A semiconductor fabrication EQUIPMENT manufacturer uses various gases to test and clean its machines in a cleanroom, then packages the finished machines for shipping -- are the test/clean gases exempt, does the packaging materials exemption apply, and does the broader cleanroom exemption for semiconductor manufacturing cover this manufacturer's own cleanroom?

Plain-English summary

A semiconductor fabrication EQUIPMENT manufacturer -- meaning it makes the machines that OTHER companies use to fabricate semiconductors, not semiconductors themselves -- rigorously tests and cleans each machine using various gases (helium, argon, krypton, nitrogen, oxygen, sulfur hexafluoride, nitrous oxide) at different points in production, entirely within a cleanroom environment. The taxpayer described seven stages: (1) vacuum leak testing with helium, (2) flow regulation testing with nitrogen/oxygen/sulfur hexafluoride, (3) characterization testing with nitrogen/oxygen/argon to verify RF plasma performance, (4) a marathon reliability test on over 1,000 wafers using nitrous oxide/sulfur hexafluoride/argon/oxygen/helium, (5) purge cleaning with high-flow nitrogen to remove contamination, (6) packaging the machine and its components in protective plastic while still in the cleanroom, and (7) shipping to the customer. The taxpayer believed both the testing/cleaning gases AND the tangible personal property connected to its cleanroom were exempt.

The Comptroller agreed only in part. The gases used in steps 1-5, all occurring BEFORE the manufacturing process is complete, qualify for exemption under Rule 3.300(d)(3) as materials directly used or consumed in the manufacturing/processing/fabricating operation and necessary or essential to it -- consistent with § 151.318(b), which exempts materials used to remove impurities, achieve quality control, or otherwise make the product more marketable, plus gases used to prevent contamination, fire, explosion, or other hazards during manufacturing. The wrapping/packing/packaging supplies used in step 6 to protect the machine and its components for shipping also qualify for exemption, under Rule 3.314(b)'s wrapping/packing/packaging supplies provision.

However, the Comptroller rejected applying the BROADER cleanroom exemption in § 151.318(q), which exempts all tangible personal property used in manufacturing/processing/fabrication in a cleanroom environment of a semiconductor PRODUCT (regardless of whether it's affixed to realty or physically inside the cleanroom). The taxpayer had argued its own cleanroom -- used to manufacture semiconductor fabrication equipment for use in OTHER companies' cleanrooms -- should qualify for the same treatment. The Comptroller disagreed: § 151.318(q) applies only to cleanrooms used to manufacture/process/fabricate a semiconductor PRODUCT itself, and a cleanroom used to fabricate semiconductor fabrication EQUIPMENT does not qualify for that broader exemption.

What this means for you

Semiconductor fabrication equipment manufacturers

Your test/clean gases used during the manufacturing process, and your final packaging materials, can be exempt under the general manufacturing and packaging exemptions -- but don't assume the specialized, broader semiconductor-cleanroom exemption (§ 151.318(q)) reaches your own cleanroom just because you also operate in one. That provision is limited to manufacturers of the semiconductor PRODUCT itself.

Semiconductor product manufacturers (as distinguished from equipment manufacturers)

If your cleanroom is used to manufacture, process, or fabricate the semiconductor product itself, § 151.318(q)'s broader cleanroom exemption for TPP used there may apply to you in a way it would not for an equipment manufacturer -- this letter is a useful contrast case showing where that line falls.

Accountants and tax professionals

This letter is a clean illustration of layering multiple manufacturing-related exemptions (general manufacturing-materials exemption, packaging-supplies exemption, and the semiconductor-specific cleanroom exemption) and recognizing that the narrowest, most specific exemption (§ 151.318(q)) doesn't automatically extend to adjacent, similarly-clean manufacturing environments.

Common questions

Q: Are gases used to test and clean manufacturing equipment during production exempt?
A: Yes, per this letter, when used before the manufacturing process is complete and necessary/essential to it, under Rule 3.300(d)(3) and § 151.318(b).

Q: Are the protective packaging materials used to ship the finished machine exempt?
A: Yes, per this letter, under Rule 3.314(b)'s wrapping/packing/packaging supplies exemption.

