Citation Numbers： 625 A.2d 468, 132 N.J. 298, 1993 N.J. LEXIS 109
Judges： Garibaldi, Handler
Filed Date： 6/8/1993
Status： Precedential
Modified Date： 11/11/2024
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
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-
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 plaintiffs customers.
II
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 photo-mask operation to make other photomasks. During the audit period, the Director conceded that projection masters and con
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, 604 A.2d 189 (1992). One judge concurred in a separate opinion. Id. at 657-62, 604 A.2d 189. We granted certification. 130 N.J. 394, 614 A.2d 617 (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, 501 A.2d 125 (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 Cove, 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
IV
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 Maglaki, supra, 126 N.J. at 434, 599 A.2d 1256; 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, 493 A.2d 1 (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, 599 A.2d 1256 (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
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, 599 A.2d 1256. 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.
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 industrial states, including such states as New York, Pennsylvania, [and] Delaware. * * *
New Jersey industry’s investment in new machinery is not rewarded with a credit but penalized with a tax which, necessarily, increases the sales price of manufactured goods and decreases the ability of New Jersey industries to compete successfully in the marketplace. No state wishing to encourage the growth of its industrial base and the expansion of job opportunities can afford such an obstacle to investment.
[Ibid.]
The Committee thus recognized the need .to restore the New Jersey manufacturing exemption:
New Jersey must seek to foster a tax policy which will assure a healthy economy characterized by high employment and income levels stemming from the attraction, retention and expansion of business and industry throughout the state.
[Ibid.]
The Committee’s prognosis was prophetic: between 1974 and mid-1975, a sharp decline occurred in the number of manufac
In 1977 the Legislature restored the manufacturing exemption by enacting section 8.13a, L. 1977, c. 18, using language identical to the former exemption provision. The Sponsor’s Statement to the 1977 legislation noted that the bill exempted from the Sales and Use Tax the purchase of business machinery and equipment, stating that “[tjhis is in keeping with the practice of neighboring states. It will help to make New Jersey manufacturers more competitive with manufacturers in surrounding states.” Senate Revenue, Finance and Appropriations Committee Statement to Assembly No. 1761 (May 13, 1976) (“Committee Statement”). Moreover, the Committee Statement declared that the exemption is intended to send “more than a token signal that the New Jersey Legislature is not anti-business” and that it expected the manufacturing exemption to have “a measurable, positive effect on the State’s economy.”
Nor is the “for sale” requirement consistent with the Legislature’s policy in the Act against the double taxation of a single product. In Metpath, Inc. v. Director, Division of Taxation, 96 N.J. 147, 474 A.2d 1065 (1984), the Court acknowledged the general policy behind exemptions from the Act.
[I]t can be seen that the genera] legislative intent was to impose the tax on sales of tangible persona] property [of the Sales and Use Tax Act] unless that property was to be resold by the purchaser. The contemplation was that the tax in such a situation would be incurred on resale. The theoretical justification for the resale exemption was “the desire to avoid pyramiding taxes as goods move along the channels of distribution toward the marketplace.” Redlich, “Sales Taxes and the Resale Exemption in the Manufacture and/or Distribution of Personal Property,” 9 Tax L.Rev. 435, 436 (1954).
[Id. at 151, 474 AM 1065.]
Because the Director’s interpretation of section 8.13a pyramids taxes on manufactured products as they move toward the market, it contravenes that legislative policy.
As in International Flavors, supra, 102 N.J. at 217, 507 A.2d 700, the Director urges that we ignore the clear intent of the Legislature that emerges from the statutory language and the legislative history and interpret the statute on the basis of the Division of Taxation’s longstanding administrative regulations and practice.
The Director first asserts that the Legislature was aware of the 1969 regulations, which are identical to the current regulations, when it reenacted the manufacturing exemption in 1977. The Director argues that the Legislature’s failure to modify the statutory language of the exemption in 1977 reveals its implicit approval of the “for sale” requirement in the 1969 regulations. However, neither the 1969 regulations nor the current regulations make an attempt to rewrite the statutory language in the manner now urged by the Director. Indeed, the regulatory statement of the statutory exemption is consistent with the language of section 8.13a. It provides:
The purchase, rental, lease or use 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 is exempt from tax * * *.
[N.J. A. C. 18:24 — 4.4(a).]
That provision is a mere restatement of the statutory language and does not attempt to add the words “for sale” to the statute. The regulations cited by the Director are definitions sections that do not attempt to restate the statutory exemption. Regulation 4.2 defines “machinery, apparatus or equipment”
as 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, (emphasis added).
Regulation 4.4(b) defines “production”:
Production is limited to those operations commencing with the introduction of raw materials into a systematic series of manufacturing, processing, assem*312 bling, or refining operations, and ceases when the product is in the form in which it will be sold to the ultimate consumer * * *. (emphasis added).
