On certification to the Superior Court, Appellate Division, whose opinion is reported at 254 N.J. Super. 653 (1992).
Garibaldi, Wilentz, O'Hern, Stein, Handler, Clifford, Pollock
The opinion of the court was delivered by
This appeal requires the Court to define the scope of N.J.S.A. 54:32B-8.13a ("section 8.13a"), the manufacturing exemption of the Sales and Use Tax Act ("Act"), N.J.S.A. 54:32B-1 to -29. That section provides an exemption from the sales and use tax for machinery, apparatus, or equipment used "directly and primarily in the production of tangible personal property by manufacturing * * *." Plaintiff, GE Solid State, Inc. ("GE"), a manufacturer of integrated circuits, claims that its purchases of photomask machinery and photoplates are exempt from the Act under section 8.13a. The Director of the Division of Taxation ("Director"), on the other hand, contends that the purchases did not meet the requirement implicit in section 8.13a and expressed in N.J.A.C. 18:24-4.2 ("regulation 4.2") and N.J.A.C. 18:24-4.4(b) ("regulation 4.4(b)") that the end product of the manufacturing process be "for sale" to a consumer. The narrow issue, therefore, is whether the manufacturing exemption applies to machinery used to produce tangible personal property that is not itself "for sale" but instead is used by the manufacturer to produce other tangible personal property, here integrated circuits, that are sold directly to consumers and on which sales taxes are paid.
Most of the facts are stipulated. GE, a Delaware corporation with its principal place of business located in Somerville, New Jersey, is the successor in interest to the Solid State Division of the RCA Corporation ("RCA"). During the assessment period of July 1, 1981, through June 30, 1984, RCA engaged in the manufacture and sale of integrated circuits, commonly known as computer chips.
Integrated circuits are rectangular transistor circuits made on small flat pieces of a secure conductor material such as silicone. The integrated circuits are typically one-quarter to one-half inch on a side containing anywhere from 100 to 10 million electrical transistors. The transistors are all fabricated directly on the chip using a mass-production technique known as photolithography, and connected together with metal wiring into a single circuit. The integrated circuit may have anywhere from seven to seventeen levels or layers of elements. The production of integrated circuits has four principal phases: (1) the research and development of a prototype of the proposed integrated circuit; (2) the production of photomasks, which are templates of the prototype, for use in the mass-production of the integrated circuits; (3) the wafer-fabrication process; and (4) the packaging of the units.
In the research-and-development phase, design engineers create a schematic diagram of the seven to seventeen levels of the proposed integrated circuit. Each level has its own pattern, and the collection of patterns defines the integrated circuit. Layout designers then create artwork that is an exact replica, magnified 500 to 1,000 times, of each level of the prototype integrated circuit. A "pattern generator tape" translates the physical artwork into numerical information that is used to create prototypes, which serve as patterns for each level of the integrated circuit. The photomask set is then used to produce a number of integrated circuits for testing. If those integrated circuits are suitable for their intended purpose, the product design is considered ready for manufacture.
Photomasks are indispensable to the manufacturing of integrated circuits. A photomask is a four- or five-inch glass plate, called a photoplate, on which one level of the design of an integrated circuit has been patterned. In the photomask operation, the second phase, the design of one level of an integrated circuit is produced on a photoplate by either an electron beam machine (MEBES machine) or an optical exposure system (TRE machine). The photoplate then goes through a number of chemical processes that result in a finished photomask that contains the pattern of one level of an integrated circuit.
The MEBES machine produces three kinds of photomasks: projection masters, print masters, and reticles. The projection master is sent directly to the silicon-wafer-fabrication phase for the actual production of the integrated circuits. The second type of photomask, the print master, is used with a contact printer machine to make another type of photomask called a contact print. The contact prints, like the projection masters, are used in the silicon-wafer-fabrication operation.
The third type of photomask produced by the MEBES machine, and the only photomask produced by the TRE machine, is a reticle. A reticle is different from other types of photomasks because the patterns on the reticle are ten times larger than actual size. The primary function of a reticle is to make other projection masters or print masters by means of a step-and-repeat machine. Reticles, like print masters, are not employed in the wafer-fabrication operation but instead remain in phase two, the photomask operation, to produce other photomasks. Only contact prints and projection masters are used in the wafer-fabrication operation.
The third phase of GE's operations is the production of the integrated circuit or wafer fabrication. The raw material of the integrated circuit is a small, round, thin wafer of silicon coated with layers of various materials such as aluminum. The wafer-fabrication phase begins when the wafer is placed in a rinser-dryer machine. The silicon wafer is then inserted into a printer machine of which the photomask is the most critical part. In the printer, the photomask modulates ultraviolet light onto the surface of the wafer, transferring the designs or patterns of the photomasks onto the silicon wafer that will contain the final integrated circuit. The photomask does not become a component part of the integrated circuit. Because each integrated circuit has seven to seventeen levels, the entire wafer-fabrication process, using different photomasks, is repeated seven to seventeen times. The wafer is then checked for defects.
