Utility-Owned Electric Transmission Equipment is Partially Subject to State Use Tax

The ruling reduces the tax liability of electric utility companies in Michigan, by at least partially exempting their distribution equipment and machinery from the state’s use tax. This may be beneficial for ratepayers and the environment, assuming the utility passes on these cost savings to its customers or re-invests it in clean energy development, which is not at all certain. Additionally, by expanding the scope of the industrial-processing tax exemption beyond the scope determined by the Department of Treasury through its prior rulemaking, this ruling will lead to reduced tax revenues to the state. This could negatively impact conservation projects that receive their funding through the state general fund. As a result, the impacts of this court decision on the environment and on utility customers is generally unknown.

The Court was asked to determine whether the electric transmission distribution equipment of a utility company was subject to the industrial-processing exemption from the state’s use tax. The Court held that because the utility’s electric transmission equipment was used both for tax-exempt industrial-processing activities, and for non-exempt shipping and distribution activities, the equipment was partially subject to the use tax. The Court remanded the case to the Court of Claims for the Department of Treasury to determine the amount of tax owed by the utility.

The Michigan Department of Treasury conducted an audit of state tax payments made by Detroit Edison Company (DTE) between 2003 and 2006, and determined that DTE owed $13 million in back taxes because it had improperly claimed the industrial-processing exemption from the state use tax for its transmission equipment located outside its generation plants. DTE paid the disputed amount under protest, and brought suit against the Department in the Court of Claims, arguing that its tangible personal property used for electricity transmission qualified for the tax exemption. The Court of Claims granted summary disposition to DTE, and on appeal the Court of Appeals affirmed. The Michigan Supreme Court granted leave to appeal.

Was the Court of Appeals correct in its determination that the electric transmission equipment and machinery of DTE qualified in full for the industrial-processing exemption from the state’s use tax?

In a 4-3 split, the Court held that the electric transmission distribution equipment and machinery owned by DTE was simultaneously used for exempt industrial-processing activity and nonexempt shipping and distribution activities. DTE was therefore entitled to an industrial-processing exemption based on the percentage of exempt use to total use, as determined by a reasonable formula or method approved by the Department of Treasury and decided in the Court of Claims. In making this determination, the majority effectively held invalid a regulation that had been promulgated by the Department of Treasury, which had declared the sale of property used in the transmission of electricity to be taxable.

In dissent, Justice Kelly, joined by Justices Zahra and McCormack, would have held that none of the equipment used by DTE to distribute electricity from the power plant to its eventual end user qualifies for the industrial-processing exemption. Rather, the dissenting justices reasoned that this equipment is best categorized as facilitating shipping and distribution of the electricity, not industrial processing, and should therefore be subject to the normal six percent state use tax, without any tax exemption.