      TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN


                                        NO. 03-17-00061-CV



  Appellant, Silicon Laboratories, Inc. // Cross-Appellants, Glenn Hegar, Comptroller of
    Public Accounts of the State of Texas; and Ken Paxton, Attorney General of the
                                       State of Texas

                                                   v.

    Appellees, Glenn Hegar, Comptroller of Public Accounts of the State of Texas; and
          Ken Paxton, Attorney General of the State of Texas // Cross-Appellee,
                              Silicon Laboratories, Inc.


     FROM THE DISTRICT COURT OF TRAVIS COUNTY, 126TH JUDICIAL DISTRICT
       NO. D-1-GN-15-000302, HONORABLE SCOTT H. JENKINS, JUDGE PRESIDING



                             MEMORANDUM OPINION


                Silicon Laboratories, Inc. (Silicon Labs) appeals the portion of the trial court’s

judgment following a bench trial that denied its refund claim for sales and use taxes that it paid on

the purchase of Electronic Design Automation (EDA) software tools for the tax period May 1, 2003,

to October 31, 2006.1 Silicon Labs claimed that the EDA software tools were exempt from the sales

and use tax because they fell within the manufacturing exemption. See Tex. Tax Code § 151.318




       1
          The trial court granted Silicon Labs’ refund claim for sales and use taxes that it paid on the
purchase of memory elements, and the Comptroller of Public Accounts and the Attorney General
have not appealed that ruling. The trial court concluded that the purchase of the memory elements
fell within the sale-for-resale exemption in sections 151.006 and 151.302 of the Texas Tax Code.
See Tex. Tax Code §§ 151.006 (defining “sale for resale”), .302 (exempting “sale for resale of a
taxable item” from taxes imposed by chapter).
(generally exempting property used in manufacturing from taxes imposed by chapter). The

Comptroller of Public Accounts and the Attorney General2 cross appeal in the alternative,

challenging the trial court’s jurisdiction over particular arguments made by Silicon Labs to support

its refund claims. For the following reasons, we affirm the trial court’s final judgment.


                                            Background

Manufacturing Exemption

               To give context to the parties’ dispute, we begin with a brief overview of the

manufacturing exemption, one of the exceptions to the general rule that sales tax is imposed on any

“sale” of a “taxable item” in the state. See Tex. Tax Code §§ 151.051 (stating general rule that “tax

is imposed on each sale of a taxable item in this state”), 151.318 (manufacturing exemption). In

general terms, “[t]he manufacturing exemption exempts a person who produces certain types of

tangible personal property for sale to ultimate consumers from having to pay sales tax on its purchase

of certain otherwise-taxable tangible personal property that is used in the production process.”

Combs v. Home & Garden Party, Ltd., No. 03-09-00673-CV, 2010 Tex. App. LEXIS 8875,

at *7 (Tex. App.—Austin Nov. 3, 2010, no pet.) (mem. op.); see GTE Sw. Inc. v. Combs,

No. 03-08-00561-CV, 2010 Tex. App. LEXIS 4223, at *7–9 (Tex. App.—Austin June 3, 2010, pet.

denied) (mem. op.) (generally describing manufacturing exemption). The manufacturing exemption

serves “to avoid pyramiding the sales tax on successive buyers 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,


       2
         Unless otherwise stated, we refer to the Comptroller of Public Accounts and the Attorney
General collectively as the Comptroller.

                                                  2
161 (Tex. App.—Austin 1996, writ denied). The exemption is also intended “to encourage

economic development in this state” and “to strike a balance between the policy of avoiding multiple

taxation and the need to raise revenue for the state.” Id.

               Relevant to the parties’ dispute, subsection (a)(2) of section 151.318 provides:


       (a)     The following items are exempted from the taxes imposed by this chapter if
               sold, leased, or rented to, or stored, used, or consumed by a manufacturer:

               ...

               (2)     tangible personal property directly used or consumed in or during the
                       actual manufacturing, processing, or fabrication of tangible personal
                       property for ultimate sale if the use or consumption of the property
                       is necessary or essential to the manufacturing, processing, or
                       fabrication operation and directly makes or causes a chemical or
                       physical change to:

               (A)     the product being manufactured, processed, or fabricated for ultimate
                       sale; or

               (B)     any intermediate or preliminary product that will become an
                       ingredient or component part of the product being manufactured,
                       processed, or fabricated for ultimate sale; . . . .


Tex. Tax Code § 151.318(a)(2). Although section 151.318 does not define “manufacturer,”

Comptroller Rule 3.300(a)(8) provides that a manufacturer is “[a] person who is engaged in

manufacturing” and that the term includes “processors, fabricators, submanufacturers, and custom

manufacturers.” 34 Tex. Admin. Code § 3.300(a)(8) (Comptroller of Pub. Accounts, Manufacturing;

Custom Manufacturing; Fabricating; Processing (Tax Code, §§ 151.005, 151.007, 151.318, and

151.3181)).




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

provides that the manufacturing exemption includes “semiconductor fabrication cleanrooms and

equipment.” Tex. Tax Code § 151.318(b). For purposes of subsection (b), “semiconductor

fabrication cleanrooms and equipment” means:


       all tangible personal property, without regard to whether the property is affixed to or
       incorporated into realty, used in connection with the manufacturing, processing, or
       fabrication in a cleanroom environment of a semiconductor product, without regard
       to whether the property is actually contained in the cleanroom environment. The
       term includes integrated systems, fixtures, and piping, all property necessary or
       adapted to reduce contamination or to control airflow, temperature, humidity,
       chemical purity, or other environmental conditions or manufacturing tolerances, and
       production equipment and machinery. The term does not include the building or a
       permanent, nonremovable component of the building, that houses the cleanroom
       environment. The term includes moveable cleanroom partitions and cleanroom
       lighting. “Semiconductor fabrication cleanrooms and equipment” are not “intraplant
       transportation equipment” as that term is used in Subsection (c)(1).


Id. § 151.318(q). The “limitations in subsection (a)(2) that refer to tangible personal property

directly causing chemical and physical changes to the product being manufactured, processed, or

fabricated for ultimate sale” do not apply to “semiconductor fabrication cleanrooms and equipment.”

Id. § 151.318(s)(1).

               For purposes of the manufacturing exemption, “‘manufacturing’ includes each

operation beginning with the first stage in the production of tangible personal property and ending

with the completion of tangible personal property having the physical properties (including

packaging, if any) that it has when transferred from the manufacturer to another.” Id. § 151.318(d);

see 34 Tex. Admin. Code § 3.300(a)(9) (defining “manufacturing” and explaining that “first

production stage means the first act of production, and it shall not include those acts in preparation

                                                  4
of production”). And “the manufacturing of computer software begins with the design and writing

of the code or program for the software and includes the testing or demonstration of the software.”

Tex. Tax Code § 151.318(p); see 34 Tex. Admin. Code § 3.300(a)(9).

               The taxpayer claiming the manufacturing exemption under section 151.318 has the

“burden 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 GTE Sw. Inc.,

2010 Tex. App. LEXIS 4223, at *6. The exclusions to the exemption in subsection (c) include

“research or development of new products.” Tex. Tax Code § 151.318(c)(3).