In the final phase of operations, the units are packaged. During that phase, the silicon wafers are diced into individual integrated circuits, which are affixed into a ceramic or plastic package with bunching wires from the integrated circuits to the package, and then sealed. After individual packaged units are tested and approved, they are packaged and shipped to plaintiff's customers.
RCA filed timely sales-and use-tax returns with the Division of Taxation for the period from July 1, 1981, through June 30, 1984. On December 7, 1987, the Director issued a final determination to RCA assessing additional sales and use tax for that tax period. Plaintiff paid the entire deficiency. On March 3, 1988, GE, as successor-in-interest to RCA, filed a complaint in the New Jersey Tax Court, contesting $61,599 of the assessment. Of the contested sum, $40,026 is attributable to a use tax imposed on GE's purchases of machinery and equipment employed in the production of photomasks. The remaining $21,573 is attributable to a use tax imposed on GE's purchases of photoplates used as reticles and print masters in its photomask operation to make other photomasks. During the audit period, the Director conceded that projection masters and contact prints used in the wafer-fabrication process are not subject to the use tax.
Before the Tax Court, GE argued that the literal language of section 8.13a and its legislative history do not require that the end product of the manufacturing process be sold. 11 N.J. Tax 320, 330 (1990). In the alternative, GE argued that its machinery and photoplates are exempt even if the exemption provision is limited to machinery that is directly used in the production of tangible personal property "for sale." According to GE, because its photomask machinery determines the configuration of its integrated circuits, its ultimate product for sale, that machinery must be considered to be used directly in the production of the product for sale. Id. at 336.
Despite the absence of any express statutory requirements, the Director, relying on the Division's own interpretative regulations, contended that the words "for sale" must be read into section 8.13a. The Director further argued that the photomask machinery and the photoplates are not used "directly" in the production of integrated circuits.
The Tax Court rejected GE's arguments. Relying on the "longstanding" regulations and the legislative history of the statute, it held that section 8.13a requires that the end product of the manufacturing process be "for sale" to consumers. 11 N.J. Tax at 335-36. The court also found that the photomask machinery and the photoplates were not used "directly" in the production of the integrated circuits. Id. at 341. Accordingly, the court concluded that neither the photomask machinery nor the photoplates was exempt under section 8.13a. Id. at 343.
The majority of the Appellate Division affirmed the judgment substantially for the reasons stated by the Tax Court. 254 N.J. Super. 653 (1992). One Judge concurred in a separate opinion. Id. at 657-62. We granted certification. 130 N.J. 394 (1992).
On this appeal, plaintiff alleges that the plain language and legislative history compel the Conclusion that section 8.13a contains no "for sale" requirement. According to GE, the regulations misinterpret the Legislature's intent. Despite the absence of the "for sale" requirement in the statutory language, the Director asserts that "where as here the agency has promulgated a regulation whose terms have been sanctioned by the Legislature, its administrative interpretation should be sustained."
Agency regulations are presumptively valid, Medical Soc'y of New Jersey v. Department of Law and Pub. Safety, 120 N.J. 18, 25, 575 A.2d 1348 (1990), and should not be invalidated unless they violate the enabling act or its express or implied legislative policies. Public Serv. Elec. & Gas Co. v. Department of Envtl. Protection, 101 N.J. 95, 102 (1985). Generally, courts accord substantial deference to the interpretation an agency gives to a statute that the agency is charged with enforcing. Merin v. Maglaki, 126 N.J. 430, 436-37, 599 A.2d 1256 (1992); see Cedar Grove, Inc. v. Stanzione, 122 N.J. 202, 212, 584 A.2d 784 (1991). In addition, courts have consistently recognized that tax exemptions are to be strictly construed against the claimant. Metromedia, Inc. v. Director, Div. of Taxation, 97 N.J. 313, 326, 478 A.2d 742 (1984); Princeton Univ. Press v. Borough of Princeton, 35 N.J. 209, 214, 172 A.2d 420 (1961).
Nevertheless, an administrative agency may not, under the guise of interpretation, extend a statute to give it a greater effect than its language permits. Kingsley v. Hawthorne Fabrics Inc., 41 N.J. 521, 528, 197 A.2d 673 (1964); see Service Armament Co. v. Hyland, 70 N.J. 550, 563, 362 A.2d 13 (1976) (noting "an administrative interpretation [that] attempts to add to a statute something [that] is not there can furnish no sustenance to the enactment"). Accordingly, we have invalidated regulations that flout the statutory language and undermine the intent of the Legislature. In re Adoption of N.J.A.C. 7:26B, 128 N.J. 442, 450 (1992); see Medical Soc'y, supra, 120 N.J. at 25.
