Document Number
06-34
Tax Type
Retail Sales and Use Tax
Description
Cleaning wafers are used directly in the Taxpayer's production process
Topic
Manufacturing Exemption
Date Issued
03-23-2006


March 23, 2006



Re: Request for Ruling: Retail Sales and Use Tax

Dear *****************:

This will reply to your letter in which you seek a ruling concerning the application of the manufacturing exemption to the use of semiconductor wafers by your client, ***** (the "Taxpayer").

FACTS


The Taxpayer is a semiconductor manufacturer that purchases silicon wafers for use in its manufacturing process. Some of the silicon wafers, known as "prime" or "virgin" grade wafers, are manufactured into finished products. Due to cost efficiencies, the Taxpayer purchases other grades of wafers that are used to perform various specialized functions in its manufacturing process. Prime grade wafers are also used for some of these functions. The Taxpayer requests a ruling to address if the wafers that are used for specialized purposes at its production facility qualify for the manufacturing exemption. The categories of wafers included in this ruling are: (1) filler or dummy wafers; (2) process control wafers; (3) cleaning wafers; (4) conditioning or warm-up wafers; and (5) engineering wafers.

The Taxpayer seeks confirmation that the filler wafers and process control wafers are exempt as determined during a recent audit by the Department. The Taxpayer requests the Department to determine if cleaning wafers, conditioning wafers, and engineering wafers qualify for the manufacturing exemption based on information provided during a tour of its facility and in its ruling request letter. The Taxpayer also requests that the Department reverse the policy set out in Public Document (P.D.) 99-115 (5/18/99), regarding the taxation of "characterization" wafers used to test and bring new production equipment online prior to the start of manufacturing.

                        • RULING 1


Virginia Code § 58.1-609.3 2 iii provides an exemption for "machinery or tools or repair parts therefor or replacements thereof, fuel, power, energy, or supplies, used directly in processing, manufacturing, refining, mining or converting products for sale or resale . . . ." [Emphasis added.] Virginia Code § 58.1-602 defines the term "used,
directly" as
    • those activities, which are an integral part of the production of a product, including all steps of an integrated manufacturing . . . process, but not including ancillary activities such as general maintenance or administration.

In interpreting the above statute, Title 23 of the Virginia Administrative Code (VAC) 10­210-920 B 2 states
    • Items of tangible personal property which are used directly in manufacturing . . . are machinery, tools and repair parts therefor, fuel, energy, or supplies which are indispensable to the actual production of products for sale and which are used as an immediate part of such production process. Convenient or facilitative items . . . or items that are essential to the operation of a business but not an immediate part of actual production, are not used directly in manufacturing or processing . . . [Emphasis added].

Virginia Code § 58.1-602 defines manufacturing and processing to include "equipment and supplies used for production line testing and quality control."

Keeping the cited statutes and regulation in mind, I will address the application of the manufacturing exemption to each type of wafer based on the Taxpayer's use of the wafers in its production process.

Filler Wafers

Filler wafers are run with prime wafers during certain production processes. For example, the Taxpayer's production process includes the heating or baking of semiconductor wafers. The prime grade production wafers are inserted in quartz boats that are then placed in diffusion furnaces for heating or baking. Filler wafers are inserted into the top and bottom areas of the quartz boats containing the prime grade wafers. The filler wafers facilitate the uniform distribution of heat to the prime grade wafers in the quartz boats during the baking process, which ensures product integrity.

The filler wafers are indispensable to the actual production of the Taxpayer's products. These wafers are included in production batches for quality control purposes and ensure the integrity of the Taxpayer's finished product. The filler wafers are an immediate and active part of the Taxpayer's production process. Based on the above, the filler wafers are used directly in the Taxpayer's manufacturing process and were properly deemed exempt by the Department's audit staff.

Process Control Wafers

Process control wafers are run in production batches with prime wafers. Process control wafers are used for testing purposes at metrology test benches located on the production line. The measurements obtained from these wafers by metrology testing determine if the prime wafers in the batch meet the Taxpayer's quality control standards. There are two types of process control wafers. "Embedded" or "in-situ monitor" wafers collect and relay real-time measurements that are used to make process corrections of the tools during production. "Non-embedded" or "ex-situ monitor" wafers collect measurement data during production and are analyzed at metrology test benches after a production batch run. The metrology test measurements are then used to determine if the prime wafers in a specific batch meet quality control standards.

The terms "manufacturing" and "processing" are defined by statute to include equipment and supplies that are used for production line testing and quality control. Both the in-situ monitor and ex-situ monitor wafers are used on the production line for quality control purposes. Both types of process control wafers are indispensable to the Taxpayer's production process and are an immediate part of production. For these reasons, the process control wafers were properly deemed exempt by the audit staff.

Cleaning Wafers

The Taxpayer uses "in-situ" cleaning wafers to clean and decontaminate production tools from within. This process removes trace particles, chemicals and any contaminants that would affect the quality of subsequent production batch runs using those tools. The cleaning wafers are primarily used to clean the tools used in the Taxpayer's etching processes. The frequency of cleaning varies depending on the type of etching process performed. Production tools used in batch runs involving "deep trenching" require cleaning after each batch run. Batch runs for deep trenching typically average about eight hours to complete. Other etching processes performed by the Taxpayer are shorter in duration. Several batches of wafers may be run through production tools before cleaning is required. On average, the cleaning wafers are used, to clean the production tools used in other etching processes after every four batch runs. The cleaning process, however, occurs more frequently due to shorter batch run times.

The Department's long-standing policy is that general maintenance performed on, exempt manufacturing equipment is a taxable activity; however, the Department has recognized some exceptions to this policy. The Department has issued several public documents that are analogous to the Taxpayer's use of in-situ cleaning wafers. These documents discuss cases in which manufacturers cleaned or sanitized manufacturing equipment that was used in such a specialized manner that the integrity of their products could not be maintained without cleaning or sanitizing the equipment. In these cases, the frequency of cleaning was dependent upon the completion of each batch in production, was performed at regular intervals and was an integral part of the production process.

In P. D. 92-65 (5/11/92), the Tax Commissioner determined that certain cleaning and sanitizing chemicals used in a food production facility were an indispensable part of the quality control function of the manufacturing process. The entire production process was shut down daily in order to sanitize the equipment and machinery. This daily cleaning was so specialized and closely related to the processing function that production could not take place unless the cleaning and sanitizing of the production equipment was performed.

P. D. 97-134 (3/20/97) discusses a dairy products manufacturer that used certain chemicals to sanitize dairy production equipment between production batch runs to prevent bacterial contamination of the product. Again, the Department agreed that the production process of this taxpayer was so specialized that the periodic cleaning of the equipment between production runs went beyond what is traditionally considered general maintenance and was essential to insure the integrity and quality of the manufactured product.

The Taxpayer has demonstrated that the use of the cleaning wafers is an integral part of the Taxpayer's production process. The Taxpayer uses the in-situ cleaning wafers in a highly specialized cleaning process that is indispensable to the Taxpayer's manufacturing process. The production equipment must be operated free of contaminants. The presence of unacceptable levels of contaminants in the tools during production results in manufactured wafers that do not meet the quality specification required for a usable final product. The cleaning wafers are run through production machinery on a scheduled basis after a fixed number of production runs. This is a continuous process that occurs on a regular and frequent basis. Based on the above, the cleaning wafers are used directly in the Taxpayer's production process and qualify for the manufacturing exemption.

Conditioning Wafers

Conditioning wafers condition or "warm up" the production tools prior to each production run. Cold production tools typically produce a high rate of manufacturing defects, which results in unusable products. A batch of conditioning wafers is run through production tools prior to each production batch run to eliminate or reduce the operating variances produced by cold production tools.

The Taxpayer maintains that the use of the conditioning wafers is necessary to protect the integrity of the finished product. The Taxpayer likens the use of the conditioning wafers to the cleaning and sanitization activities discussed in P. D. 92-65, P. D. 97-134 and other public documents. The Taxpayer suggests that the specialized maintenance activities discussed in these public documents involve the conditioning of production equipment in the same manner as the conditioning wafers condition the Taxpayer's production tools. These activities are necessary to insure the quality and integrity of the final product.

In P. D. 93-135 (6/4/93), the Department recognized a stricter standard for determining the application of the exemption for testing and quality control activities conducted by manufacturers. The exemption for tangible personal property used in quality control activities requires that the activity protect the integrity of the product being produced and that the activity occur during the actual manufacturing process.

P. D. 99-115 (5/18/99) discusses the use of partially processed wafers by a semiconductor manufacturer to calibrate production line tools. Prior to wafer production, partially processed wafers were run through production tools and tested to determine if they conformed to production standards. The tools were then adjusted to correct any deficiencies. The Department determined that the partially processed wafers were used to calibrate the tools prior to production. While this activity was necessary to insure efficient production, the wafers were not used during the actual production process and did not prevent the contamination of the final product.

I find P. D. 99-115 to be analogous with the Taxpayer's use of conditioning wafers. Clearly, the Taxpayer is not manufacturing products when the conditioning wafers are used. The use of the conditioning wafers is one step removed from the manufacturing process and does not occur during production, as the exemption for quality control activities requires. This is consistent with the Department's long-standing policy on preproduction activities conducted by manufacturers. The Taxpayer's use of the conditioning wafers is a taxable activity.

Engineering Wafers

These wafers are used whenever production tools are restarted after a shutdown. Production tools may be shut down for regular maintenance, for adjustments, due to process variances identified by metrology testing or for repairs. Engineering wafers are run through the tools prior to the start of a new production run to determine if production tools are operating within acceptable tolerances. The engineering wafers are run through the tools and then tested at the metrology bench. The test measurements are then used to make any necessary adjustments to the tools to ensure the quality of the production wafers when production begins.