The Parties’ Dispute3

               The parties’ dispute concerns the EDA software tools that Silicon Labs purchases and

uses to design and develop “mixed signal” semiconductor chips that it sells for use in a broad range

of applications including electronic products such as mobile phones and gaming consoles.4 Silicon

Labs uses the EDA software tools to design and develop semiconductor chips in a virtual

environment and then contracts with a third-party foundry in Taiwan for the actual manufacturing

and fabrication of the semiconductor chips. The foundry provides a “Process Design Kit” to Silicon

Labs that specifies the foundry’s manufacturing tolerances, and Silicon Labs then uses EDA software

tools to design and develop the semiconductor chips in a virtual environment within the foundry’s



       3
         The factual background of the parties’ dispute primarily is taken from the trial court’s
unchallenged findings of fact.
       4
          A mixed signal chip incorporates analog and digital processing onto the same integrated
circuit. Analog signals, such as sound and radio waves, are converted into digital signals that the
electronic products can process.

                                                 5
specified manufacturing tolerances. Among the components of the semiconductor chips are “logic

gates” which are etched or embedded within the chips’ silicon substrate. A collection of these logic

gates implements “functional logic”—a series of instructions or logical operations within the

semiconductor chip.

                The EDA software tools include tools that aid in: (i) generating an electric design

schematic representing the entire chip, (ii) transforming the electric design schematic into a physical

layout of how the various electric devices will be physically positioned on the chip, (iii) verifying

that the physical layout is an accurate description of the electric design schematic (the layout versus

schematic (LVS) check), (iv) verifying that all physical dimensions within the physical layout meet

the foundry’s design rules (the design rule check (DRC)), (v) creating the functional logic in a virtual

environment (the Verilog EDA tool), (vi) designing and placing the electrical connections and

integrating the chip’s various components, and (vii) verifying through simulation that the integrated

circuits of the chip will operate properly.

                After Silicon Labs completes the semiconductor chip’s design using the EDA

software tools, it creates and transmits electronically to the third-party foundry a graphic design

system (the “GDS” file) “describing a set of photolithography masks” that the foundry fabricates and

then uses to fabricate the semiconductor chips. The masks are used to pattern some of the layers of

the silicon substrate, or “wafer,” and then are cut into smaller pieces or “chips.” The chips are

placed in a package, which has a number of connection points, or “pins,” that provide electrical

connections between the packaged semiconductor chip and external circuits or components. The

foundry performs its own DRC using its own EDA software tools that it purchased before initiating



                                                   6
actual production of the semiconductor chips. The EDA software tools that Silicon Labs purchased

are not used by the third-party foundry in its manufacturing process.


The Refund Claims

               The Comptroller audited Silicon Labs’ sales and use tax records for the period

May 1, 2003, to October 31, 2006 (the audit period) and concluded that Silicon Labs owed sales

taxes on its purchases of the EDA software tools during the audit period. Following the audit,

Silicon Labs requested a redetermination hearing, which was assigned Hearing No. 102,151. Silicon

Labs also filed a separate refund claim for the same audit period and requested a refund hearing,

which was assigned Hearing No. 101,320. Both claims concerned the EDA software tools that

Silicon Labs had purchased from various vendors during the audit period, and one of the grounds

raised by Silicon Labs to support its refund claims was that the EDA software tools qualified for the

manufacturing exemption provided in section 151.318 of the Tax Code. See Tex. Tax Code

§ 151.318. The substance of both claims was addressed in Hearing No. 102,151. After the

Comptroller denied the claims in Hearing No. 102,151, Silicon Labs filed a motion for rehearing,

which was denied.      Silicon Labs then filed suit in Travis County District Court from the

Comptroller’s decision in Hearing No. 102,151.

               After Silicon Labs filed suit, the parties filed an agreed motion to dismiss Hearing

No. 101,320 to allow Silicon Labs to proceed to district court on that claim as well, stating that “the

substantive tax issues addressed in Hearing No. 102,151 are applicable to the issues addressed in this

hearing” and that the parties agreed that dismissal was appropriate in order for Silicon Labs “to

pursue its case in Travis County District Court pursuant to Chapter 112 of the Texas Tax Code by

                                                  7
joining with [its] pending lawsuit that addresse[d] the tax issues in Hearing No. 102,151.” The

Comptroller entered a written decision dismissing Hearing No. 101,320 in accordance with the

parties’ agreement, and Silicon Labs filed a motion for rehearing, which was also denied. Silicon

Labs then filed a separate suit from the Comptroller’s decision in Hearing No. 101,320.

               The suits challenging the Comptroller’s decisions in Hearing Nos. 102,151 and

101,320 were consolidated and then tried to the trial court in 2016. The parties stipulated to the

amount of taxes at issue and submitted documentary evidence, including the “Silabs Chip

Fabrication Agreement” between Silicon Labs and the third-party foundry in Taiwan. Silicon Labs’

witnesses were two of its employees, a senior director of design and the vice president of central

engineering, and the Comptroller’s witness was an expert in the design and manufacturing of

semiconductor chips. The facts were largely undisputed. The witnesses testified about the design

and manufacture of the semiconductor chips by Silicon Labs and the third-party foundry inTaiwan,

the components of the chips, the different EDA software tools that Silicon Labs used, the role of

those tools in the design and manufacture of the chips, and the division of work between Silicon

Labs and the third-party foundry to produce the semiconductor chips. The witnesses’ testimony was

consistent that the EDA software tools at issue were necessary to design and produce the

semiconductor chips sold by Silicon Labs, and that the third-party foundry did not use the EDA

software tools that Silicon Labs had purchased but its own in its manufacturing process.




                                                8
               Following the bench trial, the trial court entered judgment in favor of the Comptroller

as to Silicon Labs’ request for a tax refund on Silicon Labs’ purchases of the EDA software tools.5

The trial court also entered findings of fact and conclusions of law. Silicon Labs filed a motion for

new trial, which was overruled by operation of law. These cross-appeals followed.


                                             Analysis

Standard of Review

               In an appeal from a bench trial, we review a trial court’s conclusions of law de novo,

affirming the judgment on any legal theory that finds support in the evidence. See BMC Software

Belgium, N.V. v. Marchand, 83 S.W.3d 789, 794 (Tex. 2002); Worford v. Stamper, 801 S.W.2d 108,

109 (Tex. 1990). “[W]e will not reverse an erroneous conclusion if the trial court rendered the

proper judgment.” City of Austin v. Whittington, 384 S.W.3d 766, 779 n.10 (Tex. 2012); see

Marchand, 83 S.W.3d at 794.

               We review a trial court’s findings of fact for legal and factual sufficiency of the

evidence by the same standards applied to a jury verdict. See Ortiz v. Jones, 917 S.W.2d 770, 772

(Tex. 1996); Anderson v. City of Seven Points, 806 S.W.2d 791, 794 (Tex. 1991); see City of Keller

v. Wilson, 168 S.W.3d 802, 827–28 (Tex. 2005) (describing legal sufficiency standard of review);

Cain v. Bain, 709 S.W.2d 175, 176 (Tex. 1986) (describing factual sufficiency standard of review).

