On appeal from Tax Court of New Jersey, whose opinion is reported at 11 N.J. Tax 320 (1990).
J.h. Coleman, Stern and Keefe. The opinion of the court was delivered by Coleman, J.h., P.J.A.D. Stern, J.A.D. (concurring).
The opinion by the court was delivered by
Plaintiff, GE Solid State, Inc. (GE), appeals from a decision of the Tax Court which affirmed that portion of a determination of the Director of the Division of Taxation assessing a use tax deficiency of $61,599 for the taxation audit period of July 1, 1981 through June 30, 1984. GE paid the use tax assessment under protest, $40,026 of the sum paid is attributable to a use tax imposed on GE's predecessor, the Solid State Division of RCA, purchase of machinery and equipment used to make photomasks. The remaining $21,573 is attributable to a use tax imposed on plaintiff's predecessor's purchase of photoplates used by plaintiff as reticles and printmasters in its photomask operation to make other photomasks. This machinery and equipment were used by plaintiff's predecessor in its high technology manufacturing of integrated circuits or "chips." The process is as complicated as it sounds and it has been
thoroughly outlined below. GE Solid State v. Director, Div. of Tax., 11 N.J. Tax. 320, 323-329 (1990).
This appeal involves an interpretation of certain provisions of the Sales and Use Tax Act (Act), N.J.S.A. 54:32B-1 et seq. Under the Act, a sales tax is imposed on receipts from the sale of tangible personal property, except as provided otherwise under the Act. N.J.S.A. 54:32B-3(a). No sales tax issue is involved in this appeal. The Act also imposes a use tax on the use of any tangible personal property purchased at retail unless an exemption applies. N.J.S.A. 54:32B-6.
GE contended below and again on this appeal that the machinery and equipment in question are exempt from a use tax pursuant to N.J.S.A. 54:32B-8.13a, the so called manufacturing exemption. GE argues that when the Solid State Division of RCA purchased the photomask machinery and accessories, those purchases did not constitute taxable events because they represented "[s]ales of machinery, apparatus or equipment for use or consumption directly and primarily in the production of tangible personal property by manufacturing . . . ." N.J.S.A. 54:32B-8.13a. GE further contends that subsection 8.13a similarly exempts the reticles and printmaster "because they are used either directly in the production of integrated circuits by manufacturing or directly in the production of photomasks by manufacturing."
The Tax Court rejected GE's arguments and concluded that in light of the legislative history of the manufacturing exemption and the long standing administrative regulations, the Director's interpretation of the exemption was correct. Both the Director and the Tax Court concluded that subsection 8.13a exemption applies only to machinery used directly in the production or manufacturing of personal property that was for sale to an ultimate consumer, at which point a sales tax would be collected.
They relied in part upon N.J.A.C. 18:24-4.2 which defined "machinery, apparatus or equipment" and "manufacturing or processing" as follows:
'Machinery, apparatus or equipment' means any complex, mechanical, electrical or electronic device, mechanism or instrument which is adapted to the accomplishment of a production process, and which is designed to be used, and is used, in manufacturing, converting, processing, fabricating, assembling, or refining tangible personal property for sale.
'Manufacturing or processing' means the performance of an operation or series of operations, the object of which is to place items of tangible personal property in a form, composition, or character different from that in which they were acquired. The change in form, composition, or character must be a substantial change, and it must result in a transformation of property into a different or substantially more usable product. [ Ibid. emphasis added].
N.J.A.C. 18:24-4.4(b), which ...