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Detroit Edison Co. v. Department of Treasury

Supreme Court of Michigan

July 22, 2015

DETROIT EDISON COMPANY, Plaintiff-Appellee,
v.
DEPARTMENT OF TREASURY, Defendant-Appellant

Argued April 7, 2015.

The Detroit Edison Company brought an action in the Court of Claims against the Department of Treasury, seeking, in part, a refund of use taxes paid under protest for the tax period January 1, 2003, through September 30, 2006. Plaintiff alleged that certain property that had been subjected to the tax was exempt from the tax under the industrial-processing exemption of the Use Tax Act, MCL 205.94o, because the property, located outside plaintiff's generation plants, was used to continue the processing of the electricity. Specifically, plaintiff initially generates electricity at approximately 15,000 to 25,000 volts. To transmit the electricity through the electric system, plaintiff ups the voltage to 115,000 to 500,000 volts. Plaintiff then uses property, such as transformers, to lower the voltage as the electricity nears the consumer. Plaintiff uses other property to monitor the voltage levels across the system. The Court of Claims, Paula J. M. Manderfield, J., granted summary disposition in favor of plaintiff. Defendant appealed. The Court of Appeals, MURPHY, C.J., and FITZGERALD and BORRELLO, JJ., affirmed. 303 Mich.App. 612; 844 N.W.2d 198 (2014). Defendant sought leave to appeal, and the Supreme Court granted the application. 497 Mich. 873, 853 N.W.2d 380 (2014) .

For DETROIT EDISON COMPANY, Plaintiff-Appellee: JOHN D. PIRICH, LANSING, MI.

For TREASURY OF DEPARTMENT, Defendant-Appellant: JULIUS O. CURLING, REVENUE & COLLECTIONS DIVISION, LANSING, MI.

Chief Justice: Robert P. Young, Jr. Justices: Stephen J. Markman, Mary Beth Kelly, Brian K. Zahra, Bridget M. McCormack, David F. Viviano, Richard H. Bernstein. KELLY, J. (dissenting).

OPINION

Page 811

[498 Mich. 32] BEFORE THE ENTIRE BENCH

Stephen J. Markman, J.

The Use Tax Act (UTA), MCL 205.91 et seq., imposes a 6% tax " for the privilege of using, storing, or consuming tangible personal property in this state . . . ." MCL 205.93(1). However, the UTA exempts from the use tax property sold to " [a]n industrial processor for use or consumption in industrial processing." MCL 205.94o(1)(a). At issue here is whether and to what extent, if any, an electric utility is entitled to the industrial-processing exemption for tangible personal property located outside its generation plants. The Court of Appeals held that plaintiff was entitled to the full industrial-processing exemption for the property.

Page 812

We hold that the property here is simultaneously used for exempt " industrial processing" activity under MCL 205.94o(7)(a) and nonexempt " distribution" and " shipping" activities under MCL 205.94o(6)(b). In these circumstances, the taxpayer is entitled to the industrial-processing exemption based on the " percentage of exempt use to total use determined by a reasonable formula or method approved by the department [of Treasury]." MCL 205.94o(2). Accordingly, we affirm the judgment of the Court of Appeals in part, reverse in part, and remand to the Court of Claims for further proceedings.

[498 Mich. 33] I. FACTS AND HISTORY

Plaintiff, Detroit Edison Company (DTE), is an electric utility that is responsible for generating, transmitting, and distributing electricity to residential, commercial, and industrial consumers. The electricity is initially generated at approximately 15,000 to 25,000 volts within each of plaintiff's generation plants. However, to transmit electricity throughout the electric system, plaintiff must then " step up" the voltage to between 115,000 and 500,000 volts as the electricity is transmitted from the generation plant to substations from which the electricity is then distributed to consumers.

Electricity is not usable at the high voltage levels at which it exists when it is initially generated and as it moves throughout the electric system. For instance, most residential consumers use electricity at the 120/240 volt[1] level. For this reason, the electric system employs tangible personal property, such as transformers, at the substations to " step down" the voltage as the electricity nears the consumer. In addition to transformers, the electric system employs a variety of other tangible personal property, including fuses, circuit breakers, cables, and poles, to monitor the voltage levels and ensure that the consumer receives a useable product.