When findings of fact are filed and unchallenged, “they are binding on an appellate court unless the




       5
         As previously stated, the trial court found in Silicon Labs’ favor on its claim as to its
purchases of memory elements, and the Comptroller has not appealed that ruling.

                                                 9
contrary is established as a matter of law, or if there is no evidence to support the finding.”

McGalliard v. Kuhlmann, 722 S.W.2d 694, 696 (Tex. 1986).

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

we review de novo. See First Am. Title Ins. Co. v. Combs, 258 S.W.3d 627, 631 (Tex. 2008); see

Rodriguez v. Service Lloyds Ins. Co., 997 S.W.2d 248, 254 (Tex. 1999) (construing administrative

rules in same manner as statutes). Our primary concern in construing a statute is the express

statutory language. See Galbraith Eng’g Consultants, Inc. v. Pochucha, 290 S.W.3d 863, 867 (Tex.

2009). “We thus construe the text according to its plain and common meaning unless a contrary

intention is apparent 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. 2010) (citing City of Rockwall v. Hughes,

246 S.W.3d 621, 625–26 (Tex. 2008)). We also “read the statute as a whole and interpret it to give

effect to every part.” Railroad Comm’n v. Texas Citizens for a Safe Future & Clean Water,

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)). Further, a precondition to deference to an agency’s interpretation of a statute is

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

v. Roark Amusement & Vending, L.P., 422 S.W.3d 632, 635 (Tex. 2013) (describing

agency-deference doctrine); Combs v. Health Care Servs. Corp., 401 S.W.3d 623, 629–30 (Tex.

2013) (same).

                Statutory exemptions from taxation—like the manufacturing exemption—are strictly

construed because “they undermine equality and uniformity by placing a greater burden on some

taxpaying businesses and individuals rather than placing the burden on all taxpayers equally.” North



                                                  10
Alamo Water Supply Corp. v. Willacy Cty. Appraisal Dist., 804 S.W.2d 894, 899 (Tex. 1991). The

claimant has the burden of proof to show that an exemption applies. Id. “An exemption must

affirmatively appear in the statute, and all doubts are resolved in favor of the taxing authority.”

GTE Sw. Inc., 2010 Tex. App. LEXIS 4223, 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 narrowly construed and that taxpayer has burden to “clearly show”

that exemption applies).      “On the other hand, the concept that a tax exemption must be

‘strictly’ construed ‘cannot be used as an excuse to stray from reasonableness.’” GTE Sw. Inc.,

2010 Tex. App. LEXIS 4223, at *7 (citing Tyler Pipe Indus., Inc., 919 S.W.2d at 161). And “the

overall scheme and intent of the legislation must not be overlooked.” Tyler Pipe Indus., Inc.,

919 S.W.2d at 161–62 (citation omitted). With the foregoing in mind, we turn to the parties’ issues.


Cross-Appeal by the Comptroller

                We begin with the jurisdictional issue raised by the Comptroller in the alternative on

cross appeal. See Crites v. Collins, 284 S.W.3d 839, 840 (Tex. 2009) (determining jurisdictional

questions before addressing merits); Combs v. Chevron, Inc., 319 S.W.3d 836, 844 (Tex.

App.—Austin 2010, pet. denied) (explaining that compliance with procedural requirements of tax

protest law was jurisdictional prerequisite for trial court to hear and decide merits of tax refund suit).

                The Comptroller argues that the trial court did not have jurisdiction over Silicon Labs’

“cleanroom argument” that was based on subsections (b) and (q) of section 151.318 because Silicon

Labs failed to make the argument prior to bringing its suit for judicial review, properly present it in

a motion for rehearing, or properly raise it in its initial administrative refund request. To support its

                                                   11
position, the Comptroller relies on the fact that the motion for rehearing in No. 101,320—in which

Silicon Labs specifically referenced subsections (b)(2) and (q) and argued that the EDA software

tools were exempt from sales taxes under those subsections—was not filed until several months after

the suit for judicial review in No. 102,151 was filed.

               The Tax Code authorizes suits for tax refund claims but sets jurisdictional

prerequisites for doing so.     See Tex. Tax Code §§ 112.151 (requiring claimant to follow

administrative procedures specified in sections 111.104 and 111.105 of Tax Code prior to bringing

suit for tax refund claim), .152 (limiting issues in suit brought under subchapter to “grounds of error

contained in the motion for rehearing”); see also id. §§ 111.104 (requiring written claim for refund

to be filed with Comptroller), .105 (addressing hearing on tax refund claim and motion for rehearing

requirement); Chevron, Inc., 319 S.W.3d at 844. Section 111.004(c)(2) states that a claim for a

refund must “state fully and in detail each reason or ground on which the claim is founded.” Tex.

Tax Code § 111.104(c); Hegar v. Ryan, LLC, No. 03-13-00400-CV, 2015 Tex. App. LEXIS 5096,

at *25–28 (Tex. App.—Austin May 20, 2015, no pet.) (mem. op.) (concluding that section

111.104(c)(2) was not ambiguous, citing common meaning of “fully” and “detail,” and interpreting

plain language in context and conjunction with other sections of Tax Code that contain similar

language). Subsection (c)(2)’s requirement ensures that the Comptroller is on notice of the legal

basis of the claim. See Ryan, LLC, 2015 Tex. App. LEXIS 5096, at *28 (citing Court’s interpretation

of phrase “fully and in detail” in section 112.051 of the Tax Code “that the ‘reason’ must be stated

in such a way as to put the comptroller on notice of the legal basis of the claim”); see also Tex. Tax

Code § 112.051(b) (requiring written protest that is submitted with payment to “state fully and in



                                                  12
detail each reason for recovering the payment”). And section 111.105(d) of the Tax Code similarly

states that “[a] motion for rehearing on a tax refund claim must be written and assert each specific

ground of error.” Tex. Tax Code § 111.105(d).

                In the procedural context of these combined suits for refund claims, we conclude that

the trial court had jurisdiction to consider Silicon Labs’ arguments that were based on subsections

(b)(2) and (q) of section 151.318. Silicon Labs specifically referenced the subsections in the motion

for rehearing in Hearing No. 101,320, and Silicon Labs in its written grounds for refunds filed

with the Comptroller specifically referenced the manufacturing exemption 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) (analyzing protest letters in context of particular proceeding and

concluding that Comptroller “was on notice of the legal bases for their claims” and that claimants

had substantially met requirements of section 112.151); cf. Chevron, 319 S.W.3d at 845 (concluding

that trial court lacked jurisdiction over unrelated claims that were first raised in motion for

rehearing); Local Neon Co. v. Strayhorn, No. 03-04-00261-CV, 2005 Tex. App. LEXIS 4667, at

*14–15 (Tex. App.—Austin June 16, 2005, no pet.) (mem. op.) (concluding that “bare statement”

that paying taxes under protest did not satisfy “purpose of the written protest requirement because the

letter does not inform the Comptroller on what basis she must defend 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) (observing that claimant “asserted that it was entitled to an exemption under three subsections

of the manufacturing exemption” when it sought tax refund). Thus, we overrule the Comptroller’s

jurisdictional argument on cross appeal and turn to Silicon Labs’ appeal.