Although those provisions make clear that the ultimate result of the manufacturing effort must be a tangible product for sale, they do not state or imply that machinery is taxable if it is used to produce other property that in turn is used to produce the product for sale. Moreover, because the literal and unambiguous language of section 8.13a is inconsistent with the regulation, the Director must demonstrate that the Legislature, in reenacting the statute, considered and approved the “for sale” limitation. In Kingsley, supra, 41 N.J. 521, 197 A.2d 673, the Court stated:
Where the regulation is inconsistent with the ordinary and primary meaning of the statutory language, it should be disregarded, despite the subsequent reenactment of the statute, at least in the absence of a clear showing that the Legislature specifically considered the regulation and approved it in re-enacting the provision.
[Id. at 529, 197 A.2d 673 (emphasis added).]
The legislative history of section 8.13a fails to demonstrate that the Legislature even considered, much less approved, the 1969 regulation in re-enacting section 8.13a. The 1969 regulations were not of longstanding and consistent application; they were in effect only between August 1969 and the effective date of the repeal of the manufacturing exemption on March 1, 1970. Little opportunity was presented to challenge those regulations. Nor does the record disclose any direct proof that the Legislature was aware of, or actually intended to adopt, the regulations the Director had promulgated in 1969 when he reenacted the exemption in 1977.
Second, the Director proposes that we adhere to the well-settled principle that the Legislature’s failure to interfere with an administrative interpretation over an extended period of time is proof that such interpretation conforms with legislative intent. However, in view of the express language and legislative history of section 8.13a, the Legislature’s longstanding acceptance of the Director’s regulations is not persuasive
[t]he court will consider this factor only when it is not [sic] satisfied that the Legislature’s intent cannot otherwise be determined by a critical examination of the purposes, policies, and language of the enactment. When such circumstances point strongly to the imputation of a particular legislative intent, they may not be outweighed or overcome simply by a countervailing administrative practice.
[Airwork Servs. Div. v. Director, Div. of Taxation, 97 N.J. 290, 296, 478 A.2d 729 (1984).]
Likewise, in Fedders Financial Corporation v. Director, Division of Taxation, 96 N.J. 376, 476 A.2d 741 (1984), we stated:
It is well established that the Director’s regulatory authority cannot go beyond the Legislature's intent as expressed in the statute. As Justice Clifford observed in Service Armament Co. v. Hyland, 70 N.J. 550, 563 [362 A2d 13] (1976), “an administrative interpretation which attempts to add to a statute something which is not there can furnish no sustenance to the enactment.” (emphasis added.)
[Id. 96 N.J. at 392, 476 A.2d 741.]
Moreover, no evidence reveals whether any taxpayers other than plaintiff challenged the present regulations promulgated in September 1977. Nor do we know whether any taxpayer besides plaintiff has challenged the Director’s administrative practice regarding the “for sale” requirement of section 8.13a. We do know, however, that in the year 1981 and subsequent years, plaintiff did challenge both the administrative practice, when it arose on audit, and the Director’s regulations. Finally, our interpretation of the statute accords not only with the legislative purpose in enacting section 8.13a but also with the Legislature’s continued recognition of the importance of attracting and retaining high-technology industry in New Jersey. In enacting the Jobs, Science and Technology Bond Act of 1984, L. 1984, c. 99, para. 2, the Legislature asserted:
The future economic well-being of New Jersey requires that increased efforts be made to retain existing industry and attract new high technology industry to the State. It is also imperative that steps be taken to ensure that the State’s work force is adequately trained in the new technologies.
The • Legislature also established the New Jersey Commission on Science and Technology to make New Jersey a center of scientific innovation, and thus a magnet for high-technology
it is important that the state not impose relative cost disadvantages vis a vis other states for New Jersey’s manufacturing (and other) businesses. The contribution of economic growth — to income, employment, and tax revenue — is central to the state’s well being. Without a growing output and employment base, all the legitimate and noble goals of the public sector will be difficult, if not impossible, to achieve.
[James W. Hughes & Joseph J. Seneca, The New Jersey Manufacturing Employment Hemorrhage, Rutgers Regional Report, June 1992, at 19.]
Although the interpretation of a tax statute by the agency charged with its administration is entitled to weight in a judicial proceeding, the grounds advanced by the Director to justify departing from the statutory text are inadequate. See Township of Holmdel v. Director, Div. of Taxation, 130 N.J. 522, 529, 617 A.2d 656 (1992) (Stein, J., concurring). The Legislature’s clear intent to encourage economic growth by providing a competitive tax policy and the absence of any statutory language implying otherwise lead to the conclusion that section 8.13a has no “for sale” requirement. Because the photomask machinery and the photoplates satisfy all the express and unambiguous requirements of section 8.13a, they are exempt from the tax. Accordingly, we do not reach plaintiff’s alternative argument that its photomask equipment is so essential and substantial a step in the manufacturing process that its machinery must be considered as being used “directly” in the production of the product for sale.