Tax Type
Retail Sales and Use Tax
Description
Clean room components; Manufacturing of semiconductor computer chips
Topic
Exemptions
Property Subject to Tax
Date Issued
07-11-1986
July 11, 1986
Re: Request for Ruling/Sales and Use Tax
Dear *********************
This will reply to your letter of November 8, 1985, in which you request a ruling on the applicability of the sales and use tax to certain property used in the manufacture of semiconductor computer chips for sale or resale.
FACTS
************* ("Taxpayer") is engaged in the production of semiconductor computer chips (chips) which are integrated into computers produced by the taxpayer for sale to consumers. The taxpayer's production facility in effect consists of one structure within another, with the interior structure forming a separate "envelope" for the purposes of cleanliness and the avoidance of undue vibration in the production of chips.
The interior structure consists of separate special purpose walls, separate steel girders to support a ceiling, and a separate floor constructed of concrete "waffles" with special rubber separators. Within the interior structure is a "clean room" where chip production actually takes place. The clean room consists primarily of vertical laminar flow (VLF) equipment, a ceiling of high efficiency particulate air (EPA) filters, porcelain walls, a perforated raised access floor of porcelain, and other related equipment, materials, supplies, and tools. The purpose of the clean room and the entire interior structure is to guarantee the integrity of the chips under production by minimizing contamination and vibrations that might render chips useless.
Chips are produced within the clean room by the application to and etching of chemicals on wafers, the exposure of the wafers to special lights to harden portions of the wafers, and finally, the baking of the wafers at high temperatures. Because the chips are so miniaturized, they are especially susceptible to contamination from articles moving through the air, such as dust and electrical ions. Contamination is reduced through the use of the VLF equipment and HEPA filters, which provide a stream of filtered high velocity air in an optimum flow pattern to continuously wash contaminants from chips. Stray electrical ions are reduced through the use of the porcelain walls and raised access floor. Vibrations are reduced through the use of the concrete waffle floor below the clean room and through the use of special supports in the attic level of the clean room.
The taxpayer requests a ruling on the applicability of the sales and use tax to various components of the clean room, including the porcelain walls and perforated raised access floor, the HEPA filter ceiling, and the VLF system. In addition, the taxpayer requests a ruling on the applicability of the tax to tools and various systems used in chip production, including computers, special amber lighting, stainless steel work unit covers, and the concrete waffle floor. Lastly, the taxpayer requests a ruling on the applicability of the tax to pollution control equipment, chemical floor coatings, chemicals, raw materials, and protective coverings (clothing) used by clean room personnel.
RULING
§ 58.1-608.1 of the Code of Virginia exempts from the sales and use tax "machinery or tools or repair parts therefor or replacements thereof, fuel, power, energy, or supplies, used directly in ...manufacturing...products for sale or resale."
Virginia Code § 58.1-602.22 defines the term "used directly," as used above, to mean "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." § 630-10-63.B.2 of the Virginia Retail Sales and Use Tax Regulations interprets both of the above statutes, stating the following:
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- 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 facilftative items, such as fuel storage tanks, platforms, structural steel, grating, equipment supports, special flooring, etc., 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... Emphasis added
- 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 facilftative items, such as fuel storage tanks, platforms, structural steel, grating, equipment supports, special flooring, etc., 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... Emphasis added
Analyzing the instant facts in tight of the above authorities, I find the VLF equipment used by the taxpayer to be used directly in manufacturing. The same is not necessarily true with respect to the entire clean room, however.
The VLF equipment, consisting of air handlers, process piping, an exhaust system, and controls and instrumentation, is exempt production machinery as it guarantees the integrity of the taxpayer's products (a quality control process). In exempting the VLF system, the department is acting as it would with respect to any other industrial manufacturer that installs a ventilation system specially designed for quality control purposes. As the HEPA filters are in effect an integral part of the VLF system, they also qualify for exemption. On the other hand, the walls and floor of the clean room are not exempt from the tax as it is the longstanding policy of the department that structural steel, special flooring, and similar structural materials do not meet the test of direct usage. Furthermore, the question of direct use in production activities with respect to similar structural components was addressed and answered by the Virginia Supreme Court in both Webster Brick v. Commonwealth, 219 Va. 81, 145 S.E.2d 252 (1978) and Commonwealth v. Wellmore Coal, 228 Va. 149 (1984).
In Webster, exemption was denied for the structural materials used in the floor of a manufacturing plant. The floor in question constituted a trackage system, which the court found to be indispensable to the production of brick but used only indirectly in such production. In Wellmore, the court found taxable the materials used to construct a coal tipple structure. In its opinion, the court specifically noted that "[t]he structure contains, inter alia, a foundation, windows, floors, walls, work areas for employees, and a roof," 228 Va. at 154.
