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148753 - Detroit Edison Co v Department of Treasury

Detroit Edison Company,
John D. Pirich
(Appeal from Ct of Appeals)
(Ct/Claims – Manderfield,P.)
Department of Treasury,
Zachary C. Larson
Michael P. Bell


The Department of Treasury conducted a use tax audit of Detroit Edison for the tax periods from January 1, 2003, through September 30, 2006. After the audit, Treasury determined that Detroit Edison had not correctly calculated its liability under the Use Tax Act. The use tax is levied on each person in the state for the privilege of consuming, storing, or using tangible personal property in Michigan. But the tax does not apply to property used by an “industrial processor” for use or consumption in “industrial processing.”  MCL 205.94o. 
Treasury focused on the taxation of machinery and equipment used outside of Detroit Edison’s generation plants to transmit and distribute electricity. Detroit Edison argued that the machinery and equipment was used in industrial processing, and was therefore exempt from use tax under MCL 205.94o. Specifically, Detroit Edison argued that the machinery and equipment was used to change the form and character of electricity, and to inspect, test, and control it. Treasury disagreed, contending that the machinery and equipment was used solely for the purpose of distributing and delivering electricity, and not for industrial processing. Treasury ordered a final assessment of $13,102,113.54 in tax plus interest. Detroit Edison paid the assessment under protest, filed a refund claim with Treasury, and filed suit in the Court of Claims. The Court of Claims agreed with Detroit Edison that the property was covered by the industrial processing exemption, and it granted Detroit Edison’s motion for summary disposition. 
Treasury appealed. In a published opinion dated January 9, 2014, the Court of Appeals affirmed the Court of Claims. The Court of Appeals held that Detroit Edison’s “machinery and equipment located outside its generation plants are used in the activity of converting and conditioning electricity by changing the quality, form, character, or composition of the electricity for ultimate sale at retail up until the time the electricity reaches the customer’s meters, at which point it becomes a finished good.” As a result, the machinery and equipment was exempt from use tax under MCL 205.94o. The panel held that, even if the machinery and equipment was used for multiple purposes, with only some of the use amounting to industrial processing, the exemption applied to the machinery and equipment in full.
Treasury appealed, and on October 1, 2014, the Supreme Court granted leave to appeal.