                                                  13
Silicon Labs’ Appeal

               Silicon Labs raises two issues on appeal. It argues that the trial court erred by ruling

that the EDA software tools were not exempt from sales taxes pursuant to the manufacturing

exemption under subsection (a)(2)(A) of section 151.318 and, in the alternative, that the “digital

tools components” of the EDA software tools were exempt under subsection (a)(2)(B) of section

151.318. We address each in turn.


       Section 151.318(a)(2)(A)

               In its first issue, Silicon Labs argues that it was exempt from paying sales tax on its

purchases of the EDA software tools during the audit period pursuant to section 151.318(a)(2)(A).

As previously stated, section 151.318(a)(2)(A) provides in relevant part that:


       The following items are exempted from the taxes imposed by this chapter if sold,
       leased, or rented to, or stored, used, or consumed by a manufacturer: . . . (2) tangible
       personal property directly used or consumed in or during the actual manufacturing,
       processing, or fabrication of tangible personal property for ultimate sale if the use or
       consumption of the property is necessary or essential to the manufacturing,
       processing, or fabrication operation and directly makes or causes a chemical or
       physical change to: (A) the product being manufactured, processed, or fabricated for
       ultimate sale.


Tex. Tax Code § 151.318(a)(2)(A).

               We conclude that the applicable language of subsection(a)(2)(A) for purposes of this

appeal is not ambiguous and, thus, interpret the text according to its common and plain meaning in

the context of the framework of section 151.318. See Scott, 309 S.W.3d at 930. The statute does

not define “actual” or “directly” so we apply their common meanings. See Webster’s Third New



                                                 14
International Dictionary 22 (2002) (defining “actual” to mean “existing in fact or reality”),

641 (defining “directly” to mean “without any intervening space or time”); see also Tyler Pipe

Indus., Inc., 919 S.W.2d at 159–60, 162–63 (referring to common meaning of “actual” in analysis

of former version of manufacturing exemption and discussing other courts’ interpretation of

“directly” in similar contexts).

                Because “manufacturing” is defined by the statute and corresponding rule, we apply

those definitions. See Southwest Royalties, Inc., 500 S.W.3d at 406 (explaining that, “[a]lthough the

Comptroller’s definition is not binding, [courts] may consider it in determining the definition most

consistent with the scheme of the statute”); see also Southwest Royalties, Inc., 501 S.W.3d at 104

(discussing definition of “manufacturing” under section 151.318(d)). Under the definition provided

in the statute, the term “includes each operation beginning with the first stage in the production of

tangible personal property and ending with the completion of tangible personal property having the

physical properties (including packaging, if any) that it has when transferred by the manufacturer to

another.” Tex. Tax Code § 151.318(d); see also Webster’s at 1581 (defining “operation” as “a doing

or performing esp. of action: work, deed”). Pursuant to the corresponding rule, “[t]he first

production stage means the first act of production, and it shall not include those acts in preparation

for production.” 34 Tex. Admin. Code § 3.300(a)(9) (defining “manufacturing”).

                The plain language of subsection (a)(2)(A) requires that the use of the property cause

a direct “chemical or physical change” and “is necessary or essential” to the manufacturing

operation, as well as requiring that the tangible personal property—here, the EDA software tools—be

“directly used . . . in or during the actual manufacturing . . . of tangible personal property for ultimate



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

Code § 311.021 (presuming that entire statute is intended to be effective); Texas Citizens,

336 S.W.3d at 628 (explaining that courts interpret statutes to give effect to each part of statute);

GTE Sw. Inc., 2010 Tex. App. LEXIS 4223, at *16 (explaining that, in context of sales tax statute,

“phrase ‘tangible personal property for ultimate sale’ denotes a product manufactured, processed,

or fabricated in anticipation of a specific type of taxable transaction—the ‘sale’ of ‘tangible personal

property’”). Thus, to be entitled to an exemption under subsection (a)(2)(A), in addition to the

“direct change” and “necessary or essential” requirements, Silicon Labs had the burden to “clearly

show” that the EDA software tools were “directly used” in the “actual manufacturing” of the

semiconductor chips, and not in preparation for the first stage of the production of those chips.

See 34 Tex. Admin. Code § 3.300(a)(9) (defining “[m]anufacturing”); Southwest Royalties, Inc.,

500 S.W.3d at 404 (requiring taxpayer to “clearly show” that tax exemption applies); cf. Tex. Tax

Code § 151.318(p) (“For the purposes of this section, the manufacturing of computer software begins

with the design and writing of the code or program for the software and includes the testing or

demonstration of the software.”).

                To the extent Silicon Labs was relying on subsection (a)(2)(A), even if we assume

that it meets the definition of a manufacturer, we cannot conclude that Silicon Labs clearly showed

that its purchases of the EDA software tools were exempt under subsection (a)(2)(A). See Southwest

Royalties, Inc., 500 S.W.3d at 404; Whittington, 384 S.W.3d at 779 n.10; Marchand, 83 S.W.3d at

794; McGalliard, 722 S.W.2d at 696. The trial court’s unchallenged findings included:




                                                  16
       14.    Although Silicon Labs designs, develops and sells semiconductor chips, it
              outsources the actual manufacturing and fabrication of the chips to a factory,
              or “foundry,” in Taiwan.

       ***

       18.    On receiving the Process design Kit [from the foundry], Silicon Labs uses the
              EDA software tools at issue in this lawsuit to develop and design the chip in
              a virtual environment.

       19.    Once the design is complete, Silicon Labs creates an electronic design
              (“GDS”) file “describing a set of photolithography masks” that the foundry
              will use to actually fabricate the chips.

       ***

       22.    The fabrication of the photolithography masks at the foundry is the first step
              in the physical creation of the chip itself.

       ***

       42.    Although the foundry performs its own DRC before initiating actual
              production of the chip, its own EDA software is used for this task, not the
              EDA software that Silicon Labs purchased.

       43.    None of the EDA software tools purchased by Silicon Labs, and for
              which it seeks a tax refund, was used by the third-party foundry in its
              manufacturing process.

       44.    Rather, the foundry uses the GDS design file created and transmitted
              electronically by Silicon Labs to guide it in the actual manufacture and
              fabrication of the chips.


Because Silicon Labs has not challenged these findings, they are binding on this Court. See

McGalliard, 722 S.W.2d at 696.

              Silicon Labs argues that it uses the EDA software tools in “actual manufacturing” and

cites evidence that showed that the EDA software tools are “necessary” and “essential” to the



                                               17
manufacture of the semiconductor chips that Silicon Labs sells. See Tex. Tax Code § 151.318(a)(2).

