Is a Texas manufacturer's sale of etchant — a chemical used to etch unwanted copper off printed circuit boards — subject to sales tax, given that none of the etchant ends up in the finished circuit board and the spent etchant is bought back by the seller for recycling?

Plain-English summary

A company that manufactures "etchant" — a chemical used to etch unwanted copper off printed circuit boards, leaving behind the desired circuit pattern — asked the Comptroller whether its sale of that etchant to circuit-board manufacturers is subject to Texas sales tax.

The etchant itself never becomes part of the finished circuit board — none of the fresh etchant remains as a component once the etching is done. After use, the spent etchant (which is valuable because it's rich in copper) is bought back by the seller from the purchaser for recycling, as a condition of the original sale, and the seller also charges a service fee at the time of sale.

The Comptroller responded that the sale of the etchant is a sale of tangible personal property and is generally taxable. However, because the etchant is a necessary or essential material that is directly used or consumed in the actual manufacturing, processing, or fabricating operation (etching the circuit boards), the purchaser — a circuit-board manufacturer — may give the seller a properly completed exemption certificate to buy the etchant tax-free under 34 Tex. Admin. Code Rule 3.300(d)(3)(A). The seller must keep that certificate on file to document the exempt sale.

What this means for you

Sellers of chemicals or consumable materials used in manufacturing

Even if your product is fully consumed in a customer's manufacturing process and never becomes a physical part of the finished good, that doesn't automatically make your sale taxable. If the material is "necessary or essential" and "directly used or consumed" in actual manufacturing, processing, or fabricating, your manufacturer-customer can buy it tax-free with a resale/exemption certificate under Rule 3.300(d)(3)(A). Keep the completed certificate in your records to support the exempt sale.

Manufacturers buying etchants, solvents, or similar process chemicals

You may be able to issue an exemption certificate for chemicals that are directly consumed in your manufacturing operation, even though they don't end up as a component of what you sell — the key factor is whether the item is necessary or essential to the actual manufacturing/processing/fabricating step, not whether it survives into the final product.

Buy-back or recycling arrangements

The fact that spent material is later bought back by the original seller (here, for its recycling value) doesn't change the taxability analysis of the original sale of the fresh material.

Common questions

Q: Is a chemical that's completely consumed during manufacturing, and never becomes part of the finished product, exempt from Texas sales tax?
A: It can be, if it's a necessary or essential material directly used or consumed in the actual manufacturing, processing, or fabricating operation — the purchaser gives the seller an exemption certificate to buy it tax-free under Rule 3.300(d)(3)(A).

Q: Does the seller of the etchant collect sales tax on the sale?
A: Only if the purchaser doesn't provide a valid exemption certificate. If the purchaser is a manufacturer using the etchant directly in its manufacturing process, it can certify the purchase as exempt.

Q: Does buying back the spent etchant for recycling affect whether the original sale is taxable?
A: No — the letter treats the buy-back/recycling arrangement and service charge as separate from the taxability question of the original sale of fresh etchant.

Q: Can this company rely on this letter if its facts are slightly different?
A: No. This opinion is based on the facts submitted, and other facts, though similar, may yield different results.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.300(d)(3)(A) (exempt manufacturing items — necessary or essential materials directly used or consumed in manufacturing, processing, or fabricating)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9601L1385B09

Original ruling text

January 4, 1996

Dear ****:

Thank you for your letter concerning the taxability of a
product sold by your client.

Situation: The company in question manufactures a product
known as etchant. The etchant is used by the purchaser in the
manufacturing process of circuit boards. The specific purpose
of the etchant is to etch unwanted copper from printed circuit
boards, leaving the etched circuit pattern. The spent
etchant, which is rich in copper, is returned to the seller
for recycling as a condition of sale of the fresh etchant. In
addition, a service charge to customers is imposed at the time
of the sale. It is important to note that the spent etchant
is very valuable. Keep in mind that none of the fresh etchant
remains as a component of the circuit board.

Question: Is the original sale of the fresh etchant by your
client subject to sales tax in Texas?

Response: Your client is selling tangible personal
property which is a transaction subject to sales tax.
However, the purchaser, who is a manufacturer of circuit
boards, may give an exemption certificate to purchase the
etchant tax free because it is a necessary or essential
material directly used or consumed in the actual
manufacturing, processing, or fabricating operation. See
subsection (d)(3)(A) of enclosed Rule 3.300 regarding exempt
manufacturing items. Your client would keep the properly
completed exemption certificate in its records to document
that the sales are exempt.

This opinion is based on the facts you submitted. Other
facts, though similar, may yield different results.

You may call me toll free at 1-800-531-5441, ext. 5-0030. The
direct line is 512/475-0030. You may also write to Tax
Policy, Comptroller of Public Accounts.

Sincerely,

David Somerville
Tax Policy Division

NOTE: Previous Accession Number 9601753L