By Stephanie Do and Andrew Appleby
The Texas Comptroller determined that an integrated circuit manufacturer’s purchases of software tools used to design and test the software code embedded in its semiconductor chips did not qualify for the manufacturing exemption for sales and use tax purposes. For Texas’s manufacturing exemption, software manufacturing begins with software design or code writing, and includes software testing and demonstration. The taxpayer contended that its purchases of software tools qualified for the manufacturing exemption because such tools were used to test the functional logic of the software code that was ultimately embedded into its semiconductor chips. The Comptroller, however, determined that the software code embedded into the semiconductor chips functioned as hardware, not software, and ruled that the manufacturing exemption for software manufacturing was not applicable to the taxpayer’s purchases. The Comptroller also determined that the software tools were not incorporated into the semiconductor chips and rejected the taxpayer’s alternative argument that the software tools were exempt as sales for resale. Tex. Comp. Decision 102,151 (Feb. 5, 2014).