Silicon Labs also argues that its design of the semiconductor chip in a virtual environment was the

first stage in the “actual” manufacturing of the semiconductor chips. Applying the plain language

of subsection (a)(2)(A) to the trial court’s unchallenged findings of facts, however, Silicon Labs

“directly”—“without any intervening space or time”—used the EDS software tools to create the

GDS file. See Webster’s at 22; see also Scott, 309 S.W.3d at 930. After receiving the GDS file

electronically, the third-party foundry then performed its own DRC using its own EDA software

tools that it purchased before initiating actual production of the semiconductor chips. This evidence

supports the conclusion that Silicon Labs’ creation of the GDS file was in preparation for and not

an “operation beginning with the first stage in the production” of the semiconductor chip—the

product for ultimate sale. See Tex. Tax Code § 151.318(a)(2)(A), (d); 34 Tex. Admin. Code

§ 3.300(a)(9) (defining “manufacturing”); Webster’s at 1581 (defining “operation”); see also

Whittington, 384 S.W.3d at 779 n.10 (explaining that court will not reverse erroneous conclusion

by trial court if trial court rendered proper judgment); GTE Sw. Inc., 2010 Tex. App. LEXIS 4223,

at *16.

               We further observe that Silicon Labs’ proposed interpretation of subsection (a)(2)(A)

would render subsection (p) meaningless. See Tex. Tax Code § 151.318(p) (explaining that

“manufacturing of computer software begins with the design and writing of the code or program for

the software”); Texas Citizens, 336 S.W.3d at 628 (interpreting statutes to give effect to every part).

If pre-production design of a product is the first stage in actual manufacture as contended by Silicon

Labs, there was no need to include a provision specifically addressing manufacturers of computer



                                                  18
software. Moreover, had the Texas Legislature intended to extend the manufacturing exemption for

product design to industries other than manufacturers of computer software, it could have done so.

See GTE Sw. Inc., 2010 Tex. App. LEXIS 4223, at *6 (requiring exemption to affirmatively appear

in statute); see also Southwest Royalties, Inc., 501 S.W.3d at 104.


Do the EDA software tools fall within the definition of “Semiconductor Fabrication
Cleanrooms and Equipment”?

               Silicon Labs also argues that it was exempt under subsection (a)(2)(A) because it

conclusively established that the EDA software tools were used “in connection with” the

manufacture of a semiconductor product and, therefore, fell within the definition of “semiconductor

fabrication cleanrooms and equipment.”        See Tex. Tax Code § 151.318(b)(2) (stating that

manufacturing exemption includes “semiconductor fabrication cleanrooms and equipment”), (q) (for

purposes of subsection (b), defining “semiconductor fabrication cleanrooms and equipment” as

“tangible personal property, without regard to whether the property is affixed to or incorporated into

realty, used in connection with the manufacturing . . . in a cleanroom environment of a

semiconductor product, without regard to whether the property is actually contained in the cleanroom

environment”). In addition to focusing on the phrase “in connection with” in subsection (q), Silicon

Labs focuses on the phrase “without regard to whether the property is actually contained in the

cleanroom environment.”

               Silicon Labs argues that property falling within the definition of “semiconductor

fabrication cleanrooms and equipment” in subsection (q) is “deemed” to be within the exemption

in subsection (a)(2). As support for this position, Silicon Labs focuses on subsection (b)(2) and



                                                 19
subsection (s)(1) of section 151.318 that states that “limitations in Subsection (a)(2) that refer to

tangible personal property directly causing chemical or physical changes to the product being

manufactured . . . for ultimate sale” do not apply to “semiconductor fabrication cleanrooms and

equipment.” See Tex. Tax Code § 151.318(b)(2), (s)(1).

               Relevant to this argument, the trial court’s conclusions of law included:


       The manufacturing exemption is not available to Silicon Labs simply because it may
       or may not manufacture semiconductor fabrication equipment under § 151.318(b)
       and (q). An item enumerated under § 151.318(a)(1)–(11) must still have been sold
       to Silicon Labs. Subsection (s) states that certain limitations in § 151.318(a)(2) do
       not apply to semiconductor fabrication equipment in Subsection (q). If Silicon Labs
       did not need to meet the requirements of § 151.318(a) and could simply rely on
       Subsection (q), there would be no reason for the Legislature to specify that a portion
       of (a)(2) does not apply.


Even if the trial court erred by this conclusion and “semiconductor fabrication cleanrooms and

equipment” are “deemed” exempt under subsection (a)(2), we cannot conclude that Silicon Labs

clearly showed that the EDA software tools fall within the statutorily defined term. See id.

§ 151.318(q); 34 Tex. Admin. Code § 3.300(4) (defining “equipment” to mean “[a]ny apparatus,

working clothing, device, or simple machines used directly in production”), (5) (defining

“fabrication” to mean “[t]o make, build, create, produce, or assemble components of tangible

personal property, or to make tangible personal property work in a new or different manner”),

(10) (defining “processing” to mean “[t]he physical application of the materials and labor necessary

to modify or change the characteristics of tangible personal property”), (14) (defining

“semiconductor fabrication cleanrooms and equipment”); Southwest Royalties, Inc., 500 S.W.3d at

404, 406.

                                                 20
               As support for its interpretation of subsection (q) that the EDA software tools fall

within the definition of “semiconductor fabrication cleanrooms and equipment,” Silicon Labs cites

this Court’s interpretation of the phrase “in connection with” as that term was used in a franchise 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 & Mfg. Corp., 535 S.W.3d 1, 9, (Tex. App.—Austin

Aug. 11, 2017, pet. filed) (mem. op.) (interpreting phrase “in connection with” as used in section

171.1011(g)(3) of Tax Code to require “‘reasonable nexus’” and describing phrase to be one “‘of

intentional breadth’” but not without “‘logical limit’” (citing and quoting Titan Transp., L.P.,

433 S.W.3d at 637–39)).

               In Titan Transportation, we reasoned that the phrase “in connection with” in the

context in which it was used in the franchise tax statute required “a reasonable—i.e., more than

tangential or incidential—relationship.” 433 S.W.3d at 638. Applying this reasoning here, Silicon

Labs argues that the evidence showed that the EDA software tools were “used in connection with”

the manufacturing of the semiconductor chips. When considered in context, however, the phrase

“in connection with” as used in subsection (q) of section 151.318 is narrower than Silicon Labs’

interpretation. See Tex. Tax Code § 151.318(q). The plain language of the section requires a

connection between the property’s use and “manufacturing, processing, or fabrication in a cleanroom

environment of a semiconductor chip.” In other words, the property’s use requires a reasonable

nexus to the aspect of fabricating semiconductor chips in a cleanroom environment. See Texas

Lottery Comm’n v. First State Bank of DeQueen, 325 S.W.3d 628, 635 (Tex. 2010) (“We presume




                                                  21
the Legislature selected language in a statute with care and that every word or phrase was used with

a purpose in mind.”).

