The Washington Court of Appeals ruled that a taxpayer can qualify for a use tax exemption even if the natural gas used in manufacturing does not physically touch the product as long as it is used for one of the specifically listed activities in the exemption statute. The taxpayer, REC Solar Grade Silicon LLC (REC), produces solar grade silicon using natural gas to grow their end product in a way that the gas does not come into direct physical contact with the silicon. They filed a claim seeking a refund of use tax paid and claimed they were entitled to the exemption because the wording of the exemption specifically listed growing semiconductor materials. The Department of Revenue (DOR) and Board of Tax Appeals held that since the exemption statute, RCW 82.12.9651(1), finished with the phrase, “and other such uses whereby the gases and chemicals come into direct contact with the product during the production process,” the fact that REC did not establish direct contact disqualified them from the exemption. While considering the exemption, the Court of Appeals considered the structure and plain language of the text and determined REC was entitled to a refund of use tax they had previously paid.
The issue at hand was how much direct contact was needed between the natural gas and the final product, with the DOR holding that the “direct contact” reading of the end of the statute applied to all clauses, while REC asserted that the direct contact was only required for activities that would fall under the final catchall item in a list. The DOR argued that REC was not entitled to the exemptions, pointing out that the natural gas was used to produce a separate product—silane gas—which could be sold itself, and then the silane gas, not the original gas, was used to create the final product, the silicon. Since the exemption statute specifically mentions direct contact with the product, and REC did not have that, the DOR maintained REC was not owed a refund. However, REC argued that as a manufacturer of semiconductor materials and since the natural gas was used to further that process, they did qualify for the exemption, as they qualified under the earlier section of the statute which says the gases must be “used by a manufacturer . . . in the production of semiconductor materials” in order to claim the exemption.
In the final ruling, the Court of Appeals agreed with REC that they were entitled to the exemption and the refund, since the statute was written in such a way that the exemption could be broken into three sections, each of which listed ways a taxpayer could qualify for the exemption. The Court held that the statute first offers exemptions for gases used in production for certain listed purposes, second for gases that are used in the production process when there is direct contact with the product, and finally for gases which may be used to clean processing equipment. The ruling went on to state that there is no clear indication in the text that direct contact is required in semiconductor manufacturing at all as it is one of the specifically listed purposes in the exemption.
This is an important win for the taxpayer and for semiconductor manufacturers in general in Washington since the ruling expands eligibility for exemptions for manufacturers who rely on natural gas to produce items such as semiconductors and silicon. Additionally, any companies who use large quantities of natural gas in manufacturing and production should be aware of this ruling as it may offer them opportunities for exemptions they had not previously considered. Washington manufacturers should examine previously denied claims to see if they can take advantage of this new ruling or consider making refund claims if they had not previously done so. Additionally, since the use of the gases matters more than direct contact with a final product, taxpayers may want to evaluate how they are documenting their process or put a new process in place to do so in order to take advantage of this exemption in the future. Finally, this case highlights the importance of paying your tax bill before disputing a DOR finding; the taxpayer is entitled to a refund instead of being surprised by a bill with penalties and interest if the Court had found for the Department. (Unpublished Opinion filed December 11, 2025, Signed by Staab, ACJ, Fearing, J. and Cooney, J, concurring, REC Solar Grade Silicon, LLC v. Washington Department of Revenue, Washington Court of Appeals, Division III)