Section 8.13a exempts from the Act receipts from
a. Sales of machinery, apparatus or equipment for use or consumption directly and primarily in the production of tangible personal property by manufacturing, processing, assembling or refining.
In determining a statute's meaning we consider first the statutory language, for if the statute "is clear and unambiguous on its face and admits of only one interpretation, we need delve no deeper than [its] literal terms to divine the Legislature's intent." State v. Butler, 89 N.J. 220, 226, 445 A.2d 399 (1982); see Maglacki, supra, 126 N.J. at 434; Kimmelman v. Henkels & McCoy, Inc., 108 N.J. 123, 128, 527 A.2d 1368 (1987); International Flavors & Fragrances v. Director, Div. of Taxation, 102 N.J. 210, 214, 507 A.2d 700 (1986). Absent a legislative intent to the contrary, such language is to be given its ordinary meaning. Mortimer v. Board of Review, 99 N.J. 393, 398 (1985).
On its face, the language of section 8.13a includes no requirement that the "tangible personal property" be manufactured or produced "for sale." Although words chosen by the Legislature are deemed to have been chosen for a reason, Maglaki, supra, 126 N.J. at 435 (citing Gabin v. Skyline Cabana Club, 54 N.J. 550, 555, 258 A.2d 6 (1969)), the Dissent contends that the statute is ambiguous because it does not expressly reject the "for sale" requirement. Under the Dissent's logic, every statute is deemed ambiguous unless it explicitly sets forth every possible condition, qualification, or exception that it does not adopt. That reasoning renders inoperable the canon of statutory construction that requires a statute to be interpreted only according to the plain meaning of its clear and unambiguous language without resort to extrinsic aid.
Furthermore, N.J.S.A. 54:32B-8.13b, (section 8.13b) specifically provides an exemption for the sales of machinery, apparatus, or equipment for use "directly and primarily in the production * * * of gas [and other utilities] for sale * * *." (emphasis added). The express use of the words in section 8.13b indicates that the omission of the words "for sale" in section 8.13a was intentional. Under the established canons of statutory construction, where the Legislature has carefully employed a term in one place and excluded it in another, it should not be implied where excluded. See Marshall v. Western Union Tel. Co., 621 F.2d 1246, 1251 (3d Cir. 1980). Had the Legislature intended to restrict the exemption only to machinery producing tangible personal property that is "for sale," it would have drafted the statute accordingly.
Thus, the plain and unambiguous language of the manufacturing exemption imposes no "for sale" requirement on the "tangible personal property" produced. That section's legislative history supports that Conclusion. We have continually recognized that the furtherance of legislative purpose is the key to the interpretation of any statute. Donnelley Corp. v. Director, Div. of Taxation, 128 N.J. 218, 227, 607 A.2d 1281 (1992); Maglaki, supra, 126 N.J. at 435. Seldom has a statute's legislative history so clearly revealed the Legislature's intent. The Sales and Use Tax Act, L. 1966, c. 30, included a manufacturing exemption, the predecessor to section 8.13a, when enacted on April 29, 1966. The exemption was amended shortly thereafter by L. 1966, c. 53, effective May 25, 1966. In 1969, the Director adopted regulations interpreting the manufacturing exemption that were virtually identical to the current regulations interpreting section 8.13a. The manufacturing exemption, however, was repealed in 1970. See L. 1970, c. 7.
In 1972, the New Jersey Tax Policy Committee issued a report to the Governor recommending the restoration of the manufacturing exemption because its absence retards investment and the growth of the state's industrial base. The Committee noted that a failure to restore the manufacturing exemption "will lead to dire consequences for the economic health of the State in terms of business and industrial location, retention of industry and expenditures on plants and equipment, all of which, in turn, suggest [a] discouraging implication for jobs, income and government revenue." Report of the New Jersey Tax Policy Committee, "Non-Property Taxes in a Fair and Equitable Tax System," Part V at 73 (1972). The Tax Policy Committee quoted the following testimony taken at public hearings:
Most other states * * * carefully avoid such laws (sales tax on factory machinery and equipment). Some states, in fact, offer inducement in the way of tax holidays for companies willing to move from New Jersey * * *.
To survive, industrial plants located in New Jersey must compete with American industries located in many states which exempt or provide preferential treatment for investment in production facilities. Production machinery and related equipment are purchased free of State sales taxes in a majority of the nation's leading ...