Q: Does the semiconductor cleanroom exemption (§ 151.318(q)) apply to a company that manufactures semiconductor fabrication EQUIPMENT rather than semiconductors themselves?
A: No, per this letter -- that exemption applies only to cleanrooms used to manufacture/process/fabricate the semiconductor product itself.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.318(b) (exemption for materials removing impurities/achieving quality control)
• Tex. Tax Code § 151.318(q) (semiconductor-product cleanroom exemption)
• 34 Tex. Admin. Code Rule 3.300(d)(3) (materials necessary/essential to manufacturing)
• 34 Tex. Admin. Code Rule 3.314(b) (wrapping, packing, packaging supplies)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9707556L

Original ruling text

July 9, 1997

Dear ***:

This is in response to your request for a ruling interpretation on your
client's taxation and use of gases and tangible personal property in its
manufacture of semiconductor fabrication machines. I have restated your fact
situation, discussion and questions below followed by my response:

You would like a ruling on the following:

1. Gases to rigorously test and clean each manufactured semiconductor
   fabrication machine.

2. Tangible personal property used in connection to their clean room in the
   manufacturing of semiconductor fabrication equipment.

You believe that both are exempt from sales and use tax under Texas law.

Your client, a semiconductor fabrication equipment manufacturer, uses gases to
rigorously test and clean each machine to ensure all computer, electrical and
mechanical systems are in perfect condition. All testing and cleaning is
performed in a cleanroom environment. The tests and cleaning occur at various
stages of production. The stages and specific gas used are as follows:

1. Vacuum leak testing - helium. Tests to indicate leaks which don't meet
   customer specifications.

2. Flow regulation testing- nitrogen, oxygen and sulfur hexafluoride. Tests to
   see if on-board gas flow controllers are calibrated to precise requirements.
   The [low regulation must be tuned and verified using gases with specific
   molecular weights. However, many of those gases are hazardous to personnel so
   testing is performed with these non-toxic gases.

3. Characterization testing- nitrogen, oxygen and argon. Test to see if the
   controlled radio frequency plasma is performing to customer specifications. An
   RF plasma is the result of using very high RF plasma to ignite gas molecules,
   forming a controlled "fire" within the process chamber. The gas molecules serve
   as the fuel for the "fire". Here again, these surrogated gases are used for
   safety reasons.

4. Marathon test - nitrous oxide, sulfur hexafluoride, argon, oxygen and
   helium. This test is designed to simulate actual semiconductor fabrication.
   This test is run on over 1000 wafers to verify the machine's reliability.

5. Purge cleaning - nitrogen. After the machines are qualified, nitrogen at
   high flow rates is passed through the vacuum stream to remove any contamination
   which may have accumulated during assembly or testing.

6. The machines are readied for packaging. Components which would be damaged
   in shipping are detached. Each component is then sealed twice in protective
   plastic to protect them from contamination during shipping. The base machine is
   also sealed in protective plastic. The sealing is performed while the machine
   is still in the cleanroom. The plastic protective covering will not be removed
   until the machine and components arrive in the customer's cleanroom.

7. Product is shipped to customer.

Texas tax code ¤151.318(b) and 34 TAC ¤3.300 provide that any material which is
used or consumed in a process to remove impurities, to achieve quality control
or otherwise make the product more marketable are exempt. The code further
provide gases used on premise of a manufacturing plant to prevent contamination
of raw material or to prevent a fire, explosion or other hazardous or
environmental situations at any stage of the manufacturing process or loading
or storage of the product or raw material on premise are exempt.

Finally, Texas tax code section 151.318(q) provides that all tangible personal
property used in manufacturing, processing or fabrication in a cleanroom
environment of a semiconductor product, without regard to whether the property
is affixed to or incorporated into realty or actually contained in the
cleanroom environment is exempt. The manufacturing of semiconductor fabrication
equipment in a cleanroom environment for use in a cleanroom environment in
which semiconductors are fabricated, would appear to qualify for the same
exemption.

Response: Gases and materials directly used or consumed in any phase of the
actual manufacturing, processing, or fabricating operation are exempt if they
are necessary or essential to the operation. See subsection (d)(3) or Rule
3.300. Therefore, the gases used in steps 1-5 prior to completion of the
manufacturing process would qualify for exemption. Wrapping, packing, and
packaging supplies used in step 6 to further the sale of the product qualify
for exemption under subsection (b) od Section 3.314. Wrapping, Packing,
Packaging Supplies, Containers, Labels, Tags, Export Packers, and Stevedoring
Materials and Supplies.

Texas tax code section 151.318(q) applies only to tangible personal property
used in connection with the manufacturing, processing, or fabrication in a
cleanroom environment of a semiconductor product. A cleanroom used to
fabricate semiconductor fabrication equipment does not qualify for the
exemptions provided under this section.

This opinion is based on the facts presented. Other facts though similar may
provide a different result.

I hope this information answers your questions. If you need additional
information, please
call me toll-free at 1-800-531-5441, extension 3-4502. The direct line is
512/463-4502. You may also write to Tax Policy Division, Comptroller of Public
Accounts. My Internet address is: [email protected].

Sincerely,

Gilbert Zamora
Tax Policy Division