Tax Type
Retail Sales and Use Tax
Description
Manufacturing; Semiconductor manufacturing materials
Topic
Taxability of Persons and Transactions
Date Issued
05-19-1995
May 19, 1995
Re: Request for Ruling: Retail Sales and Use Tax
Dear******************
This will reply to your letter of May 4, 1995 in which you request a ruling on behalf of********** (the "Taxpayer") concerning the application of the manufacturing exemption to certain components used in the production of semiconductors .
FACTS
The Taxpayer is a manufacturer of semiconductors. Production takes place in the "clean room," a confined area within the manufacturing facility. The floors, walls and ceilings of the clean room are specially and specifically designed to create the sterile and controlled production environment necessary for the manufacture of semiconductors. The clean room is removable, is not load-bearing, and does not form the exterior of the building. The purpose of the clean room is to guarantee the integrity of the semiconductors by minimizing contamination and vibrations that could render the product worthless.
Above and below the clean room are the support systems: environmental control system, process piping system, and a deionized water cooling system. The environmental control system includes an air handling system which preserves the sterile and controlled production environment by creating an "air wash" - a continual exchanging of the air in the clean room to remove any particles that may exist. All the support systems are placed outside the clean room to preserve the sterile environment.
The Taxpayer requests a ruling on the application of the sales and use tax to: (1) various components and support systems of the clean room; (2) chemicals and raw materials; and (3) protective coverings worn by production personnel.
RULING
Code of Virginia § 58.1-609.3(2) provides an exemption from the sales and use tax for machinery, tools, fuel, power, energy or supplies "used directly" in manufacturing products for sale or resale. The term "used directly" is defined in Code of Virginia §58.1-602 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."
Virginia Regulation (VR) 630-10-63 provides that the exemption applies to "machinery, tools, and repair parts therefor, power, 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." Items which are essential to the operation of a business but not an immediate part of actual production are not used directly in manufacturing.
In addition, Code of Virginia § 58.1-602 includes equipment and supplies used directly in production line quality control within the scope of the manufacturing exemption.
In view of this background, I will now address the availability of the manufacturing exemption to the items described in your letter.
Environmental Control Systems
These systems include air handlers, fans with integrated coil units, monitors, controls, and instrumentation (including alarms, warning devices, and shutdown systems) to create the "air wash" and to maintain air pressure balance and proper temperature and humidity levels within the clean room. The environmental control systems also consist of removable high-efficiency particulate attenuation (HEPA) filters and the framework in which the filters are installed. The filters remove impurities and contaminants from the semiconductor manufacturing process.
The air handlers, fans, monitors, controls and instrumentation for the air systems are exempt production machinery as they guarantee the integrity of the Taxpayer's product (a quality control process). The HEPA filters are an integral part of the air handling system; therefore, they also qualify for exemption.
The framework for the filters is suspended from large beams in the ceiling of the building in which the clean room is located. It is not load-bearing and prevents impurities and contaminants from entering the clean room. The framework is made of special materials that do not generate, attract, retain or release particles or contaminants.
Framework and support structures are ordinarily considered taxable, as they are not used directly in manufacturing. However, in this case, the framework is an integral part of the environmental control system and performs a quality control function by preventing impurities, which could destroy the product, from entering the clean room and by ensuring that particles or contaminants are not generated, retained or released. Accordingly, the framework also qualifies for exemption.
The alarms, warning devices and shutdown systems warn of a situation that is life threatening to either the semiconductors or production personnel and take measures to correct the situation (e.g., create a negative air pressure or vacuum to remove potentially toxic gases).
Generally, items used for safety or accident prevention are taxable. See VR 6301 0-63(C). However, in this case, the alarms, warning devices and shutdown systems protect the integrity of the product by automatically taking corrective measures when the quality of the product is threatened by the improper level of gases. Thus, the alarms, warning devices and shutdown systems serve a quality control function and qualify for exemption. This contrasts with systems that have been held taxable in previous public documents which were not essential for product integrity and which were not capable of taking automatic corrective action.
Clean Room Antistatic Vertical Walls or Partitions
The walls or partitions have two functions: (1) to channel the vertical air wash that is essential for the removal of impurities and contaminants; and (2) to remove impurities and contaminants from the manufacturing process.
The walls or partitions are specifically designed to resist electrostatic discharge created by the air wash and have a special coating so they do not generate, attract, retain, or release particles or contaminants. The partitions are not load-bearing, can be removed and, in fact, are regularly removed when the Taxpayer reconfigures its clean room space to accommodate new machinery or to adjust air pressure balances.