The engineering wafers are clearly used prior to the start of a production run. Production cannot begin until the engineering wafers are run through the tools to confirm that the tools are running within acceptable tolerances. To qualify as quality control, the wafers must be used during actual production. The engineering wafers are used to insure the efficient operation of production tools, but unlike the in-situ cleaning wafers, do not prevent the contamination of the final product. Like the conditioning wafers, the engineering wafers are used in a preproduction activity and are taxable.

Characterization Wafers

The Taxpayer asks the Department to reconsider the position taken in P.D. 99­115 with regard to the characterization of new production tools. Characterization is a process where wafers are run through new tools under full production conditions and the wafers are then subjected to extensive testing. The test results are used to adjust the production parameters required for the tools to produce wafers that meet the Taxpayer's quality standards. The characterization process utilizes the same type of metrology testing that occurs during actual production batch runs. The characterization process may take from 10 to 90 days.

The Taxpayer maintains that the characterization process is unique to semiconductor manufacturing. It is highly specialized to ensure that strict production quality controls are maintained when the tools are ready for use in the manufacturing process. The Taxpayer notes that the Department has agreed that metrology testing is exempt when performed during production and suggests that the characterization process is performed using the same type of testing. The Taxpayer notes that the integrity once actual production begins. Although production has not commenced when the characterization process is performed, the characterization wafers are run through production line equipment and metrology testing occurs as if production is taking place.

Title 23 VAC 10-210-920 B 2 provides that the manufacturing exemption applies to tangible personal property that is used directly in manufacturing. Tangible personal property must be indispensable to the actual production of products for sale and must be used as an immediate part of the production process. The regulation goes on to state that items that are essential to the operation of a business, but not an immediate part of actual production, are not used directly in manufacturing or processing.

The characterization process clearly takes place prior to production. While the characterization process is performed on production tools and takes place on the production line, it is a preproduction activity. It is clear that production cannot begin until the production tools are operating within proper tolerances. The metrology testing performed during the characterization process does not occur during actual production. The characterization process simulates actual production but it clearly is not an immediate part of the actual production process. The fact that the process occurs over a span of 10 to 90 days is further evidence that characterization is a pre-production activity.

While I appreciate the fact that the Taxpayer's production process is highly specialized and the characterization process is costly and time-consuming, I find no basis in this instance to reverse the Department's long-standing policy with respect to preproduction activities as set forth in P. D. 99-115. Therefore, the Taxpayer's characterization process and the characterization wafers used in this process do not qualify for the manufacturing exemption.

Preponderance of Use

Title 23 VAC 10-210-920 D discusses tangible personal property used by manufacturers in both taxable and exempt activities. If a single item is used in an exempt manufacturing activity and in a taxable activity, the sales and use tax applies when the preponderance of the item's use is 50 percent or more in the taxable activity. Likewise, if the item is used 50 percent or more in the exempt activity, the sales and use tax does not apply.

The Taxpayer indicates that some wafers may be used for different purposes. For example, wafers may be purchased for use in an exempt activity but also used in a taxable activity 2 If the Taxpayer uses wafers in a mix of taxable and exempt activities, the preponderance of use test should be applied to the wafers. If the preponderance of use for a particular type of wafer is in one of the exempt activities discussed in this ruling, the wafer qualifies for exemption. The Department can review the Taxpayer's, use of any wafers that may qualify for exemption under the preponderance of use test.

CONCLUSION


The Taxpayer's use of filler wafers, process control wafers and in -situ cleaning wafers qualify for the manufacturing exemption. The conditioning wafers and engineering wafers are used in taxable preproduction activities and are taxable. in addition, the characterization process is a taxable activity and any wafers used in that process are taxable. The preponderance of use test may apply to the Taxpayer's usage of wafers in both taxable and exempt activities.

I understand that the Department's audit was still in progress at the time this ruling request was submitted. The audit will be adjusted based on this ruling. Although this ruling letter has been issued, the Taxpayer will maintain its right to appeal any remaining issues in the audit under the provisions of Va. Code § 58.1-1821 and Tax Bulletin 03-8 (7/15/03).

The Code of Virginia sections, regulations and public documents cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's website. If you have any questions concerning this ruling, you may contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at *****.
                • Sincerely,
                    • Kenneth W. Thorson
                      Tax Commissioner



AR/1-293312012S
1Pending legislation currently before Governor Timothy Kaine may affect the result of this ruling. See 2006 Senate Bills 475 and 601, and House Bill 530.
2Some of the wafers in question may be used multiple times and for multiple purposes. Other wafers may be used only once for a single purpose. Generally, the wafers are ultimately consumed in the process to which they are adapted.


Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46