-then-scrap/destroy is not a taxable event at all, provided the goods were never put to any use other than being held, shown, or demonstrated for sale.

Companies maintaining spare-parts inventories at a customer's site

If you're a vendor stocking replacement parts at a customer's facility for future resale/use in warranty or maintenance work, this letter confirms that obsolete parts you eventually scrap (rather than sell) don't generate a sales or use tax liability, as long as you haven't used them beyond retaining/displaying/demonstrating them for sale.

Common questions

Q: Can inventory parts be purchased tax-free if they're meant for resale?
A: Yes — a resale certificate may be issued in lieu of tax on items purchased for resale.

Q: If I mark down obsolete inventory and then sell it at the lower price, do I owe sales tax?
A: Yes. Sales tax is due on the selling price of inventory items that are marked down.

Q: If I scrap or destroy obsolete inventory instead of selling it, do I owe tax?
A: No. Sales/use tax is not due on inventory items that are destroyed, scrapped, or otherwise disposed of ("written off") due to obsolescence, etc., as long as the seller hasn't made any use of the items other than retaining, displaying, or demonstrating them while holding them for sale in the regular course of business.

Q: What if I used the obsolete parts (beyond display/demonstration) before scrapping them?
A: The letter doesn't address that scenario directly — its "no tax due" answer is expressly conditioned on the seller not having made any use of the items beyond retaining, displaying, or demonstrating them for sale.

Q: Can I rely on this letter for my own facts?
A: No, not directly — the letter itself notes it's "based on the facts you presented and current law" and that "different facts although similar, may result in different answers." Only the taxpayer it was issued to can rely on it for detrimental-reliance purposes.

Citations and references

No specific statutes or rule numbers were cited in this letter.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9606L1417A08

Original ruling text

June 10, 1996

Dear ****:

Thank you for your letter dated June 3, 1996, concerning sales tax.

Facts: ABC Company sells scanner equipment to XYZ Company. ABC Company will
keep an inventory of parts to the scanner equipment on hand at XYZ Company
headquarters so when a breakdown occurs those parts will be available for
replacement.

At times, ABC Company will write down certain of its inventory parts if they
become obsolete.

Question: Would the inventory parts be subject to sales tax when purchased
for resale? Please explain how the parts are treated when they are written
down due to obsolescence.

Comptroller Response: A resale certificate may be issued in lieu of tax on
items that are purchased for resale.

Sales tax is due on the selling price of inventory items that are marked down.

Sales/use tax is not due on inventory items that are destroyed, scrapped, or
otherwise disposed of ("written off") due to obsolescence, etc., before the
seller has made any use of the items other than retaining, displaying, or
demonstrating them while holding them for sale in the regular course of
business.

This opinion is based on the facts you presented and current law. Different
facts although similar, may result in different answers.

Please call me if you have any questions or need more information. Our toll
free number is 1-800-531-5441, and my extension is 5-0330. The direct line
is 512/475-0330. You may also write to Tax Policy Division, Comptroller of
Public Accounts.

Sincerely,

Bettie Peterson
Tax Policy Division

NOTE: Previous Accession Number 9606336L