Is Selling Factory Scrap or By-Products Subject to VAT? Why Regular Beats Isolated

Yes — if a business regularly generates and sells scrap, waste, or by-products as part of its normal operations, that revenue is generally subject to VAT. Recurring scrap sales count as a “transaction incidental” to the regular conduct of the business under the Tax Code, even though scrap isn’t the company’s main product and each sale may be small. The deciding factor is regularity, not the item sold.

Why does a recurring scrap sale count as “in the course of trade or business”? #

A sale is VATable when it happens “in the course of trade or business,” a phrase the Tax Code defines broadly enough to capture activity well beyond a company’s main product line. A factory that sells its metal shavings, cardboard, or defective units every month isn’t making a side hustle out of trash — it’s monetizing a routine output of its own manufacturing process, which is exactly the kind of recurring, connected activity the law targets.

“the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto” — Section 105 of the National Internal Revenue Code (NIRC), as amended

Two things matter in that definition for scrap and by-product sales specifically:

• Regularity. A transaction repeated month after month, quarter after quarter, is the opposite of “isolated.” It is, by definition, part of the regular conduct of the business.
• Connection to the main activity. Scrap and by-products exist only because the business manufactures something else. Selling them is a direct, foreseeable consequence of running the factory — not an unrelated, standalone event.

Our companion piece, Isolated Transactions and the VAT Exemption Test, walks through the case law (CIR v. Magsaysay Lines, CS Garment, Mindanao II Geothermal) on when a sale is genuinely a one-off that falls outside VAT. This post doesn’t repeat that analysis — it applies the same Section 105 framework to the opposite fact pattern: a sale that happens over and over.

How does a recurring scrap sale compare to a true isolated sale? #

A one-time disposal and a monthly scrap run look similar on the surface — both involve selling something that isn’t the company’s core product — but they sit on opposite sides of the VAT line once you apply the regularity test. The comparison below shows why.

A company that sells its own delivery truck once in a decade is already a useful contrast: courts have treated that as an incidental, VATable transaction because it’s connected to running the business, even though it’s infrequent. A factory selling scrap metal or cardboard every month is on firmer VATable ground still — there’s no serious argument that monthly activity is “isolated” once it’s established as a pattern. Frequency alone resolves most of the ambiguity that a one-time asset sale might otherwise raise.

Worked example: scrap sales from an electronics assembly plant #

A concrete, recurring fact pattern makes the rule easier to apply than an abstract statement of the doctrine. The figures below are illustrative, not drawn from an actual taxpayer.

“Bayview Electronics Assembly Corp.” (fictional) runs a VAT-registered plant producing consumer electronics components. Every month, the plant’s assembly line generates metal shavings, packaging offcuts, and a batch of defective or out-of-spec units that can’t be sold as finished goods. Bayview sells all of this to a local junk dealer for approximately ₱80,000 per month, and has done so consistently for the past three years.

Because this ₱80,000 is not a one-off — it recurs predictably every month as a direct by-product of Bayview’s manufacturing activity — it falls squarely within “transactions incidental” to the regular conduct of Bayview’s business. Bayview should charge the ₱9,600 output VAT, issue a VAT invoice or receipt to the junk dealer, and include the ₱80,000 in its regular VAT return for the period, the same as any other sale.

Contrast: suppose instead that a single flood event damages a batch of finished inventory beyond repair, and Bayview sells the ruined stock as scrap in a one-time clearance sale that never recurs. That fact pattern looks closer to an isolated transaction — it’s triggered by an unusual, non-recurring event rather than by the ordinary operation of the plant — and may be more defensible as outside VAT’s reach. Even so, it’s a judgment call that depends on the specific facts, and it’s the kind of close case worth confirming with a tax professional before taking a position either way. See the companion post for the case law that applies to that side of the line.

Why do businesses miss this on their RELIEF SLSP? #

Scrap and by-product sales revenue is a common blind spot precisely because the material sold isn’t the company’s main product — bookkeepers sometimes mentally file it under “miscellaneous income” or don’t record it as a sale at all, rather than treating it as a VATable transaction that belongs in regular compliance reporting.

• Scrap and by-product sales should be included in the seller’s regular VAT return for the period, just like sales of the company’s main products.
• Where the threshold for RELIEF SLSP reporting applies, recurring scrap sales to the same buyer should also be reflected there, consistent with how any other recurring sale is reported.
• Treating scrap revenue as “not a real sale” because the material isn’t core inventory is a common but incorrect shortcut — the VAT law doesn’t exempt a sale just because the item sold is a by-product rather than the main product.
• Keep records of the recurring pattern (monthly logs, junk dealer invoices, recorded frequency) — that documentation is what supports the “regular” classification if the treatment is ever questioned.

A transparency note on sources #

No BIR ruling specific to scrap or by-product sales was identified for this post. The analysis above applies the general Section 105 “in the course of trade or business” doctrine — the same framework addressed in RMC No. 15-2011, which revoked earlier rulings that had exempted certain asset disposals and reflects a stricter BIR reading of what counts as “incidental” — by extension to the scrap/by-product fact pattern, rather than citing a scrap-specific issuance. For a borderline case, especially a genuinely one-time disposal like the flood-damaged inventory example above, confirm the treatment with a qualified tax professional rather than relying solely on this general analysis.

Summary #

A business’s recurring sale of scrap metal, cardboard, defective units, or other by-products generated by its normal operations is generally subject to VAT, because repeated, connected transactions fall within “the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto” under NIRC Section 105. The deciding factor is regularity and connection to the main business, not whether scrap is the company’s core product or how small each individual sale is. A monthly scrap run, like Bayview’s ₱80,000-a-month example above, sits firmly on the VATable side; a true one-time disposal triggered by an unusual event, like a single post-flood clearance sale, is closer to the isolated-transaction exception covered in our companion piece — but still worth confirming case by case. Either way, recurring scrap and by-product revenue belongs in the seller’s regular VAT return and RELIEF SLSP reporting, not treated as an informal side transaction outside the VAT system.