               We recognize that the enumerated examples in subsection (q) are not exclusive. See

Tex. Gov’t Code § 311.005(13) (explaining that “‘[i]ncludes’ and ‘including’ are terms of

enlargement and not of limitation or exclusive enumeration, and use of the terms does not create a

presumption that components not expressed are excluded”); Sneed v. Webre, 465 S.W.3d 169,

191–92 (Tex. 2015). The examples, however, of the types of tangible personal property that fall

within the definition of “semiconductor fabrication cleanrooms and equipment” conform with the

statutorily required use of the property in the context of the cleanroom aspect of fabricating

semiconductor chips. See, e.g., Ritchie v. Rupe, 443 S.W.3d 856, 869 (Tex. 2014) (observing that

“familiar principle of statutory construction that words grouped in a list should be given related

meaning,” citing Riverside Nat’l Bank v. Lewis, 603 S.W.2d 169, 174 n.2 (Tex. 1980), “and similarly

that ‘the meaning of particular words in a statute may be ascertained by reference to other words

associated with them in the same statute,’” citing City of San Antonio, 111 S.W.3d at 29); City of

Houston v. Bates, 406 S.W.3d 539, 545 (Tex. 2013) (explaining that, when general words follow

specific, enumerated categories, courts limit general words’ application to same kind or class of

categories as those expressly mentioned).

               As previously stated, the term “semiconductor fabrication cleanrooms and equipment”

pursuant to the statute “includes”:


       integrated systems, fixtures, and piping, all property necessary or adapted to reduce
       contamination or to control airflow, temperature, humidity, chemical purity, or other
       environmental conditions or manufacturing tolerances, and production equipment

                                                22
       and machinery. The term does not include the building or a permanent,
       nonremovable component of the building, that houses the cleanroom environment.
       The term includes moveable cleanroom partitions and cleanroom lighting.
       “Semiconductor fabrication cleanrooms and equipment” are not “intraplant
       transportation equipment” as that term is used in Subsection (c)(1).


See Tex. Tax Code § 151.318(q).

               Comptroller Rule 3.300(14) also provides other examples of property falling within

the definition of “semiconductor fabrication cleanrooms and equipment” consistent with subsection

(q)’s focus on the cleanroom aspect of fabricating semiconductor chips:


       all tangible personal property that moves the product or other materials that are
       necessary or essential to the process, including piping that is used to move gas,
       liquids, deionized water, and hazardous waste material; silicon wafer moving,
       handling, and tracking systems; and electrical supply and control equipment, such as
       switches, wiring, and monitoring equipment that is incorporated into the realty. The
       term does not include the building or any permanent, nonremovable structural
       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 “fabrication”). Although

the specific enumeration of property falling within the definition is not exhaustive, the properties

identified in the statute and rules are types of property that are necessary to “make, build, create,

produce, or assemble” the “components” of a semiconductor chip within a cleanroom environment.

See id. § 3.300(5). On this record, the trial court could have concluded that Silicon Labs failed to

clearly show how the EDA software tools had a reasonable nexus with the third-party foundry’s

cleanroom environment for fabricating the semiconductor chips to fall within the definition of

“semiconductor fabrication cleanrooms and equipment.”



                                                 23
Were the EDA software tools necessary to control manufacturing tolerances?

               Silicon Labs further argues that the EDA software tools were used “in connection

with” the manufacturing of the semiconductor chips because they fall within the example of

“property necessary . . . to control . . . manufacturing tolerances” that is expressly included in the

enumerated list in subsection (q). See Tex. Tax Code § 151.318(q). Because the word “control” 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) (defining “control” to mean “[t]o exercise

power over or influence over” or “[t]o regulate or govern”); see also Southwest Royalties, Inc.,

500 S.W.3d at 406 (considering plain meaning of term in context of framework of section 151.318).

Evidence was presented to support a finding that Silicon Labs used the EDA software tools to

“control” manufacturing tolerances of the semiconductor chips. The trial court’s findings of fact,

however, included the following:


       15.     The Taiwan foundry’s manufacturing equipment includes “semiconductor
               fabrication cleanrooms” and equipment.

       16.     The foundry’s cleanrooms include all equipment and production
               machinery that reduce contamination and/or control airflow, temperature,
               humidity, chemical purity, or other environmental conditions or
               manufacturing tolerances.

       17.     The foundry sends its “Process Design Kit” to Silicon Labs, specifying the
               foundry’s manufacturing tolerances.

       18.     On receiving the Process Design Kit, Silicon Labs uses the EDA software
               tools at issue in this lawsuit to develop and design the chip in a virtual
               environment.




                                                 24
                Although Silicon Labs challenges the legal sufficiency of the evidence to support

finding of fact no. 16 in its reply brief, it has not challenged the other findings, and we are bound by

the unchallenged findings. See McGalliard, 722 S.W.2d at 696. Further, sufficient evidence

supports the trial court’s finding of fact no. 16. See Ortiz, 917 S.W.2d at 772 (reviewing trial court’s

findings of fact by same standards applied to jury verdict for evidentiary sufficiency review). Silicon

Labs’ vice president of central engineering described the inside of a cleanroom as follows:


        So it depends on which fabs you’re talking about, but in this case, this would be .18
        micron technology or larger, so kind of some of the older fabs. So start out by
        putting on what we call a bunny suit to actually go into the fab to maintain the clean
        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 you
        have several bays where you actually operate different steps of the process. So that
        includes lithography, that includes etching, that includes metallization, thin film
        deposition. Again, everyone [sic] is wearing gloves, wearing face masks, wearing
        the full body suit to maintain the clean nature of the fab. And then you have what we
        call the boats of wafers, which are batches of 25 wafers at a time typically that are
        carried from station to station to process at that next step of the fab.


                He also answered the following questions about the cleanroom at the third-party

foundry in Taiwan:


        Q.      The clean room in Taiwan that manufactured Silicon Labs semiconductor
                chips during the tax period was a general clean room, correct?

        A.      Yes.

        Q.      And the clean room environment is the main part of the foundry where the
                processing is done; is that right?

        A.      Correct.

        Q.      And it’s the foundry that actually manufactures the physical chip, correct?

                                                  25
       A.      Yeah, you could say that. Yeah, that’s the first physical, if you don’t count
               the computer where all the stuff is stored.

       Q.      But as for the physical chip itself, it’s the foundry—

       A.      Right.

       Q.      —that actually manufacturers the physical chip?

       A.      Correct.


               In contrast to this evidence of the third-party foundry’s cleanroom facility, evidence

showed that Silicon Labs used the EDA software tools to design the entire chip in a virtual

environment within the confines of the manufacturing tolerances as determined by the parameters

of the third-party foundry’s fabrication facility—not that the manufacturing tolerances were

“controlled” by Silicon Labs. See Black’s at 378 (defining “control” to mean “[t]o exercise power

over or influence over” or “[t]o regulate or govern”); Scott, 309 S.W.3d at 931 (explaining that

“[c]ourts must not give the words used by the Legislature an ‘exaggerated, forced, or constrained

meaning’” (quoting City of Austin v. Southwestern Bell Tel. Co., 92 S.W.3d 434, 442 (Tex. 2002))).

