No Tax Exemption for Car Emissions Testing Facilities

This case determined whether automotive test cells which measured exhaust pollution could qualify for a tax exemption under the Natural Resources and Environmental Protection Act for air pollution control facilities. The Court ruled that the facilites did not qualify for the exemption because they were testing facilities, which did not directly control pollution themselves.

By narrowing the definition of qualifying facilities to exclude ancillary testing facilities, the majority opinion removed an incentive to help businesses control their air pollution. The majority based its decision on the general rule of interpreting statutes that tax exemptions should be narrowly construed. The dissent, on the other hand, would have preserved the tax incentive for ancillary facilities which help businesses control their air pollution because the facilities were built to reduce air pollution.

In 2003 and 2004, Ford, DaimlerChrysler, and Detroit Diesel applied to the State Tax Commissioner (STC) for tax exemptions under Michigan’s Natural Resources and Environmental Protection Act (NREPA) for building emissions testing facilities and taking other measures to reduce air pollution. The STC denied the requests, and the companies sued. The Michigan Supreme Court held that the testing facilities and new engine manufacturing line at issue were not eligible for the exemption because their primary purpose was to produce cars and engines that complied with federal requirements rather than to curb air pollution.

Federal law requires new cars and other vehicles to comply with emissions standards created by the federal Environmental Protection Agency before they receive a certificate allowing them to be sold to the public. Detroit’s major car manufacturers built their own testing facilities (“test cells”) to ensure compliance with these federal emissions standards during the vehicle manufacturing process. Detroit Diesel also installed a new engine production line to meet federal emissions regulations.

The companies then sought tax exemptions for these facilities from the State Tax Commission under a section of Michigan’s Natural Resources and Environmental Protection Act (NREPA) that provides exemptions for certain air pollution control facilities. The Michigan Department of Environmental Quality (MDEQ), which reviews exemption applications for STC, found that the car companies’ equipment was not eligible for tax exemptions, because its primary purpose was not to control air pollution.

The car companies sued both STC and MDEQ, appealing their decisions that the companies did not qualify for the NREPA tax exemption. Various trial courts held that Ford should have received the tax exemptions, but DaimlerChrysler and Detroit Diesel were not eligible. The car companies appealed again, and the Court of Appeals held that all of the companies’ “test cells” were eligible for the tax exemption, because their primary purpose is to reduce pollution. However, the Court of Appeals thought that Detroit Diesel’s engine manufacturing line did not qualify for the tax exemption because its primary purpose was engine manufacturing, not pollution reduction.

Was the Court of Appeals correct in holding that all of the car companies’ testing facilities qualified for the NREPA tax exemption, but that Detroit Diesel’s new engine manufacturing line did not?

The Court (Chief Justice Taylor, and Justices Weaver, Kelly, Corrigan, Young, and Markman) held that neither the testing facilities nor Detroit Diesel’s new engine manufacturing line qualified for the tax exemption. The Court relied on a provision of NREPA that said that facilities and equipment must be “designed and operated primarily for the control, capture, and removal of pollutants from the air” in order to qualify for the exemption. In this case, the Court found that the primary purpose of the testing facilities was to “ensure that petitioners have properly designed their engines to meet federal regulations so that they can sell them to consumers,” not to reduce pollution, so they did not qualify for the tax exemption. Similarly, the Court found that the primary purpose of Detroit Diesel’s new engine line was to build engines, not regulate pollution, so it did not qualify for the exemption either. The Court thought that it was necessary to interpret the tax exemption narrowly to avoid awarding tax breaks to business entities that fail to reduce pollution in the state.

Justice Kelly wrote a concurring opinion in which she agreed that neither the testing facilities nor the engine manufacturing line qualified for the NREPA tax exemption. She wrote separately because she would have analyzed the issue differently even though she would have ultimately come to the same conclusions as the majority. In particular, she thought that the statutory language was ambiguous, and therefore applied the general rule that tax exemptions should be narrowly interpreted.

Justice Weaver, joined by Justices Corrigan and Markman, concurred in part and dissented in part. She agreed with the majority that Detroit Diesel’s new engine manufacturing line did not qualify for the exemption, because its primary purpose was to manufacture engines, not control pollution. However, she would have held that the testing facilities qualified for the exemption. Justice Weaver reasoned that because testing emissions is an essential component of controlling air pollution, and the testing facilities were installed specifically to test for air pollution, it would be fair to characterize their primary purpose as “controlling or disposing of air pollution.”