Defendant conducted a use-tax audit for the period between January 1, 2003, and September 30, 2006, and determined that plaintiff had a deficiency because it had claimed the industrial-processing exemption from the use tax for tangible personal property located [498 Mich. 34] outside its generation plants.[2] Accordingly, defendant issued a notice of intent to assess in the amount of $11,020,506 in tax plus interest-- an amount that was subsequently corrected upward to $14,046,249 plus interest. Ultimately, defendant issued a final assessment in the amount of $13,102,133.54 plus interest. Plaintiff paid the deficiency under protest and filed suit in the Court of Claims, seeking a refund for the use tax and interest paid under protest, as well as statutory costs, interest, and attorney fees.[3] The parties filed competing motions for summary disposition under MCR 2.116(C)(10). The Court of Claims eventually granted summary disposition in favor of plaintiff, reasoning that it was clear " that electricity is continuing to be processed up until the point at which it reaches

Page 813

the customer's meter, because the voltage and current levels are drastically changed multiple times at set points, the last being at or near the customer's meter . . . ."

Defendant appealed, and the Court of Appeals affirmed. Detroit Edison Co. v Dep't of Treasury, 303 Mich.App. 612; 844 N.W.2d 198 (2014). The Court of Appeals held that the " machinery and equipment are concurrently used in a unified system for purposes of both distribution and industrial processing. In such a situation, the caselaw is clear that the 'industrial processing' [498 Mich. 35] exemption applies to the machinery and equipment in full." Id. at 630. We granted defendant's application for leave to appeal in this Court. Detroit Edison Co v Treasury Dep't, 497 Mich. 873; 853 N.W.2d 380 (2014). Oral arguments were heard on April 7, 2015.

II. STANDARD OF REVIEW

" A trial court's ruling on a motion for summary disposition is a question of law, which this Court reviews de novo." Shepherd Montessori Ctr Milan v Ann Arbor Charter Twp, 486 Mich. 311, 317; 783 N.W.2d 695 (2010). Questions of statutory interpretation are also reviewed de novo. Klooster v Charlevoix, 488 Mich. 289, 295; 795 N.W.2d 578 (2011).

III. ANALYSIS

A. USE TAX AND EXEMPTION

The UTA " imposes a 6% tax on a consumer's use, storage, and consumption of all tangible personal property in Michigan." Andrie Inc v Treasury Dep't, 496 Mich. 161, 164; 853 N.W.2d 310 (2014). At the time relevant to this case, MCL 205.93(1) of the UTA provided in pertinent part:

There is levied upon and there shall be collected from every person in this state a specific tax for the privilege of using, storing, or consuming tangible personal property in this state at a rate equal to 6% of the price of the property or services . . . . [As amended by 2002 PA 511.]

The UTA industrial-processing statute, MCL 205.94o, provided in pertinent part:

(1) The tax levied under this act does not apply to property sold to the following after March 30, 1999, subject to subsection (2):
[498 Mich. 36] (a) An industrial processor for use or consumption in industrial processing.
(b) A person, whether or not the person is an industrial processor, if the tangible personal property is intended for ultimate use in and is used in industrial processing by an industrial processor.
(c) A person, whether or not the person is an industrial processor, if the tangible personal property is used by that person to perform an industrial processing activity for or on behalf of an industrial processor.
* * *
(2) The property under subsection (1) is exempt only to the extent that the property is used for the exempt purpose stated in this section. The exemption is limited to the percentage of exempt use to total use determined by a reasonable formula or method approved by the department.
(3) Industrial processing includes the following activities:
* * *
(d) Inspection, quality control, or testing to determine whether particular units of materials or products or processes conform to specified parameters at any time before materials or products

Page 814

first come to rest in finished goods inventory storage.
* * *
(j) Production material handling.
(k) Storage of in-process materials.
* * *
(6) Industrial processing does not include the following activities:
* * *
[498 Mich. 37] (b) Sales, distribution, warehousing, shipping, or advertising activities.
* * *
(7) As used in this section:
(a) " Industrial processing" means the activity of converting or conditioning tangible personal property by changing the form, composition, quality, combination, or character of the property for ultimate sale at retail or for use in the manufacturing of a product to be ultimately sold at retail. Industrial processing begins when tangible personal property begins movement from raw materials storage to begin industrial ...

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