Law360 (July 13, 2018, 7:55 PM EDT) — A Texas appeals panel upheld a trial court’s denial of a $1.49 million sales and use tax refund claim by Silicon Laboratories Inc. on Friday, saying state law doesn’t exempt purchases of software that creates blueprints for third parties to manufacture semiconductor chips.
A three-justice panel for the Third District of the Texas Court of Appeals in Austin unanimously affirmed the Travis County District Court’s finding that the circuit maker’s purchases of electronic design automation software tools, which lay out the design for chips manufactured by a separate company in Taiwan, don’t fall under the umbrella of the state’s manufacturing exemption because the software tools aren’t directly used in the process of manufacturing the chips.
In a 35-page opinion for the court, Justice Melissa Goodwin said that because the Taiwanese manufacturer establishes the parameters for Silicon Laboratories’ software design of the chips and the overseas company used a different design software than the software purchased by Silicon Laboratories, the trial court correctly upheld the Texas comptroller’s denial of a sales tax refund for the software during an audit period from May 1, 2003, through Oct. 31, 2006.
Justice Goodwin said even if the software itself could be exempt from taxation under the state’s manufacturing exemption, “the purchases of the [electronic design automation] software tools here were not ‘deemed exempt’” under the state code because they were too far removed from the manufacturing process.
Silicon Laboratories argued that even if the software purchase wasn’t exempt, then the “digital tools components” of the software, which create “functional logic,” a series of instructions and operations that were vital to the semiconductor chip’s use, should be exempt because state law said manufacturing starts with the design and writing of code. But the panel held that Silicon Laboratories misapplied that particular manufacturing definition because it applies only to finished programs, and the functional logic itself was not a completed product.
The court said state law does not define software, but cited a comptroller’s rule titled “software” that defined a computer program in part as “a series of instructions sold as a completed program.” The panel noted that comptroller’s rules are not binding, but also cited a previous case involving Verizon in which the court determined that software falls under the state’s definition of a computer program.
“These unchallenged findings are fatal to Silicon Labs’ position that the ‘functional logic’ was ‘sold as a completed program,’” the panel said.
The panel also tossed a comptroller’s challenge to the trial court’s jurisdiction to hear the case, saying Silicon Laboratories specifically referenced the issues it was challenging in motions for redetermination hearings of the comptroller’s original denial of the credit.
Jack Hohengarten, counsel for the attorney general and the comptroller, said he had no comment on the case Friday, referring questions to the agency’s press office.
The opinion did not specify the amount of sales tax at issue in the case. Karen Hudgins, spokeswoman for the attorney general, said in an email Friday the amount at issue was $1.488 million.
Chief Justice Jeff Rose and Justices Melissa Goodwin and Scott Field sat on the panel for the court.
Counsel information for Silicon Laboratories Inc. was not immediately available.
The comptroller and attorney general are represented by Jack Hohengarten and Melissa Hargis of the attorney general’s tax division.
The case is Silicon Laboratories Inc. v. Glenn Hegar, Comptroller of Public Accounts of the State of Texas and Ken Paxton, Attorney General of the State of Texas, case number 03-17-00061-CV, in the Texas Court of Appeals for the Third District.
by Paul Williams
July 13, 2018