               Although the witnesses provided conflicting testimony,6 Silicon Labs’ vice president

confirmed that one of the functions of the DRC was to verify that Silicon Labs’ design would adhere

to the foundries’ specifications and manufacturing tolerances for the entire chip as provided by the

foundry in its process design kit (PDK). Concerning how the EDA software tools and the PDK

worked together, he explained:


       6
         For example, the vice president answered “Yes” when asked if the EDA software and
the process design kit are both necessary to control the manufacturing tolerances of the
semiconductor chip.

                                                26
       So the PDK provides the parameters that set the limitations of what the mechanical
       tolerances are in the fab, and those parameters are fed into the EDA software so that
       as you’re designing and trying to design for specific electrical performance of the
       device, the PDK will set limits on how small a transistor or how big a transistor can
       be or how close you can put lines together in the layout of your device. So the PDK
       sets the constraints under which you can design the product, the electrical
       performance that you’re looking for.


Based on its resolution of the conflicting evidence, the trial court could have found that Silicon Labs’

EDA software tools did not “control” the manufacturing tolerances but were used to operate within

the manufacturing tolerances as determined by the third-party foundry’s facility and equipment.7


       7
         When asked, the Comptroller’s expert agreed that Silicon Labs used the PDK from the
foundry “to figure out what different tolerances Silicon Labs was allowed to work with.” Silicon
Labs’ vice president testified consistently:

       Q.      Because initially before Si[licon] Labs even begins its design of the chip,
               it’s going to receive normally or typically a design kit from the Taiwan
               foundry, correct?

       A.      Yes, that’s correct.

       Q.      And that design kit will contain certain specifications regarding and
               explaining the manufacturer’s tolerances, correct?

       A.      Yes, it will describe the process and the rules that are needed in order to
               manufacture—you know, in order to fabricate the device there.

       Q.      And the design rule check is intended to ensure that the design is consistent
               with those specifications from the manufacturer and the tolerances, correct?

       A.      Yes, that’s one function of DRC.

       Q.      And these specifications and tolerances that are received from the
               manufacturer are specifications and tolerances for the entire chip and not just
               the functional logic Si[licon] Labs is claiming as software entitling it to a tax
               refund in this case, correct?

                                                  27
                   Applying the applicable standard of review and the plain meaning of the relevant

statutory language, we conclude that Silicon Labs did not “clearly show” that the EDA software tools

fall within the definition of “semiconductor fabrication cleanrooms 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, Silicon Labs did not establish that its purchases of the

EDA software tools were exempt under subsection (b)(2) and, therefore, even if property falling

within the definition of “semiconductor fabrication cleanrooms and equipment” is “deemed” exempt

under subsection (a)(2)(A), the purchases of the EDA software tools here were not “deemed”

exempt, and Silicon Labs was required to satisfy the requirements of subsection (a)(2)(A). See Tex.

Tax Code § 151.318(a)(2)(A), (b)(2), (s)(1), (q). As previously stated, we have concluded that it

failed to do so.

                   For these reasons, we overrule Silicon Labs’ first issue.


        Section 151.318(a)(2)(B)

                   In its second issue, Silicon Labs argues in the alternative that the trial court erred by

ruling that its purchases of the “digital tools components” of the EDA software were not exempt

from sales taxes pursuant to section 151.318(a)(2)(B). See id. § 151.318(a)(2)(B). As previously

stated, section 151.318(a)(2)(B) provides in relevant part:


        The following items are exempted from the taxes imposed by this chapter if sold,
        leased, or rented to, or stored, used, or consumed by a manufacturer: . . . (2) tangible




        A.         It’s for the—it’s for the entire chip, yes.

                                                      28
        personal property directly used or consumed in or during the actual manufacturing,
        processing, or fabrication of tangible personal property for ultimate sale if the use or
        consumption of the property is necessary or essential to the manufacturing,
        processing, or fabrication operation and directly makes or causes a chemical or
        physical change to: . . . (B) any intermediate or preliminary product that will become
        an ingredient or component part of the product being manufactured . . . for
        ultimate sale.


Id. § 151.318(a)(2)(B). We conclude that the applicable language of this subsection also is not

ambiguous for purposes of this appeal and, thus, interpret the text according to its plain and common

meaning in the context of the framework of section 151.318. See Scott, 309 S.W.3d at 930.

                  Silicon Labs argues that it conclusively established that the digital tools components

were used to produce a “preliminary or intermediate product”—“functional logic”—that became an

“ingredient or component part” of the semiconductor chips it produced and sold. According to

Silicon Labs, the functional logic is “computer software” that was incorporated and sold as a

component part of the semiconductor chips, and, therefore, the digital tools that were used to design

the functional logic were used in the “actual” manufacturing and made a direct change to the

functional logic. See Tex. Tax Code § 151.318(a)(2)(B), (p) (stating that, for purposes of section,

“manufacturing of computer software begins with the design and writing of the code or program for

the software”).

                  As part of this issue, Silicon Labs challenges the legal sufficiency of the evidence to

support the trial court’s finding of fact no. 45 in which the trial court found that “[t]he EDA software

tools sold to Silicon Labs do not directly make or cause a chemical or physical change to an

intermediate or preliminary product.” Based on this finding, the trial court concluded that “[t]he

EDA software tools sold to Silicon Labs are not qualifying items under § 151.318(a)(2)(B) because

                                                    29
they do not directly make a chemical or physical change to an intermediate or preliminary product.”

Also related to this issue, the trial court’s unchallenged findings of fact included:


       10.     Among the ingredients or components of the semiconductor chip are the
               “logic gates” etched or embedded within the chip’s silicon substrate.

       11.     Using digital signals only, a collection of these logic gates implements
               “functional logic”—that is, a series of instructions or logical operations
               within the chip. But not all logic gates contained in Silicon Labs’
               mixed-signal chip are considered to be functional logic.

       ***

       13.     To function properly and in accordance with its design, the functional logic
               implemented by the logic gates depends on its integration and interface with
               the chip’s other components and ingredients.

       ***

       36.     The Verilog EDA tools are used to create the functional logic in a
               virtual environment.


               Because Silicon Labs’ theory under subsection (a)(2)(B) is based on its position that

it was a manufacturer of “computer software” when it produced the functional logic, the plain

language of subsections (a)(2)(B) and (p) required Silicon Labs to clearly show that the functional

logic was an “intermediate or preliminary product” and “computer software.” See Tex. Tax Code

§ 151.318(a)(2)(B), (p) (stating that, for purposes of section, “manufacturing of computer software

begins with the design and writing of the code or program for the software”), (r); Southwest

Royalties, Inc., 500 S.W.3d at 404. Because the term “product” is not defined, we apply its plain

meaning. See Webster’s at 1810 (defining “product” as “something produced”); Black’s at 138

(defining “product” to mean “something that is distributed commercially for use or consumption and

                                                  30
that is usu. (1) tangible personal property, (2) the result of fabrication or processing, and (3) an item

that has passed through a chain of commercial distribution before ultimate use or consumption”).8

                Chapter 151 of the Tax Code also does not define “software,” but “computer

program” is defined to mean “a series of instructions that are coded for acceptance or use by a

computer system and that are designed to permit the computer system to process data and provide

results and information. The series of instructions may be contained in or on magnetic tapes,

punched cards, printed instructions, or other tangible or electronic media.” Tex. Tax Code

§ 151.0031. During the relevant time period, Comptroller Rule 3.308, under subsection (b), that is

titled “software,” defined “computer program” to mean:


        a series of instructions sold as a completed program which are coded for acceptance
        or use by a computer system and which are designed to permit the computer system
        to process data and provide results and information. The series of instructions may
        be contained in or on . . . semiconductor chips.