The walls or partitions serve a quality control function by creating a sterile environment which is critical to guaranteeing the integrity of the Taxpayer's product. Therefore, they qualify for the manufacturing exemption.
Manufacturing Platform: Louvered Waffle Floor Panels and Raised Access Grating
For the "air wash" to function properly, a constant, balanced, vertical air flow is necessary throughout the entire clean room. To maintain this air flow, specialized louvered waffle "floor" panels are used. These individual panels are inserted into a raised access grating, which is attached to the exterior walls and floors of the building that contains the clean room. The grating is made of special materials that do not generate, attract, retain or release contaminants. The grating and various items of machinery are suspended on mobile vibration columns.
The louvered floor panels serve a quality control function similar to the walls or partitions and qualify for the manufacturing exemption.
As discussed above, support structures are normally considered taxable, as they are not used directly in manufacturing. In this case, the grating serves a quality control function, as the special materials from which it is made prevent the accumulation, generation, retention or release of particles which could render the product useless.
The mobile vibration columns (as well as the louvered panels and grating) are not the floor of the building, but instead are a platform designed to float inside the building and maintain the integrity of the semiconductors. The mobile vibration columns prevent particles from being jarred loose by equipment and ground vibrations. The columns are used directly in quality control and qualify for exemption.
Process Piping Systems and Tanks
The process piping systems furnish gases and chemicals that are used directly in the production of the semiconductors and also become a component part of the product. The gases and chemicals are used to "etch" silicon wafers during production and add certain compounds that change the electrical chemical characteristics of the wafer. The gases are also used to remove some of the etching chemicals from the wafers.
The definition of "manufacturing" found in Code of Virginia §58.1-602 provides that exempt production activities of a manufacturer begin "with the handling and storage of raw materials at the plant site." Because the chemicals and gases are used directly in the production of the semiconductors and in some instances become a component part of the finished product or are coated upon or impregnated into the product, the process piping systems and tanks used to store such chemicals and gases are exempt as raw materials storage tanks.
Deionized Water Cooling Systems
These systems furnish deionized water used to cleanse the semiconductors under production so as to guarantee the integrity of the product. Thus, they are exempt production machinery. These systems include tanks, specialized filtering systems, vacuum pumps, high pressure valves, pipes, and other specialized components.
Processing Vacuum and Compressed Air Systems
The processing vacuum and compressed air systems are exempt from the tax as they furnish a quality control function and provide a source of power for tools used directly in the manufacturing process.
Instrumentation and Wiring
Instrumentation and wiring used by personnel and automated systems to direct production machinery, tools, computers and other control systems are deemed to be used directly in exempt production activities.
Daifuku Wafer Particulate Minimization Tracking System
This system qualifies for the manufacturing exemption as it is used directly in the manufacturing process to transport the semiconductors from one step of production to another. It also serves a quality control function by shielding wafers from potentially destructive vibrations or environmental contaminants.
Specialized Non-Ultraviolet Illumination System
Special lighting is required to protect the wafer after the "printing" and prevents the etching process from being ruined. In addition, special fixtures with non-adhesive surfaces and special aerodynamic features are used so as to not interfere with the air wash process.
Under VR 630-10-63, lighting specifically designed to protect the integrity of products is exempt. In this case, the specialized non-ultraviolet illumination system is used directly in such a manner and is exempt.
Integrated Production Machinery Separated for Contaminant Prevention
In some cases, production machinery designed originally to operate as an integrated whole may be separated physically to reduce the risk of generating particles in the clean room. The machinery may be connected by piping to allow for proper operation. The machinery and the connecting piping are used directly in production and quality control and qualify for exemption.
Chemicals and Raw Materials
These chemicals and raw materials are used directly in the production of semiconductors and, in some cases, become component parts of the semiconductors. As provided by statute and regulation, chemicals and raw materials used directly in production are exempt from the tax.
Protective Coverings
The protective coverings are special suits worn by production personnel to reduce impurities and contaminants in the clean room. These suits help guarantee the integrity of the product and, therefore, are exempt production supplies.
If you have any questions regarding this ruling, or if the department can be of additional assistance, please let me know.
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- Sincerely,
Danny M. Payne
Tax Commissioner
- Sincerely,
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OTP/9674F
Rulings of the Tax Commissioner