The instant facts may be analogized directly to Webster and Wellmore in that while the walls and floor of the clean room help to expedite production and quality control, they do not play an immediate role in the production or quality control processes. Unlike the VLF equipment which plays an active role in quality control by sweeping the air of contaminants, the walls and floor serve only a limited quality control purpose. The walls and floor also serve to support the weight of production equipment and provide dividers between various parts of the clean room.
Having addressed the VLF system and the special walls and floor of the clean room, I will now address the application of the tax to tools and various other systems used in manufacturing the taxpayer's products:
Tools: As provided by Virginia Code § 58.1-608.l and Regulation § 630-10-63, tools used in the actual production process are exempt from the tax.
Computers: As noted in Regulation § 630-10-63, computers that actually direct or control production equipment are exempt from the tax. However, if the computers in question also perform administrative tasks and other nonexempt functions, the preponderance of use test set forth in Regulation 630-10-63.D will apply.
Process vacuum and compressed air systems: The process vacuum and compressed air systems are exempt from the tax under both the statute and regulation as they provide the source of power for tools used directly in the manufacturing process.
Deionized Water Cooling and Process Systems
These systems are exempt production equipment as the deionized water furnished by the systems is used to cleanse chips under production so as to guarantee the integrity of the products.
Process piping and tanks
It is my understanding that the tanks and piping in question furnish gases and chemicals that are used directly in the production of chips. As noted above, the chemicals are used to "etch" silicon wafers during production. The gases are used to remove some of the etching chemicals from the wafers.
As the handling and storage of items used in production is an activity that only indirectly touches on production, storage tanks and pipes are ordinarily considered taxable. One exception to this general rule is the handling and storage of raw materials, which is exempted by virtue of the Virginia Code § 58.1-602.9 definition of "manufacturing." Under this definition, the exempt production activities of a manufacturer begin "with the handling and storage of raw materials at the plant site." As the chemicals and gases in question enter into the production of products and in some instances become a component part of the finished products or are coated upon or impregnated into the product, I consider the tanks and pipes that store and supply such chemicals and gases to be exempt raw material storage tanks.
Instrumentation Wiring
It is my understanding that the instruments to which this wiring relates may be used in either of two ways. First, some instruments are used in a control function, i.e., to enable plant personnel or management to access production information. As such instrumentation is used in an administrative or managerial function, the wiring for such instrumentation is taxable. Second, some instruments are used by personnel to direct production computers and tools. To the extent instrumentation is used in such a manner, the wiring for the instruments will be deemed used directly in exempt production activities.
Concrete Waffle Floor
For the reasons noted above with respect to porcelain panels and the perforated service floor, the concrete waffle floor is used only indirectly in production and is therefore taxable.
Miscellaneous Anti-Vibration Equipment
I understand that the items in question are actually special springs that are placed on piping and pumps in the plant to reduce vibrations. As these items touch only indirectly on production, they are subject to the tax.
Special Amber Lighting
As noted in Regulation § 630-10-63, general plant lighting is subject to the tax unless such lighting is specially designed to protect the integrity of products under production. As the amber lighting is used to prevent photolithographic films used in the etching process from being ruined (as they might under ordinary white light), I find the lighting to be used directly in exempt production activities.
Stainless Steel Work Unit Covers
It is my understanding that these items are in effect specially constructed work surfaces upon which tools and equipment may be placed. While the construction of the units is such that vibrations are minimized, they are analogous to desks, tables, and other more standard work surfaces found in a production plant. Therefore, I find the units to be used only indirectly in production and taxable.
Pollution Control Equipment
Virginia Code § 58.1-608.52 Provides an exemption for pollution control equipment or facilities certified by the state Water Control Board or Air Pollution Control Board. If not certified by either of those boards, however, the equipment in question would be taxable under Regulation § 630-10-63 as such equipment is used indirectly in production.
Special Chemical Floor Coatings
The coatings in question are designed to protect the concrete waffle floor from chemical and other spills. The coatings help to contain any such spills so that they may be collected and disposed of. While the failure to contain and collect spillage might contaminate the air flowing through the clean room above, thus tainting chips under production, I find the chemicals to touch only indirectly on production. Therefore, the chemicals are taxable.
Chemicals, Raw Materials, and Protective Coverings
As provided by statute and regulation, chemicals and raw materials used directly in production are exempt from the tax. The protective coverings in question are special suits worn by production personnel to reduce contamination in the production area. These suits help to guarantee the integrity of the taxpayer's products and are therefore exempt production supplies.
I trust that this will answer the questions posed in your ruling request. If further information is desired or further questions arise, please do not hesitate to contact the department.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner