### T E X A S C O U R T O F A P P E A L S , T H I R D D I S T R I C T , A T A U S T I N

NO. 03-17-00061- CV

Appellan t, Silicon L aboratorie s, Inc. // Cross-Appellan ts, G lenn Hegar, Com ptroller of P ubl ic Acc ounts of

the State of T exas; and Ke n Paxt on, Attorney G eneral of the

State of Texas

v. Appellees, G lenn Hegar, Com ptroller of P ubl ic Acc ounts of the State of T exas; and Ke n Paxt on, Attorney G eneral of the State of Texas // Cross-Appellee,

Sili con Laboratories, Inc.

F ROM TH E DISTRI CT COURT O F TRAVIS CO UNTY, 126 TH JUDICI AL DISTRICT NO. D-1 -GN-1 5-0 0030 2, H ONO RAB LE SCO TT H . JENK INS, J UDGE P RESIDING

M E M O R A N D U M O P I N I O N

Sili con L abora

tories, I nc. (Silicon L abs) appea ls the portion of the tr i al court’s judgme nt following a bench trial that denied its re fund claim for sales and use taxes that it pa id on the purcha se of Electronic Desig n Automation (EDA) softwar e tools for the tax period May 1, 2003,
to October 31, 2006. Sili con L abs claimed that the EDA softwar e tools wer e exempt from the sales 1 and use tax beca

use t hey fell wit hin the m anufa cturing exemption. See Tex. Tax Code § 151.318

The trial court g rante d Sili con L abs’ ref und claim for sales and use taxes that it paid on the 1 purcha se of memory elements, and t h e C o m p t rol ler of Public Acc ounts and the Attorney Gene ral have not appea led that ruling

. The trial court conclude d that the purcha se of the memory elements fell wi thin the s ale- for- resa le ex emption in sections 151.006 and 151.302 of t he Tex as Tax Code. See Tex. Tax Code §§ 151.00 6 (d ef ining “sale for resa le”) , .302 (exempting “sale for resa le of a taxable item” from taxes imposed by chapte r).(g ener ally exempting proper ty used in m an u facturing from taxes imposed by chapte r). The Comptroller of Public Acc ounts and the Atto rn ey Ge n era l cross appea l in the alternative, 2 challeng ing the trial court’s jurisdiction over particula r arg uments made by Sili con L abs to support its refund c laims. For the f ollowing r easons, we aff

irm the trial cour

t’s final judg ment.
Background Manuf acturing Exem ption To g ive context t o t h e p ar t ies’ dispute, we beg in with a brief overvie w of the manufa cturing exemption, one of the exceptions to the g ener al rule that sales tax is imposed on any “sale ” of a “taxable item” in the state. See Tex. Tax Code §§ 151.051 (stating g ener al rule that “tax i s i m p osed on eac h sale of a taxable item in this state”) , 151.318 (manufa cturing exemption). I n g ener al terms, “[t] he manufa cturing exemption exempts a person who produce s cer tain ty pes of tang ible persona l proper

ty for sale to ultimate consumers from having to pay sales tax on its purcha se of cer tain otherwise- taxable tang ible persona l proper ty that is used in the p ro d u ct ion proce ss.” Combs v. Home & Garden Party, Ltd. , No. 0 3 -09-00673- CV, 2010 Tex. App. L EXI S 8875,
at *7 (Tex. App.—Austi n No v . 3 , 2010, no pet.) (mem. op.); see GTE Sw. Inc. v. Combs , No. 03-08-00561- CV, 2010 Tex. App. L EXI S 4223, at *7–9 (Tex. App.—Austin J une 3, 2010, pet. denied) (mem. op.) ( g ener ally descr ibing manufa cturing exemption). The manufa cturing exemption

serve s “to avoid py

ramiding the sales tax on succe ssive buy ers and sellers, which would result in the ultimate consumer paying sales tax on sales tax.” Sharp v. Tyler Pipe Indus., Inc. , 919 S.W .2d 157,

Unless otherwise stated, we ref er to the Comptroller of Public Acc ounts and the Attorney 2 Gene ral c ollectively

as the Comptroller. 2161 (Tex. App.—Austin 1996, writ denied)

. The exempt i o n i s al so intended “to encour ag e

economic development in this state” and “to strike a balanc e betwee n the policy of avoiding multipl e taxation and the need to ra ise reve nue for the state.” Id. Relevant to the pa

rties’ dispute, subsec tion (a)( 2) of se ction 151.318 provides:
(a) The following items are exempted from the taxes imposed by this chapte r if sold, leased, or

rente d to, or stored, used, or consumed by

a manuf actur er:

. . . (2) tang ible persona l proper ty direc tly used or consumed in or during the actua l manufa cturing , proce ssing, or fabr ication of tang ible persona l proper ty for ulti m ate sale if the use or consumption of the proper ty is nece ssary or essential to the manufa cturing , proce ssing, or fabr ication operation and direc tly makes or cause s a chemica l or phy sical cha

ng e to: (A) the product being manufa cture d, proce ssed, or fabr icated for ultimate sale; or (B ) any intermediate or preliminar y product that will become an ingr ed i ent or component part of the product being manufa cture d, proce ssed, or fa

bricated for ultimate sa le; . . . .

Tex. Tax Code § 151.318(a) (2 ). Al t houg h section 151.318 does not define “manuf actur er,” Comptroller Rule 3.300(a) (8) provides that a manufa cture r is “[ a] p er son who is eng ag ed in manufa cturing ” and that the term includes “proc essors, fabr icators, submanufac turers, and custom manufa c tu

r e r s . ” 3 4 T e x. A d

mi n . Co de § 3.300(a) (8) (Comptroller of Pub. Acc ounts, Manufa cturing ; Custom Manufa cturing ; Fa bricating; Processing (Tax C o d e, §§ 151.005, 151.007, 151.318, and 151.3181)).

3Also rele vant to the parties’ dispute, subsection (b)( 2) of section 151.318 expressly

provides that the manufa cturing exemption includes “semiconduc tor fabr ication clea nrooms and equipment.” Tex. Tax Code § 151.318(b). For purposes of subsection (b), “semiconduc tor fabr ication clea

nrooms and equipment” means:

all tang ible persona l proper ty , without reg ard to whether the proper ty is aff ix ed to or incorpora ted into rea lty , used in connec tion with the manufa cturing , proce ssing, or fabr ication in a clea

nroom environment of a semiconductor product, without reg ard to whether the proper

ty is actua lly contai n ed i n t he clea nroom environment. The term includes integ rate d sy stems, fix tures, and piping, all proper ty nece ssary or adapte d t o reduc e contamination or to control airflow, temperature, humidity , chemica l purity , or other environmenta l conditions or manufa cturing toleranc es, and production equipment a

nd machiner

y . The term does not include the building or a perma nent, nonremova

ble comp o n ent of the building, that houses the clea nroom environment. The term includes moveable clea n ro om partitions and clea nroom lighting

. “Semiconductor fabr ication clea nrooms and equipment” are not “intrapla nt transportation equipment” as that ter m is used in Subs ection (c )(1)

.

Id. § 151.318(q). The “limitations in subsection (a) (2) that ref er to tang ible person al p ro p erty direc tly causing chemica l an d phy sical chang es to the product being manufa cture d, proce ssed, or fabr icated for ultimate sale” do not apply to “semiconduc tor fabr ication clea nr o o ms and equipment.” Id . § 151.318(s)(1)

.

For p u rp o ses of the manufa cturing exemption, “‘ma nufac turing ’ includes eac h
operation be g inning with the first stag e in the production of tang ible persona l pr operty and ending with the completion of t angible persona l proper ty having the phy sical proper ties (including packa g ing, if any

) that it has when transfe rre d from the manufa cture r to another .” Id. § 151.318(d);

see 34 Tex. Admin

. C o d e § 3.300(a) (9) (def ining “manuf

actur ing” and explaining that “first production stag e means the first act of production, and it shall not include those acts in prepa ration

4of production”)

. And “the manufa cturing of computer softwar e beg ins with the desig n and writing

of the code or prog ram for the softwar e and includes the testing or demonstration of the softwar e.” Tex. Tax Code § 151.318(p); see 34 Tex. Admin. C ode § 3.300(a )(9)

.

The taxpay er claiming the manufa cturing exemption under section 151.318 has the “b u rd en of proof that the exemption is applicable and that no exclusion under Subsection (c ) applies.” Tex. Tax Code § 151.318(r) ; 34 Tex. Admin. Code § 3.300(j); see GT E S w
. In c. , 2010 Tex. Ap p. L EXI S 4223, at *6. The exclusions to the exemption in subsection (c) include “re sear ch or de velopment of ne w produc ts.” Tex. Tax Code § 151.318(c) (3).

The Par ties’ D ispu te 3

The parties’ dispute conce rns the EDA softwar e tools that Sili con L abs purc h a s e s and

uses to desig n and develop “mix ed signa l” semiconductor chips that it sells for use in a broad rang e of applications including elec tronic products such as mobile phones and g aming consoles. Sili con 4
L abs uses the EDA softwar e tools to desig n and d evelop semiconductor chips in a virtual environment a

nd then contracts with a third-pa rty foundry in Taiwan f

or the a ctual manuf

actur ing and fabr ication of the semiconductor chips. The foundry provides a “Proce ss Desig n Kit” to Sili con L abs that specifie s the foundry ’s manufa cturing tolera n c e s , a n d Si li c o n L abs then uses EDA softwar e tools to desig n and develop the semiconductor chips in a virtual environment within the foundry ’s

The fac tual backgr o u n d o f the parties’ dispute primarily is taken from the trial court’s 3 unchalleng ed finding s of fa ct. A mix ed sig nal chip incorporates a nalog and dig ital proce ssing onto the sa me integ rate d 4 circ uit. Analog signa ls, such as sound an d ra d io wave s, are conver ted i nto digital signals that the elec tronic produc ts can proc ess. 5specifie d manufa cturing toleranc es. Among the components of the semiconductor chips are “log ic

g ates” which are etche d or embedde d within the chips’ silicon substrate. A collection of these logic
g ates implements “func tional logic ”—a series of instructi o n s o r logic al operations within the semiconductor c hip.

The EDA softwar e tool s include tool s t h at ai d i n: (i) gene rating an electric design schematic repr esenting the entire chip, (ii) transfor ming the elec tric desig n schematic into a phy sical lay out of how the various elec tric devices wil l be phy sically positioned on the chip, (iii) verify ing that the phy sical lay out is an acc urate descr iption of the elec tric desig n schematic (the lay out versus schematic (LVS) chec k), (iv) verify ing that all phy sical dimensions within the phy sical layout meet the foundry ’s desig n rules (the desig n rule chec k (DRC)), (v) cre ating the functional logic in a virtual environment (the Ver ilog EDA tool), (vi) desig ning and placing the elec trical connec t i o n s an d integ rating the chip’s various components, and (vii) verify ing throug h simulation that the integ rate d circ uits of the chip will operate prope rly

.

After Sili con L abs completes the semiconductor chip’s desig n using the EDA

s o ft wa re tools, it cre ates and transmits elec tronically to the third-par ty foundry a g raphic desi gn sy stem (the “GDS” file) “desc ribing a set of photolithogra phy masks” that the foundry fabr icates and then uses to fabr icate the semiconductor chips. The masks are used to pattern some of the lay ers of the silicon substrate, or “wa fer ,” and then are cut into smaller pi ec es o r “c h i ps.” The chips are place d in a packa g e, which has a number of connec tion points, or “pins,” that provide elec trical

connec tions betwee n the packa g ed semiconductor chip and external circ u i t s or components. The foundry perf

orms its own DRC using its own EDA softwar e tools that it purcha sed befor e initiating

6actua l production of the semiconductor chips. The EDA softwar e tools that Sili con L abs purcha sed

are not used by

the third-par

ty foundry in its m anufa cturing proce ss.

The Refun d Claims

The Compt ro l l er audited Sili con L abs’ sales and use tax rec ords for the period May 1, 2003, to October 31, 2006 (the audit period) and conclude d t h at S i l i co n L abs owed sales
taxes on its purcha ses of the EDA softwar e tools during the audit period. Following t h e au d i t, Sili con L abs reque sted a rede termination hear ing, which was assig ned Hea ring No. 102,151. Sili con L abs also filed a s ep ar at e ref und claim for the same audit period and reque sted a ref und hear ing, which was assig ned Hea ring No. 101,320. Both claims conce rned the EDA softwar e tools that Sili con L abs had purcha sed from various vendors during the audit period, and o n e o f t he grounds raised by Sili con L abs to support its ref und claims was that the EDA softwar e tools qualified for the manufa cturing exemption provided in section 151.318 of the Tax Code. S ee T ex . T ax Code § 151.318. The substance of both cl aim s was addre ssed in Hea ring No. 102,151. After the Comptroller denied the claims in Hea ring No. 102,151, Sili con L abs filed a mot ion for rehea ring , which was denied. Sili con L abs then filed suit in Travis County District Court from the Comptroller’s dec ision in HearingNo. 102,151.

After Sili con L abs filed suit, the parties filed an agr ee d motion to dismiss Hea ring No. 101,320 to allow Sili con L abs to proce ed to district court on that claim as well, stating that “the substantive tax issues addre ssed in Hea ring No. 102,151 are applicable to the issues addre ssed in this hear ing” and that the parties ag re ed t h at d i s missal was appropr iate in order for Sili con L abs “to pursue its ca se in Travis County District Court pursuant to Chapter 112 of the Texas T ax C ode by

7joini n g wi t h [ i t s] pending lawsuit that addre sse[d] the tax issues in Hea ring No. 102,151.” The Comptroller enter ed a writ t en decision dismiss ing Hea ring No. 101,320 in acc ordanc e with the parties’ ag ree ment, and Silicon L abs filed a motion for rehe aring , which wa s also denied. Sili con L abs then filed a

separ ate suit from the Comptroller’ s decision in Hea ring No. 101,320. Th e s u i t s challeng ing the Comptroller’s decisions in Hea ring Nos. 102,151 and 101,320 wer e consolidated and then tried to the tri al co urt in 2016. The parties stipulated to the
amount of taxes at issue and submitt ed documentar y evidenc e, including the “S i l ab s C hip
Fa brication Ag ree ment” betwee n Sili con L abs and the third-par ty foundry in Taiwa

n. Sili con L abs’ wi t n es ses wer e two of its employ ees, a senior direc tor of desig n and the vice president of centr al
eng ineer ing, and the C o m ptroller’s witness was an expert in the desig n and manufa cturing of semiconductor chips. The fac ts w ere larg ely undisputed. The witnesses testified about the desig n and manufa cture of the semiconductor chips by Sili con L abs and the third-par ty foundry inTaiwan, the compon en ts of the chips, the differ ent EDA softwar e tools that Sili con L abs used, the role of
t h o s e t o o l s in the desig n and manufa cture of the chips, and the division of work betwee n Sili con L abs and the third-par

ty foundry to produce the semiconductor chips. The witnesses’ testimony was consistent that the EDA softwar e tools at issue wer e neces s ar y t o d esig n and produce the semiconductor chips sold by Sili con L abs, and that t he third-par ty foundry did not use the EDA softwar e tools that Sil icon L abs had pur chase d but its own in i ts manufac turing proce ss.

8Following the bench trial, the trial court enter ed judgme nt in favor of the Comptroller

as to Sili con L abs’ reque st for a tax ref und on Sili con L abs’ purcha ses of the EDA softwar e tools. 5 The trial court also enter ed finding s of fac t and conclusions of law. Sili con L abs filed a motion for new tria l, which was ove rruled by operation of law. These cross-a ppeals followe d.
Analysis Stand ard of Review

I n an appea l from a bench trial, we revie w a trial court’s conclusions of law de novo, aff irming the judgme nt on any leg al theory that finds support in the evidenc e. See BMC Software Belgium, N.V. v. Marchand , 83 S.W .3d 789, 794 (Tex. 2002); W orford v. Stamper , 801 S.W .2d 108, 109 (Tex. 1990). “[W ]e will not reve rse an err oneous conclusion if the trial court rende red the
proper jud gm en t.” City of Austin v. W hittingt on , 384 S.W .3d 766, 779 n.10 (Tex. 2012); see Marchand , 83 S.W .3d at 794.

We revie w a trial court’s finding s of fac t for leg al and fac tual sufficie ncy of t h e evidenc e by the same standards applied to a jury verdic t. See Ortiz v

. Jones , 917 S.W .2d 770, 772 (Tex. 1996); Anderson v. City of Seve n Points , 806 S.W .2d 791, 794 (Tex. 1991); see City of Keller v. W ilson , 168 S.W .3d 802, 827–28 (Tex. 2005) (desc ribing leg al suffic iency standard of

revie w); Cain v. Bain , 709 S.W .2d 175, 176 (Tex. 1986) (desc ribing fac tual sufficie ncy standard of revie w). When finding s of fac t are filed and unchalleng ed, “they are binding on an appellate court unless the

As previously stated, the trial co u rt fo u n d i n Sili con L abs’ favor on its claim as to its 5 purcha ses of memory

elements, a

nd the Comptroller has not appe aled that r uling. 9contra

ry is establis h ed as a matter of law, or if there is no evidenc e to support the finding .” McG alliard v. Kuhlmann , 722 S.W .2d 694, 696 (Tex. 1986).

The parties’ issues also addre ss statutory and rule construction, questions of law that

we r eview de novo. See First Am. T itle Ins. Co. v. Combs , 258 S.W .3d 627, 631 (Tex. 2008); see Rodriguez v. Servic e Lloyds Ins. Co. , 997 S.W .2d 248, 254 (Tex. 1999) (construing administrative

ru l es i n same manner as statutes). Our primary conce rn in construing a statute is the ex p re s s statutory lang uag e. See Galbraith Eng’g Consultant s, Inc. v. Pochuc ha , 290 S.W .3d 863, 867 (Tex. 2 0 0 9). “We thus construe the text acc ording to its plain and common meaning unless a cont ra ry intention is appar ent from the context or unless such a construction leads to absurd results.” Presidio Indep. Sch. Dist. v. Scott , 309 S.W .3d 927, 930 (Tex. 2 0 1 0 ) (c i t i n g City of Rock wall v. Hughes , 246 S.W .3d 621, 625–26 (Tex. 2008)). We also “re ad the statute as a whole and interpre t it to g ive ef fe ct to ever

y part.” Railroad Comm’n v. Texas Citi zens for a Safe Future & Cle a n W a t er , 336 S.W .3d 619, 628 (Tex. 2011) (quoting City of San Antonio v. City of Boerne , 111 S.W .3d 22, 25 (Tex. 2003 )). Fur

ther, a prec ondition to defe renc e to an ag ency ’s interpre tation of a statute is ambig uity

. Southwest Royalties, Inc. v. Hegar , 500 S.W .3d 400, 404–05 (Tex. 2016); see Combs

v. Roark A mus eme nt & Vending, L.P. , 422 S.W .3d 632, 635 (Tex. 2013) (desc ribing
ag ency -def

ere nce doctrine) ; Combs v. He a l t h Care Servs. Corp. , 401 S.W .3d 623, 629–30 (Tex. 2013) (same). Statutory exem p ti o n s f r o m ta xa ti o n —like the manufa cturing exemption—are strictly construed beca

use “they undermine equality and uniformity by placing a gre at er burden on some taxpay ing businesses and individuals rathe r than placing the burden on all taxpay ers equally .” North

10Alamo W

ater Supply Corp. v. W

illacy Cty. Appraisal Dist. , 804 S.W .2d 894, 899 (Tex. 1991). The claimant has the burden o f p ro o f to show that an exemption applies. Id. “An exemption must aff irmatively appea

r in the statute, an d al l d oubts are resolved in favor of the taxi ng authority .” GTE Sw. Inc. , 2010 Tex. App. L EXI S 42 2 3 , at * 6 (citing Bullock v. National Bancshares Corp. , 584 S.W .2d 268, 272 (Tex. 1979)); see also Southwest Royalties Inc. , 500 S.W .3d at 404 (explaining that tax exemptions are narr owly construed an d t h at t ax pay er has burden to “cle arly show” that exemption applies). “On the other hand, the conce pt that a tax exemption must be ‘strictly ’ construed ‘ca

n n o t b e u s ed as an excuse to stray from rea sonablene ss.’” GTE Sw. Inc. , 2010 Tex

. Ap p . L EXI S 4223, at *7 (citing Tyler Pipe Indus., Inc. , 919 S.W .2d at 161). And “the

overa ll scheme and intent of the leg islation must not b e o v er l o o k ed.” Tyler Pipe Indus., Inc. , 919 S.W .2d at 161–62 (citation omitted). Wit h the fore g oing in mind, we turn to the parties’ issues.

Cross-A ppeal b y the Com ptroller

We beg in with the jurisdictional issue raised by the Comptroller in the alternative on cross appeal. See Crit es v. Colli ns , 284 S.W .3d 839, 840 (Tex. 2009) (d et er m i n i n g j urisdictional questions befor e addre ssing merits); Combs v. Chevron, Inc. , 319 S.W .3d 836, 844 (Tex. App.—Austin 2010, pet. denied) (explaining that c ompliance with proc edura l require ments of tax protest law was jurisdictional prer equisite for trial court to hear and decide merits of tax ref und suit). The Comptroller argues that the tria l c o u r t d id n o t h a

v e jur isdiction over Sili con L abs’ “cle anroom argument” that was based on subsections (b) and (q) of section 151.318 beca use Sili con L abs failed to make the argument prior to bring ing its suit for judicial revie w, proper ly prese nt it in

a motion for rehe aring , or proper ly raise it in its initial administrative ref und reque st. To support its

11position, the Comptroller relies on the fac t that the motion for rehe aring in No. 101,320—in which

Sili con L abs specific ally ref ere nced subsections (b )( 2 ) an d (q) and arg ued that the EDA softwar e tools wer e exempt from sales taxes under those subsections—was not filed until sever al months afte r the suit for judicial re view in No. 102,151 wa s filed.

The Tax Code authorizes suits for tax ref und claims but sets jur isdictional
prer equisites fo r d o i n g s o . See Tex. Tax Code §§ 112.151 (re quiring claimant to follow administrative proce dures specifie d in sections 111.104 and 111.105 of Tax Code prior to bring ing suit for tax ref

und claim), .152 (limiti ng issues in suit broug ht under subchapte r to “g rounds of err or contained in the motion for rehe aring ”); see also id

. §§ 111.104 (re quiring written claim for ref und
to be filed with Comptroller), .105 (addr essing hear ing on tax ref und claim and motion for rehe aring require ment); Chevron, Inc. , 319 S.W .3d at 844. Section 111. 0 0 4 (c )( 2 ) s t ates that a claim for a ref und must “state fully

and in detail ea ch re ason or g round on which the claim is founded.” Tex. Tax Code § 111.104(c) ; Hegar v. Ryan, LLC , No. 03-13-00400- CV, 2015 Tex. App. L EXI S 5096,
at *25–28 (Tex. App.—Austin May 20, 2015, n o pet.) (mem. op.) (conc luding that section 111.104(c) (2) was not ambiguous, citing common meaning of “fully ” and “deta il,” and interpre ting plain lang uag e in context and conjunction with other sections of Tax Code that contain simil ar lang uag e). Subsection (c) (2 )’ s require ment ensure s that the Comptroller is on notice of the leg al basis of the claim. See Ryan, LLC , 2015 Tex. App. L EXI S 5096, at *28 (citing Court’s interpre tation of phrase “fully and in detail” in section 112.051 of the Tax Code “that the ‘re ason’ must be stated in such a way as to put the comptroller on notice of the leg al basis of the claim”) ; see also Tex. Tax C o de § 112.051(b) (requiring written protest that is submitt ed with pay ment to “state ful l y an d i n

12detail eac h rea son for rec overing the pay ment”). And section 111.105(d) of the Tax Code simil arly
states that “[a] motion f

or rehe aring on a tax re fund cla im must be wr itten and asser t e ach specific
g round of e rror .” Te x . Tax Code § 111.105(d).

I n the proce dural context of these combined suits for ref und claims, we conclude that the trial court had jurisdiction to consider Silicon L abs’ arguments that wer e based on subsections (b)( 2) and (q) of section 151.318. Sili con L abs specific ally ref ere nced the subsections in the motion for rehe arin g i n He aring No. 101,320, and Sili con L abs in its written g rounds for ref unds filed with the Comptroller specific ally ref ere nced the manufa cturing ex em p tion in section 151.318. See Strayhorn v. Lexington Ins. Co. , 128 S.W .3d 772, 779–81 (Tex. App.—Austin 2004), aff’d , 209 S.W .3d 83 (Tex. 2006) (ana ly zing protest letters in context of particu l ar p ro ce eding and concludingthat Comptroller “wa s on notice of the le g al base s for their claims” and that claimants had substantially met require ments of section 112.151); cf. Chevron , 319 S.W .3d at 845 (conc luding th at t ri al court lacke d jurisdiction over unrelated claims that wer e first raised in motion for rehe aring ); L o ca l N

eo n Co. v. Strayhorn , No. 03-04-00261- CV, 2005 Tex. App. L EXI S 4667, at *14–15 (Tex. App.—Austin J une 16, 2005, no pet.) (me m. op.) (conc luding that “ bare statement” that paying taxes under protest did not s atisfy “purpose of the written protest require ment beca use the letter does not inform the Comptroller on what basis she must defe nd the suit”); see also Southwest Royalties, Inc. v. Combs , 501 S.W .3d 95, 97 (Tex. App.—Austin 2014), aff’d , 500 S.W .3d 400 (Tex. 2016) (obser

ving that claimant “asse rted that it was entitled to an exemption under three subsections of the manufa cturing exemption” when it soug ht tax ref und). Thus, we overr

ule the Comptroller’s jurisdictional argument on cross a ppeal a nd turn to Sil icon L abs’ a ppeal.

13Sili con Labs’ App eal Sili con L abs raises two issues on appea l. I t arg ues that the trial court err ed by ruling that the EDA softwar e tools we re not exempt from sales taxes pursuant to the manufa cturing

ex em p t i on under subsection (a) (2)( A) of section 151.318 and, in the alternative, that the “dig i t al tools components” of the EDA softwar e tools wer e exempt under su b s ec tion (a) (2)( B) of section 151.318. We addre ss eac h in turn.
Section 151.318(a)( 2)(A) I n its first issue, Sili con L abs argues that it was exempt fr om pa y ing sales tax on its purcha ses of the EDA softwar e tools during the audit period pursuant to section 151.318(a) (2)( A). As previously

stated, sec tion 151.318(a)( 2)(A) provides in re levant par t that:

The following items are exempted from the t ax es imposed by this chapte r if sold, lease d, or rente d to, or stored, used, or consumed by a manufa cture r: . . . (2) tang ible persona l pr operty direc tly used or consumed in or during the ac tual manufa cturing , proce ssing, or fabr ication of tang ible persona l proper ty for ultimate sale if the use or consumption o f t h e p roperty is nece ssary or essential to the manufa cturing , proce ssing, or fabr ication operat i o n an d direc tly makes or cause s a chemica l or phy sical chang e to: (A) the product being manufa cture d, proce ssed, or fabr icated for ultimate sale.

Tex. Tax Code § 151.318(a) (2)( A).

We conclude that the applicable lang uag e of subsection(a )(2) (A) for purposes of this
appea l is not ambig uous and, thus, interpre t the text acc ording to its common and plain meaning in the contex t of t he fr amewor k of sec tion 151.318. See Scott , 309 S.W .3d at 930. The statute does
not define “ac tual” or “dire ct ly ” so we apply their common meaning s. See W ebster’s Third New

14International Dictionary 22 (2002) (def ining “ac tu al ” t o m ea n “existi ng in fac t or rea lity ”), 641 (def ining “dire ctly ” to mean “without any intervening space or time”); see also T yl er Pipe Indus., Inc. , 919 S.W .2d at 159–60, 162–63 (re fer ring to common meaning of “a ctual” in a naly sis of former version of manufa cturing exemption and discussing o t h er courts’ interpre tation of “dire ctly ” in similar contexts).

Be cause “manuf

actur ing” is define d by the statute and corr esponding rule, we apply those definitions. See Southwest Royalties, Inc. , 500 S.W .3d at 406 (explaining that, “[a]lt houg h the Comptroller’s definition is not binding, [courts] may consider it in deter mining the definition most consistent with the scheme of t he st atute”) ; see also Southwest Royalties, Inc

. , 501 S.W .3d at 104 (discussing definition of “manuf actur ing” under section 151.318(d))

. Under the definition provided in the statute, the term “ includes ea ch oper ation beg inning with the f irst stag e in the production of tang ible persona l proper

ty and ending with the completion of tang ible persona l proper ty having the phy sical proper

ties (including packa g ing, if any ) that it has when transfe rre d by the manufa cture r to another .” Tex. Tax Code § 151.318(d); see also W ebster’s at 1581 (def

ining “oper ation” as “a doing

or perf o rm i n g es p. of action: work, deed” ). Pursuant to the corr esponding rule, “[t] he first production stag e means the first act of production, and it shall not include those acts in prepa ration for pr oduction.” 34 Te x . Admin. Code § 3.300(a) (9) ( defining “manuf actur ing” ). The plain lang uag e of subsection (a) (2)( A) require s that the use of the proper ty cause

a direc t “che mical or phy sical chang e” and “is neces s ar y o r essential” to the manufa cturing

o p e r a ti o n , a s well as requiring that the tang ible persona l proper ty —here , the EDA softwa

r e to o ls

— b e “dire ctly used

. . . in or during the actua l manufa cturing

. . . of tang ible persona l proper ty for ultimate

15sale” —here the semiconduc tor chip. See Tex. Tax Code § 151.318(a) (2)( A); see also Tex. Gov’t

Code § 311.021 (pre suming that entire statu t e i s i n t en ded to be eff ective) ; Texas Citi

zens , 3 3 6 S

. W

. 3 d at 628 (explaining that courts interpre t statutes to g ive eff ect to eac h part of statute ); GTE Sw. Inc. , 2010 Tex. App. L EXI S 4223, at *16 (explaining that, in context of sales tax statute, “phra se ‘tangible personal property for ulti mate sale’ denote s a p roduct manufactur ed, processed,

or fabr icated in anticipation of a specific ty pe of taxable transac tion—the ‘sale’ of ‘tang ible persona l
proper ty ’”)

. Thus, to be entitled to an exempti o n u n d er s u b s ection (a) (2)( A), in addition to the “dire ct chang e” and “nec essar y or essential” require ments, Sili con L abs had the burden to “ clea rly show” that the EDA softwar e tools wer e “dire ctly used” in t h e “ac tual manufa cturing ” of the semiconductor chips, and not in prepa ration for the first stag e of the product i o n of those chips. See 34 Tex. Admin. Code § 3.300(a) (9) (def ini n g “[m] anufa cturing ”); Southwest Royalties, Inc. , 500 S.W .3d at 404 (re quiring taxpay er to “ clea rly show” that tax exemption applies); cf. Tex. Tax Code § 151.318(p) (“ F o r th e purposes of this section, the manufa cturing of computer softwar e beg ins with the desig n and writing of the code or prog ra m for the softwar e and includes the testing or demonstration of the sof

tware .”). To the ex tent Sili con L abs was rely ing on su b s ection (a) (2)( A), even i f we assume that it meets the definition of a manufa cture r, we cannot conclude that Sili con L abs clea rly showed that its purcha ses of the EDA softwar e tools wer e exempt under subsection (a) (2)( A). See Southwest Royalties , Inc. , 500 S.W .3d at 404; W hittingt on , 384 S.W .3d at 779 n.10; Marchand , 83 S.W .3d at 794; McG alliard , 722 S.W .2d at 696. The tria l court’s unc halleng ed finding s included:

1614. Although Sili con L abs desig ns, develops and sells semicondu ct o r chips, it outsources the actua l manufa cturing and fabr ication of the chips to a fac tory , or “f oundry ,” in Taiwa

n. * * * 18. On rec eiving the Process desig n Kit [from the foundry ], Sili con L abs uses the EDA softwar e tools at issue in this lawsuit to develop and desig n the chip in a virtual e nvironment. 19. Once the desig n is complete, Sili con L abs cre ates an elec tronic desig n (“G DS”) file “ descr ibing a set of photolithogr aphy masks” that the f

oundry will use to actually

fabr icate the chips. * * * 22. The fabr ication of the photolithogra phy masks at the foundry is the first step in the phy sical cr eation of the chip itself. * * * 42. Although the foundry perf orms i t s o wn DRC befor e initiating actua l p roduction of the chip, its own EDA softwar e is used for this task , n o t t h e EDA softwa

re that Sil icon L abs purc hased. 43. None of the EDA softwar e tools purcha sed by Sili con L abs, and for wh i ch it seeks a tax ref und, was used by the third-par ty foundry in its manufa cturing proce ss. 44. Rather, the foundry uses the GDS desig n fi l e cre ated and transmitted elec tronically by Sili con L abs to g uide i t in the actua l manufa cture and fabr ication of the c hips.

Be cause Sili con L abs has not ch al l en ged t hese finding s, they are binding on this Court. See McG alliard , 722 S.W .2d at 696.

Sili con L abs argues that it uses the EDA softwar e tools in “ac tua l manufa cturing ” and cites evidenc e that showed t h at the EDA softwar e tools are “nec essar y ” and “esse ntial” to the

17manufa cture of the semiconductor chips that Sili con L abs sells. See Tex. Tax Code § 151.318(a) (2).

Sili con L abs also argues that its desig n of the semiconductor chip in a virtual environment was the first stag e in the “ac tual” manuf actur ing of

the semiconduc tor chips. Applying the plain lang uag e

o f subsection (a) (2)( A) to the trial court’s unchalleng ed finding s of fac ts, howeve r, Sili con L ab s “d i re ct ly ”—“w ithout any intervening space or time”—used the EDS softwar e tools to cre ate t h e GDS file. See W

ebster’s at 22; s ee also Scott , 309 S.W .3d at 930. After rec eiving the GDS file elec tronically , the third-par ty foundry then perf

ormed its own DRC usin g i t s o wn EDA softwar e tools that it purcha sed befor e initiating actua l production of the semiconductor chips. This evidenc e supports the conc lusion that S ilicon L abs’ creation of t he GDS file was in prepa ration for and not

an “oper ation beg inning with the fi rs t stag e in the production” of the semiconductor chip—the product for ultimate sale. S ee T ex . Tax Code § 151.318(a) (2)( A), (d); 34 Tex. Admin. Code § 3.300(a) (9) (def

ining “manuf

actur ing” ); W

ebster’s at 1581 (def

ining “oper ation”); see also W hittingt on , 384 S.W .3d at 779 n.10 (explaining that co u rt wi l l not reve rse errone ous conclusion by trial court if trial court rende red proper judgme nt); GTE Sw. I nc. , 2010 Tex. App. L EXI S 4223, at *16. We further observe that Sili con L abs’ proposed interpre ta tion of subsection (a) (2)( A) would rende r subsection (p) meaning less. See Tex. Tax Code § 1 5 1

. 3 1 8 (p) (explaining that “manuf actur ing of computer softwar e beg ins with the desig n and writing of the code or prog ram for the softwar e”) ; Texas Citi zens , 336 S.W .3d at 628 (interpr eting statutes to g ive eff ect to ever

y part).
I f pre- production desig n of a product is the first stag e in actua l manufa cture as contende d by Sili con L abs, there was no need to include a provision specific ally addre ssing manufac turers of computer

18softwar e. Moreove r, had the Texas L eg islature intended to extend the manufa cturing exemption for

product desig n to industries other than manufa cture rs of computer softwar e, it could have done so. See GTE Sw. Inc. , 2010 Tex. App. L EXI S 4223, at *6 (re quiring exemption to aff irmatively appea

r in statute); see also Southwest Royalties, Inc

. , 501 S.W .3d at 104.

Do the EDA softw are tools fal l wi thin the defi nit i o n of “Sem icondu ctor F abrication Cleanroom s and Equ ipme nt”?

Sili con L abs also arg

ues t h at it was exempt under subsection (a) (2)( A) beca use it conclusively established that the EDA softwar e tools we re u s ed “in connec tion with” the manufa cture of a semiconductor product and, there fore , fell within the definition of “semiconduc tor fab ri ca t ion clea

nrooms and equipment.” See Tex. Tax Code § 151.318(b)( 2) (stating that manufa cturing exemption includes “semiconduc tor fabr ication c le a nr o o ms a n d e q u ip me nt” ) , ( q ) ( for
purposes of subsection (b), defining “semiconduc tor fabr ication clea nrooms and equipment” as “tang ible persona l proper

ty , without reg ard to whether the proper ty is aff ix ed to or incorporated into

rea lty , used in connec tion with the manufa cturing

. . . in a clea nroom enviro n m en t o f a semiconductor product, without reg ard to whether th e p r o p e r ty is a c tu ally contained in the clea nroom environment” ). I n addition to focusing on the phrase “in connec tion with” in subsection (q), Sili con L abs focuse s on the phrase “without reg ard to whether the proper ty is actua lly contained in t h e clea nroom environment.”

Sili con L abs argues that p ro p erty falling within the definition of “semiconduc tor fabr icat i o n clea

nrooms and equipment” in subsection (q) is “dee med” to be withi n the ex emption in subsection (a) (2). As support for this position, Sili con L abs focuse s on subsection (b )( 2 ) and

19subsection (s)(1) of section 15 1

. 3 1 8 that states that “limitations in Subsection (a) (2) that ref er to tang ibl e persona l proper

ty direc tly causing chemica l or phy sical chang es to the product being manufa cture d

. . . fo r ultimate sale” do not apply to “semiconduc tor fabr ication clea nrooms and equipment.” See Tex. Tax Code § 151.318(b)( 2), (s)( 1).

Relevant to this argument, the trial cour t’s conclusions of lawincluded:

The manufa cturing exemption is not available to Sili con L abs simply beca use it may or m ay not manufa cture semiconductor fabr ication equipment under § 151.318(b) and (q)

. An item e numera ted under § 151.318(a) (1)–( 11) must still have bee n sold to Sil icon L abs. S ubsection (s) states that ce rtain limitations i n § 151.318(a) (2) do not apply to semiconductor fabr ication equipment in Subsection (q). I f Sili con L abs did not need to meet the require ments of § 15 1

. 3 1 8 (a ) and could simply rely on Subsection (q), there would be no rea son for the L eg islature to specify that a portion of (a )(2) does not apply

.

Even if the trial court err ed by this conclusion and “semiconduc tor fabr ication clea nrooms and equipment” are “deem ed ” exempt under subsection (a) (2), we cannot conclude that Sili con L abs clea rly showed that the E DA softwar e tools fall within the statutorily define d term. See id. § 151.318(q); 34 Tex. Admin. Co d e § 3.300(4) (def ining “equipment” to mean “[a]ny appar atus, working clothing, device , or simple machines used direc tly in p ro d u ct ion”), (5) (def ining “fa brication” to mean “[t] o make, build, cre ate, produce , or assemble components of tang ible
persona l proper

ty , or to make tang ible p er s o nal proper ty work in a new or differ ent manner ”), (10) (def ining “proc essing ” to mean “[t] he phy sical application of the materia ls and labor nece ssary
to modify or chang e the char acte ristics of tang ible persona l proper ty ”), (14) (def

ining “semiconduc tor fabr ication clea nrooms and equipment”) ; Southwest Royalties, Inc. , 500 S.W .3d at 404, 406.

20As support for it s i n t erpretation of subsection (q) that the EDA softwar e tools fall

within the definition of “semiconduc tor fabr ication clea nrooms and equipment,” Sili con L abs cites this Court’s interpre tation of the phrase “in connec tion with” as that term was used in a fra nchise tax
statute. See Titan Transp., L.P. v. Combs , 433 S.W .3d 625, 637–39 (Tex. App.—Austin 2014, pet. denied) ; see also Hegar v. Gulf Copper & Mf g
. C o r p
. , 535 S.W .3d 1, 9, (Tex. App.—Austin Aug

. 11, 2017, pet. filed) (mem. op.) (interpr eting phrase “in connec tion wit h ” as used in section 171.1011(g )( 3 ) o f T ax Code to require “‘r easona ble nex us’” and descr ibing phrase to be one “‘of intentional brea dth’” but n o t without “‘log ical limit ’” (citing and quoting Titan Transp., L.P. , 433 S.W .3d at 637–39)).

I n Titan Transport ation , we rea soned that the phra s e “i n connec tion with” in the
context in which it was used in the fra nchise tax statute requ i re d “a rea sonable—i.e., more than tang ential or incidential—re lationship.” 433 S.W .3d at 638. Apply ing this rea soning here , Sili con L abs argues that the evidenc e showed that the EDA softwar e tools wer e “used in connec tion with”
t h e m an u fa cturing of the s emiconductor chips. When considere d in context, howeve r, t he phrase “in connec tion with” as used in subsection (q) of section 151.318 is narr ower than Sili con L abs’ int er p re t at ion. See Tex. Tax Code § 151.318(q). The plain languag e of the section require s a

c o n n e ction betwee n the proper ty ’s use and “manuf

actur ing, proce ssing, or f

a b r ic a ti o n in a c le a n r o o m environme nt of a semiconductor chip.” I n o t her words, the proper ty ’s use require s a rea sonable

nexus to the aspec t o f fa b ri ca t ing semiconductor chips in a clea nroom environment. See Texas Lottery Comm’n v. First State Bank of DeQue en , 325 S.W .3d 628, 635 (Tex. 2010) (“We presume

21the L eg islature selec ted lang uag e in a statute with car e and that ever y word or phrase was used with
a purpose in mind.”).

We rec og nize that the enumer ated examples in subsection (q) are not exclusive. See Tex. Gov’t Code § 3 1 1 .005(13) (explaining that “‘[i] ncludes’ and ‘including ’ are terms of enlar g ement and not of limit ation or exclusive e numeration, a nd use of the terms does not c reate a presumption that components not expressed are ex cl u d ed”); Sneed v. W ebre , 465 S.W .3d 169, 191–92 (Tex

. 2 0 1 5 ). The examples, howeve r, of the ty pes of tang ible persona l proper ty that fall within the definition of “semiconduc tor fabr ication cleanrooms and equipment” c onform with the statutorily require d use of the proper ty in t h e context of the clea nroom aspec t of fabr icating semiconductor chips. See , e.g. , Ritchie v. Rupe , 443 S.W .3d 856, 869 (Tex. 2014) (obser ving that “fa miliar principle of statutory construction that words g rouped in a list should b e gi v en related meaning ,” citing Riverside Nat’l Bank v. Lewis , 603 S.W .2d 169, 174 n.2 (Tex. 1980), “and simil arly that ‘the m ea n i n g of particula r words in a statute may be asce rtained by ref ere nce to other words associ at ed wi th them in the s ame statute,’” citing City of San Antonio , 111 S.W .3d at 29); City of Housto n v. Bates , 406 S.W .3d 539, 545 (Tex. 2013) (explaining that, when g ener al words follow specific , enumer ated cate g ories, courts limit g ener al words’ application to same kind or class of
cate g ories as those e x pressly mentioned). A s p r e v io u s ly s ta

te d , th e te r m “ s e mi c o n d

u c to r f a b rication clea

n r o o ms a n d e q u ip me nt” pursuant to the statute “ includes”:
integ rate d sy stems, fix tures, and piping, all proper ty nece ssary or adapte d to reduc e contamination or to control airflow, tempera ture, humidity , chemica l purity , or other environmenta l conditions or manu fa cturing toleranc es, and production equipment

22an d m achine ry . The term does not include the building or a perman en t ,

nonremova

ble component of the building, that houses the clea nroom environment. The term includes moveable clea nroom partitions and clea nroom li gh t i n g . “Semiconduct o r fabr ication clea nrooms and equipment” are not “intrapla nt transportation equipment” as that ter m is used in Subs ection (c )(1)

.

See Tex. Tax Code § 151.318(q).

Comptroller Rule 3.300(14) also provides other examples of proper ty falling within the definition of “semiconduc tor fabr ication clea nrooms and equipment” consistent with subsection (q)’ s focus on the c leanr oom aspec t of fabr icating semiconductor c hips:

all tang ible p er s o n al proper ty that moves the product or other materia ls that are nece ssary or essential to t h e p rocess, including piping that is used to move g as, liquids, deionized wa t er , and hazardous waste materia l; silicon waf er moving, handling , and trac king sy stems; and elec trical supply and control equipment, such as switches, wiring , and monitoring equipment that is incorporated into the rea lty

. The term does not include the building or any p er m an en t , nonremova ble structura l component part of the building such as vibration-isolation platforms and vibration columns.

See 34 Tex. Admin. Code § 3.300(14); see also id. § 3.300(5) (defining “fa brication”). Although the specific enumer ation of proper ty falling with i n the definition is not exhaustive, the proper ties identified in the statute and rules ar e t y p es o f proper

ty that are nece ssary to “make , build, cre ate, produce , or assemble” the “compone nts” of a semiconductor chip within a clea nroom environment. See id . § 3.300(5). On t his rec ord, t he trial court c ould have c oncluded that Silicon L abs fa iled to clea rly show how the E DA s oftwar e tools had a rea sonable nexus with the third-par ty foundry ’s clea nroom environment for fabr icating the semiconductor chips to fall within the definition of “semiconduc tor fabr ication clea nrooms and equipment.”

23Were the EDA softw are t ools necessary t o control m anuf acturing toler ances? S i l i co n L abs further argues that the EDA softwar e tools wer e used “in connec tion with” the manufa cturing of t h e s em iconductor chips beca use they fall within the example of “prope rty n ecessary . . . to control

. . . manufa cturing toleranc es” that is expressly included in the

enumer ated list in subsection (q). See Tex. Tax Code § 151.318(q). Be cause the word “contr ol” is
not defined in the statute, we apply its plain meaning in the context of the framework of section 151.318. See Black’

s Law Dictionary 378 (9th ed. 2009) (def ining “contr ol” to mean “[t] o exercise
power over or influence o v er ” or “[t] o regulate or g overn” ); see also Southwest Royalties, Inc. , 500 S.W .3d at 406 (consider ing plain meaning of term in context of framework of section 151.318). Evidence was prese nted to support a finding that Sili con L abs used the EDA s o ftwar e tools to “contr ol” m anufa cturing toleranc es of the s emiconductor chips. The trial court’s findings of fac t, howeve r, included the following :

15. The Taiwa

n foundry ’s manufa cturing equipment includes “semiconduc tor fabr ication clea

nrooms” and e quipment. 16. The foundry ’s clea nrooms include all equipment and p ro d u ction machiner y that reduc e contamination and/or control airflow, temperat u re , humidity , chemica l purity , or other environmenta l conditions or manufa cturing toleranc es. 17. The foundry sends its “Proce ss Desig n Kit” to Sili con L abs, specify ing the foundry ’s manufa cturing toleranc es. 18. On rec eiving t h e P ro cess Desig n Kit, Sili con L abs uses the EDA softwar e tools at issue in this lawsuit to develop and desig n the chip in a virtual environment.

24Although Sili con L abs challeng es the leg al sufficie ncy of the evidenc e t o support

finding of fac t no. 16 in its reply brief, it has not challeng ed the other finding s, and we are bound by the unchalleng ed finding s. See McG alliard , 722 S.W .2d at 696. Fur ther, suffi ci en t evidenc e supports the trial court’s finding of fac t no. 16. See Ortiz , 917 S.W .2d at 772 (re viewing trial court’s finding s of fac t by same standards applied to jury verdic t for evidentiar y sufficie ncy revie w). Sili con L abs’ vice president of

centr al eng ineer ing de scribed the inside of a c leanr oom as follows:

So it depends on which fabs y ou’re talking about, but in this case , this would be .18 micron technolog y or larg er, so kind o f s o m e o f t he older fabs. So start out by putting on what we call a bunny suit to actua lly g o into the fab to maintain the clea n room environment. You have a laminar flow, which is essentially air flowing from the top of the room down to the bottom to keep particulates down. And then y ou have sever al bay s wher e y ou actua lly operate differ ent steps of the proce ss. So that incl u d es lithogra

phy , that includes etching , that includes metallization, thin film deposition. Ag ain, ever

y one [si c] is wea

ring g loves, wea

ring fac e masks, wea

ring the full body suit to maintain the clea n nature of the fab. And then y ou have what we call t h e b o at s o f waf

ers, which are batche s of 25 waf ers at a ti me t y

pically that are car ried fr om station to st ation to proce ss at that next s tep of the f ab.

He also ans wer ed the following questions about the clea nroom at the third-par

ty foundry in Taiwan:
Q. T h e clea

n room in Taiwa

n that manufa cture d Sili con L abs semiconduct o r chips during the tax period was a g ener al clea n room, corr ect? A. Yes. Q. And t h e clea

n room environment is the main part of the foundry wher e the proce ssing is done; is that rig ht? A. Correc t. Q. And it’s the foundry that actua lly

manufa cture s the phy sical chip, c orre ct?

25A. Yea h, y ou could s ay that. Yea h, that’s the first phy sical, if y ou don’t count the computer

wher e all the stuff

is stored. Q. But a s for the phy sical chip itself, it’s the foundr y

— A. Right. Q. —that actua lly

manufa cture rs the phy sical chip? A. Correc t.

I n contra st to this evidenc e of the third-par ty foundry ’s clea

nroom fac ility , evidenc e sho we d t h at Sili con L abs used the EDA softwar e tools to desig n the entire chip in a virtual environment within the conf ines of the manuf

actur ing toler ance s as determined by the par ameter s of the third-par

ty foundry ’s fabr ication fac ility —not that the manufa cturi n g t olera nces wer e “contr olled” by Sili con L abs. See Black’ s at 378 (def

ining “contr ol” to mean “[t] o exercise power

over or i n fl u en ce over” or “[t] o regulate or g overn” ); Scott , 309 S.W .3d at 931 (explaining that “[c]ourts m u st not g ive the words used by the L eg islature an ‘exag g era ted, forc ed, or constraine d meaning ’” (quoting City of Austin v. Southwestern Bell Tel. Co. , 92 S.W .3d 434, 442 (Tex. 2002)))

. Although the witnesses provided conflicting testimony , Sili con L abs’ vice president 6 confirme d that one of the functions of the DRC was to verify that Sili con L abs’ desig n would adher e
to the foundries’ specific ations and manufa cturing toleranc es for the entire chip as provided by the fo u n d ry in its proce ss desig n kit (PDK). Concerning how the EDA softwar e tools and the P DK worke d toge ther, he explained:

For example, t h e v i ce p resident answe red “Ye s” when asked if the EDA softwar e and 6 the proce ss desig n kit are both nece ssary to control the manufa cturing toleranc es o f the semiconductor c hip. 26So the PDK provides the para meters that set the limit ations of what the mecha nical toleranc es are in the fab, and those para meters are fed into the EDA softwar e so that as y ou’re desig ning and t ry i n g t o desig n for specific elec trical perf ormanc e of the device , the PDK will set limit s on how small a transistor or how big a transistor can be or how close y ou can put lines toge ther in the lay out of y our device

. So the PDK sets the constraints under which y ou can desig n the p roduct, the elec trical perf ormanc e that y ou’re looking f or.

Ba sed on its resolution of the conflicting evidenc e, the trial court could have found that Sili con L abs’ EDA softwar e tools did not “contr ol” the manufa cturing toleranc es but wer e used to opera te within the manufa cturing toleranc es as de termined by the third-par

ty foundry ’s fa cility

and equipment. 7

When asked, the Comptroller’s expert ag ree d that Sili con L abs used the PDK from the 7 foundry “to figure out what differe nt toleranc es S ilicon L ab s was allowed to work with.” Sili con L abs’ vice president testified c onsistently : Q. Be cause initially befor e S i [ l i co n ] L abs even beg ins its desig n of the chip, it’s g oing to rec eive normally or ty p i cally a desig n kit from the Taiwa n foundry , corr ect? A. Yes, that’s c orre ct. Q. And that desig n k i t wi l l co n t ai n ce rt ai n s p ec i fi ca t ions reg ardingand explaining the manuf

actur er’ s toleranc es, cor

rec t? A. Yes, it will descr ibe the proce ss and the rules that are neede d in order to manufa cture —y ou know, in order to fabric ate the de vice ther e. Q. And the desig n rule chec k is intende d to e nsure that the desig n is c onsistent with those specific ations from the manufa cture r and the toleranc es, corr ect? A. Yes, that’s one function of DRC. Q. An d t h ese specific ations and toleranc es that are rec eived from th e manufa cture r are specific ations and toleranc es for the entire chip and not just the functional logic Si[ licon] L abs is claiming as softwar e entitling it to a tax ref und in this case, cor

rec t? 27Apply i n g t h e applicable standard of revie w and the plain meaning of the rele vant

statutory lang uag e, we conclude that Sili con L abs did not “cle arly show” that the EDA softwar e tools fall within the definition of “semiconduc tor fabr ication clea nrooms and equipment.” See Southwest Royalties, Inc. , 500 S.W .3d at 404; Marchand , 83 S.W .3d at 794; Ortiz , 917 S.W .2d at 772; see also City of Keller , 168 S.W .3d at 827–28. Thus, Sili con L abs did not establish that its purcha ses of the EDA softwar e tools wer e exempt under subsection (b)( 2) and, there fore , even if proper ty falling within the definition of “semiconduc tor fabr ication clea nrooms and equipment” is “ d e e me d” exempt under subsection (a) (2)( A), the purcha ses of the EDA softwar e tools here wer e not “dee med” exempt, and Sili con L abs was require d to satisfy the require ments of subsection (a) (2)( A). See Tex. Tax Code § 151.318(a) (2)( A), (b)( 2), (s)(1 ), (q ). As previously stated, we have conclude d that it failed to do so. For

these re asons, we ove rrule Silicon L abs’ f irst issue.
Section 151.318(a)( 2)(B) I n its second issue, Sili con L abs argues in the alternative that the trial court err ed by ruling that its purchas es o f t he “dig ital tools components” of the EDA softwar e wer e not exempt from sales taxes pursuant to section 151.318(a)(2) (B ). See id. § 151.318(a) (2)( B)

. As previously stated, sec tion 151.318(a)( 2)(B ) provides in re levant par t:

The following i t ems are exempted from the taxes imposed by this chapte r if sold, lease d, or rente d to, or stored, used, or consumed by a manufa cture r: . . . (2) tang ible

A. I t’s for the—it’s f or the e ntire chip, yes.

28persona l pr operty direc tly used or c onsumed in or during the actua l ma nufac turing , proce ssing, or fabr ication of tang ible persona l proper ty for ultimate sale if the use or consumption of the proper ty is n ec es s ar y or essential to the manufa cturing , proce ssing, or fabr ication operation and direc t l y m akes or cause s a chemica l or phy sical chang e to:

. . . (B ) any intermediate or preliminary product that will become an ingr edient or component part of the product being manufa cture d

. . . for ultimate sale.

Id. § 151.3 1 8 (a )( 2 )(B). We conclude that the applicable lang uag e of this subsection also is not ambig uous for purposes of this appea l and, thus, interpre t the text acc ording to its plain and common meaningin the context of the framework of section 151.318. See Sc ott , 309 S.W .3d at 930. Sili con L abs arg

ues that it conclusively established that the digital tools components

wer e used to produce a “pre liminary or intermediate product” —“func tional logic ”—that beca me an “ing redie nt or component part” of the semiconductor chips it p ro d u ce d an d sold. Acc ording to Sili con L abs, the fu n ctional logic is “computer softwar e” that was incorporated and sold as a component part of the semiconductor chips, and, there fore , the digital tools that wer e used to desig n the functional logic wer e used in the “ac tual” manufa cturing and made a d i re ct chang e to the functional log ic. See Tex. Tax Code § 151.318(a) (2)( B) , (p) ( stating that, for purpose s of sec tion, “manuf actur ing of computer softwar e beg ins with the desig n and writing of the code or prog ram for the softwar e”)

. As part of this issue, Sili con L abs challeng es the leg al sufficie ncy of the evidenc e to support the trial court’s finding of fac t no. 45 in which the trial court found that “[t] he EDA softwar e tools sold to S ilicon L abs do not direc tly make or cause a chemica l or phy sical chang e to an intermedi at e or preliminary product.” Ba sed on this finding , the trial court conclude d that “[t] he EDA softwar e tools sold to Sili con L abs are not qualifying items under § 151.318(a) (2)( B) beca use
29they do not direc tly make a chemica l or phy sical chang e to an intermediate or preliminary product.”

Also relate d to this i ssue, the trial c ourt’s uncha lleng ed finding s of fa ct included:

10. Among the ingr edients or components of the semiconductor chip are the “log ic g ates” etche d or embe dded within the chip’s silicon substrate. 11. Using digital s i g nals only , a collection of these logic g ates implements “f u n cti onal logic ”—that is, a series of instructions or logic al operation s within the chip. But not all l og ic g ates contained in Sili con L abs’ mix ed-sig nal chip ar e conside red to be functional log ic. * * * 13. To function prope rly and in a ccor dance with its desig n, the func tional logic implemented by the logic g ates depends on its integ ration and interfa ce with the chip’s other

components and ing redie nts. * * * 36. The Ver ilog EDA tools are used to cre ate the functional logic in a virtual environment.

Be cause Sili con L abs’ theory under subsection (a) (2)( B) is based on its position that it was a manufa cture r of “computer softwar e” when it produce d the functiona l logic , the plain lang uag e of subsections (a) (2)( B) and (p) require d Sili con L abs to c lear ly show that the functional logic was an “interme diate or preliminary product” and “computer softwar e.” See Tex. Tax Code § 151.318(a) (2)( B) , (p) (stating that, for purposes of section, “manuf actur ing of computer softwar e beg ins with the desig n and writing of the code or prog ra m for the softwar e”) , (r) ; Southwest Royalties, Inc. , 500 S.W .3d at 4 0 4

. Be cause the t erm “product” is not define d, we apply its plain meaning

. See W

ebster’s at 1810 (def

ining “produc t” as “something p ro d u ce d ”) ; Black’ s at 138 (def ining “produc t” to mean “something that is distributed commerc ially for use or consumption and

30that is usu. (1) tang ible persona l proper ty , (2) the result of fabr ication or proce ssing, and (3) an item that has passe d throug h a chain of commerc ial distribution bef ore ultimate use or consumption”). 8
C hapter 151 of the Tax Code also does not define “softwa re,” but “co m p u t er prog ram” is define d to mean “a series of instructions that are co d ed fo r ac ce ptance or use by a computer sy stem and that are desig ned to per mit the computer sy stem to process data and pr ovide results and information. The series of instructions may be contained in or on mag netic t apes, punched car ds, printed instructions, or o t h er t ang ible or elec tronic media.” Tex. Tax Code § 151.0031. During the rele vant time period, Comptroller Rule 3.308, under subsection (b), that is titled “softwar e,” de fined “ computer pr og ram” to mean:

a series of instructions sold as a completed prog ram which are coded for acc eptanc e or use by a computer sy stem and which are desig ned to permit the computer sy stem to proce ss data and provide results and information. The series of instructions may be conta ined in or on . . . semiconduc tor chips.

See 34 Tex

. Admin. Code § 3.308(b)( 1) (Comptroller of Pub. Acc ts., Computers—Hardw are , Software , Service s, and S al es ); cf. id

. § 3.308(a) (1) (def ining “har dwar e” to include “ce ntral
proce ssing units and a ll periphera l equipment, parts, and supplies” ). 9

We observe that applying the plain meaning of the undefine d word “produc t” is consistent 8 with its other uses in section 151.318. See general l y Tex. Tax Code § 151.318; In re Mem orial Herman n Ho s

p
. S ys ., 464 S.W .3d 686, 701 (Tex. 2015) (“‘[C] ourts should not g ive an undefine d statutory term a meaning out of harmony or inconsistent with other provisions, althoug h it might be susceptible of such a construction if standing alone.’ ” (quoting Texas Dep’ t of Transp. v. Needham , 82 S.W .3d 314, 318 (Tex. 2002))). Sili con L abs has not challeng ed the validity of t his rule. Rule 3.308 was amended to be 9 eff ective January

22, 2018, and the a

mended r ule def ines “c omputer program” to mean: A series of instructions that are coded for ac ceptance or use by a computer sy stem 31To support its interpre tation of s ec t i on 151.318(a) (2)( B) , Sili con L abs equate s the

statutory definition of “computer prog ram” in section 151.0031 wit h the definition of “computer softwar e” as that term is used in subsection (p) of section 151.318. See Tex. Tax Code §§ 151.0031, .318(a) (2)( B) , (p). B eca

use “f unctional l og ic” is “computer softwar e,” acc ording to Sili con L abs, it uses t he digital tools components during the “ac tual manufa cturing ” because the manufa cturing of computer softwar e “beg ins with the desig n and writing of t h e co d e” under subsection (p) and, there fore , the use of the digital tools components to desig n the functional logic satisfied subsection (a) (2)’ s require ment that the proper ty be “dire ctly used

. . . in or during the actua l ma nufac turing .” See id. § 151.318(a) (2), (p). The “func tional logic ,” howeve r, would also hav e t o be an “interme diate or preliminary product” to fall within the plain lang uag e o f the manufa cturing exemption under subsection (a) (2)( B)

. And, a p p ly in g the Comptroller rule’s definition of “computer
prog ram” as related to “softwa re,” the functional logic would have to be “sold as a completed
prog ram.” See 34 Tex. Admin. C ode § 3.308(b) (1); Southwest Royalties, Inc. , 500 S.W .3d at 406 (explaining that, “[a]lt houg h the Comptroller’s definition is not binding, [court] may consider it in d etermining the definition most consistent with the scheme of the statute”). To be entitled t o a manufa cturing exemption under subsection (a) (2)( B) as to the digital tools components then, it was

and that are desig ned to permit the computer sy stem to proce ss data an d p ro vide results and information

. The series of instructions may be contained in or on m agnetic tapes, semiconductor chips, punched car ds, printed instructions, or other tang ible or ele ctronic me dia. 34 Tex. Admin. Code § 3.308(a) (1) (Comptroller of Pub. Acc ts., Computers—Hardw are , Computer Prog rams, Servic es, and Sale s); see 42 Tex. Reg. 353, 355 ( 2018).

32Sili con L abs’ bur den to establish t hat t he “functional l og ic” that was cre ated with the dig ital tools

components was “sold as a co m p l et ed p ro g ram” and that it was a “produc t.” See Tex. Tax Code § 151.318(a) (2)( B) , (p), ( r); 34 Te x . Admin. Code § 3.308(b)(1)

.

Apply ing the applicable standard of revie w and the plain meaning of the re l ev an t statutory and regulatory lang uag e, we conclude that it failed to do so. See City of Keller , 168 S.W .3d
at 827–28; Marchand , 83 S.W .3d at 794. Among t h e ev i d en ce befor e the trial court, the Comptroller’s expert testified t hat t he “functional l og ic” could not do any thing separate and apar

t from other

components of the chip and “[i] t r equire d the fabr ication” befor e it wa s useable

. I n his expert repor

t, he further opined that “ther e [was] no softwar e being d ev el o p ed b y [S ilicon L abs] when using the EDA softwar e, and no softwar e [was] being dev el oped by [S ilicon L abs] as an ingr edient or component part of another product” and conclude d that “the functional logic internal to the chip does not provide a ‘ complete d program ’ since it is controlled by exte rnal softwar e and there fore the functional logic cited by [S ilicon L abs] does not meet the definition of ‘software ’ as define d above by Rule 3.308.” This evidenc e supports that “func tional logic ” does not fall within the plain meaning of the undefine d term “produc t” and that it wa s not “ sold a s a completed prog ram.”

Sili con L abs argues that the functional logic falls within Ru le 3

. 3 0 8 (b)( 1)’s definition of softwar e beca

use the func tional logic w as “c omplete as to func tionality from the perspe ctive of the seller (i.e. Sili con L abs)” and cites t h i s Court’s opinion in Verizon North, Inc. v. Combs , 308 S.W .3d 1 (Tex. App.—Austin 2009, pet. denied) , as support for its posit ion. I n that case , the issue was whether software that was purchase d by the appellant from a thi rd -par ty was a “taxable item” so as to be subject to sales tax. Id. at 2. This Court conclude d that the softwar e fell within the

33definition of “compute r p ro gram” in section 151.0031 and that the softwar e was “sold as a

completed prog ram” by the third party to appellant under Rule 3.308(b)( 1) based on the trial court’s finding s of fac t an d , there fore , that the purcha se of the softwar e was taxable. Id. at 5–6. I n our analy sis, we explained that the focus of the rule was “on the code and desig n of the softwar e as sold,
not on the intended use by the purcha ser” and “re g ardle ss of how t h e b u y er i n tends to use the
prog ram and reg ardle ss of what modifications might be nece ssary in order to incre ase or modify its functions for the individual needs of the buy er.” Id. at 2.

Citi ng this analy sis in Verizon North , Sili con L abs arg ues that the functi o nal logic

was a “complete d prog ram” from its perspe ctive as the seller and, there fore , that it was within Rule 3.308(b)( 1)’s definition of a “computer prog ram.” Even if the focus of the rule is f rom the seller’ s perspe ctive, howeve r, the trial court’s unchalleng ed finding s contra dict Sili con L abs’ position. See id. at 2 (e x plaining that, absent cha lleng e to finding s of fac t, a ppellate court acc epts them as true)

. The trial court’s finding s of fac t included that Sili con L abs cre ated the functional logic in a virtual environment, and that the third-par ty foundry , as part of the proce ss of manufa cturing the semiconductor chips, “etc hed or embedde d [l og ic gates] within the chip’s silicon substrate.” The trial court further found that, althoug h some of the logic g ates implemented functiona l l o gi c, the functional logic “depe nd[ed] on its integ ration and interfa ce with the chip’s other components and ingr edients” “to function proper ly and in acc ordanc e with its desig n.” These unchalleng ed finding s

are fata l to Si licon L abs’ position that the “func tional logic” was “ sold as a complete d prog ram.”

For these re asons, we ove rrule Silicon L abs’ se cond issue.

34Conclusion Havingoverr

uled Silicon L abs’ issues, we aff irm the trial cour

t’s final judg ment. 1 0

__________________________________________ Melissa Goodwin, Jus tice Be fore Chief J ustice Rose, Jus tices Goodwin a nd Field Affir med Filed: Jul y

13, 2018

Given our dispositi on of these issues, we do not addre ss t h e C o m p troller’s alterna tive 1 0 arguments to support aff

irming the trial court’s judgme nt, including his arg uments that Sili con L abs’ purcha ses of the EDA softwar e tools wer e excluded fr om the manufa cturing exemption under subsection (c) (3). See Tex. Tax Code § 151.318(c) (3) (excluding “re sear ch or development of new products” f

rom manufa cturing exemption); see also Tex. R. App. P . 47.1. 35