See 34 Tex. Admin. Code § 3.308(b)(1) (Comptroller of Pub. Accts., Computers—Hardware,

Software, Services, and Sales); cf. id. § 3.308(a)(1) (defining “hardware” to include “central

processing units and all peripheral equipment, parts, and supplies”).9

        8
          We observe that applying the plain meaning of the undefined word “product” is consistent
with its other uses in section 151.318. See generally Tex. Tax Code § 151.318; In re Memorial
Hermann Hosp. Sys., 464 S.W.3d 686, 701 (Tex. 2015) (“‘[C]ourts should not give an undefined
statutory term a meaning out of harmony or inconsistent with other provisions, although 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))).
        9
          Silicon Labs has not challenged the validity of this rule. Rule 3.308 was amended to be
effective January 22, 2018, and the amended rule defines “computer program” to mean:

        A series of instructions that are coded for acceptance or use by a computer system

                                                   31
               To support its interpretation of section 151.318(a)(2)(B), Silicon Labs equates the

statutory definition of “computer program” in section 151.0031 with the definition of “computer

software” as that term is used in subsection (p) of section 151.318. See Tex. Tax Code §§ 151.0031,

.318(a)(2)(B), (p). Because “functional logic” is “computer software,” according to Silicon Labs,

it uses the digital tools components during the “actual manufacturing” because the manufacturing

of computer software “begins with the design and writing of the code” under subsection (p) and,

therefore, the use of the digital tools components to design the functional logic satisfied subsection

(a)(2)’s requirement that the property be “directly used . . . in or during the actual manufacturing.”

See id. § 151.318(a)(2), (p).     The “functional logic,” however, would also have to be an

“intermediate or preliminary product” to fall within the plain language of the manufacturing

exemption under subsection (a)(2)(B). And, applying the Comptroller rule’s definition of “computer

program” as related to “software,” the functional logic would have to be “sold as a completed

program.” See 34 Tex. Admin. Code § 3.308(b)(1); Southwest Royalties, Inc., 500 S.W.3d at 406

(explaining that, “[a]lthough the Comptroller’s definition is not binding, [court] may consider it in

determining the definition most consistent with the scheme of the statute”). To be entitled to a

manufacturing exemption under subsection (a)(2)(B) as to the digital tools components then, it was




       and that are designed to permit the computer system to process data and provide
       results and information. The series of instructions may be contained in or on
       magnetic tapes, semiconductor chips, punched cards, printed instructions, or other
       tangible or electronic media.

34 Tex. Admin. Code § 3.308(a)(1) (Comptroller of Pub. Accts., Computers—Hardware, Computer
Programs, Services, and Sales); see 42 Tex. Reg. 353, 355 (2018).


                                                 32
Silicon Labs’ burden to establish that the “functional logic” that was created with the digital tools

components was “sold as a completed program” and that it was a “product.” See Tex. Tax Code

§ 151.318(a)(2)(B), (p), (r); 34 Tex. Admin. Code § 3.308(b)(1).

               Applying the applicable standard of review and the plain meaning of the relevant

statutory and regulatory language, 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 the evidence before the trial court, the

Comptroller’s expert testified that the “functional logic” could not do anything separate and apart

from other components of the chip and “[i]t required the fabrication” before it was useable. In his

expert report, he further opined that “there [was] no software being developed by [Silicon Labs]

when using the EDA software, and no software [was] being developed by [Silicon Labs] as an

ingredient or component part of another product” and concluded that “the functional logic internal

to the chip does not provide a ‘completed program’ since it is controlled by external software and

therefore the functional logic cited by [Silicon Labs] does not meet the definition of ‘software’ as

defined above by Rule 3.308.” This evidence supports that “functional logic” does not fall within the

plain meaning of the undefined term “product” and that it was not “sold as a completed program.”

               Silicon Labs argues that the functional logic falls within Rule 3.308(b)(1)’s definition

of software because the functional logic was “complete as to functionality from the perspective of

the seller (i.e. Silicon Labs)” and cites this Court’s opinion in Verizon North, Inc. v. Combs,

308 S.W.3d 1 (Tex. App.—Austin 2009, pet. denied), as support for its position. In that case, the

issue was whether software that was purchased by the appellant from a third-party was a “taxable

item” so as to be subject to sales tax. Id. at 2. This Court concluded that the software fell within the



                                                  33
definition of “computer program” in section 151.0031 and that the software was “sold as a

completed program” by the third party to appellant under Rule 3.308(b)(1) based on the trial court’s

findings of fact and, therefore, that the purchase of the software was taxable. Id. at 5–6. In our

analysis, we explained that the focus of the rule was “on the code and design of the software as sold,

not on the intended use by the purchaser” and “regardless of how the buyer intends to use the

program and regardless of what modifications might be necessary in order to increase or modify its

functions for the individual needs of the buyer.” Id. at 2.

               Citing this analysis in Verizon North, Silicon Labs argues that the functional logic

was a “completed program” from its perspective as the seller and, therefore, that it was within Rule

3.308(b)(1)’s definition of a “computer program.” Even if the focus of the rule is from the seller’s

perspective, however, the trial court’s unchallenged findings contradict Silicon Labs’ position. See

id. at 2 (explaining that, absent challenge to findings of fact, appellate court accepts them as true).

The trial court’s findings of fact included that Silicon Labs created the functional logic in a virtual

environment, and that the third-party foundry, as part of the process of manufacturing the

semiconductor chips, “etched or embedded [logic gates] within the chip’s silicon substrate.” The

trial court further found that, although some of the logic gates implemented functional logic, the

functional logic “depend[ed] on its integration and interface with the chip’s other components and

ingredients” “to function properly and in accordance with its design.” These unchallenged findings

are fatal to Silicon Labs’ position that the “functional logic” was “sold as a completed program.”

               For these reasons, we overrule Silicon Labs’ second issue.




                                                  34
                                            Conclusion

               Having overruled Silicon Labs’ issues, we affirm the trial court’s final judgment.10



                                              __________________________________________
                                              Melissa Goodwin, Justice

Before Chief Justice Rose, Justices Goodwin and Field

Affirmed

Filed: July 13, 2018




       10
         Given our disposition of these issues, we do not address the Comptroller’s alternative
arguments to support affirming the trial court’s judgment, including his arguments that Silicon Labs’
purchases of the EDA software tools were excluded from the manufacturing exemption under
subsection (c)(3). See Tex. Tax Code § 151.318(c)(3) (excluding “research or development of new
products” from manufacturing exemption); see also Tex. R. App. P. 47.1.

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