LANSING – In a case dealing with
whether an electric utility is eligible for a use tax exemption for industrial
processing, a divided Supreme Court held that a utility is entitled to only a
partial exemption.
The majority in the 4-3 decision
returned the case to the Court of Claims to develop a “reasonable formula
or method” to establish how much of an exemption a utility is entitled to
as electricity shipped over the electric system undergoes processing and at the
same time is being shipped and delivered. The processing of generating the
electricity is entitled to an exemption, but not the shipping and delivery, the
court said.
The majority, in Detroit Edison v. Treasury (SC docket No. 148753) overturned part of the Court of Appeals decision and
upheld part of it. Both the appeals panel and the Court of Claims had found for
Detroit Edison.
joined by Chief Justice Robert Young Jr., Justice David Vivianoand Justice Richard Bernstein,
wrote in the majority opinion there was no question that Edison was entitled to
an exemption under the use tax for electricity created and used within its
plants. The issue was the electricity located outside the plants and
transmitted through the system to customers.
The Department of Treasury, after conducting
an audit, held that Edison owed the state a use tax payment of $38,000, plus
interest, for 2003 through 2006. The company paid the assessment under protest
and filed the action in the Court of Claims.
Electricity is generated in the
Edison plants at between 15,000 volts and 25,000 volts. However, to move across
the system, the electricity has to be increased to between 155,000 volts and
500,000 volts.
As it is moved through the
distribution system, the electricity is stepped down in voltage through
transformers so it is usable by customers. Electricity running through a
residential house runs at 120 volts.
The use tax is imposed at 6 percent
on the use, storage and consumption of personal property.
The state allows a use tax exemption
for industrial processing, which is considered converting personal property
into a form that will be ultimately sold at retail either for direct consumer
use or for use in manufacturing.
Edison argued that its electricity
remained exempt from taxation throughout the process of creating it and
distributing it to customers.
Generating the electricity does meet
the definition of industrial processing, Mr. Markman said, and the processing
continues from the plant to the consumer because there is no time when the
electricity can be considered complete and stored in readiness for its use by
consumers.
But when the electricity leaves the
industrial plant, it simultaneously goes through both processing, which is tax
exempt, and shipping, which is not, Mr. Markman said.
The state argued that the shipping
process makes the electricity ineligible for the industrial processing
exemption, but Markman disagreed.
But, recognizing the system operates
both in an exempt and non-exempt manner, the law stipulates that the exemption
applies only to the percentage of processing in relation to the total use of
the product. “As a simple matter of mathematics – the sum of all uses –
must equal 100 percent,” Markman said.
The state, then, has to create a
reasonable formula that would calculate the total exempted use. The state
cannot simply hold that once the electricity leaves the plant it is no longer
exempt, Markman said, because the court has held the electricity in
transmission is simultaneously exempt and not-exempt.
Dissenting, Justice Mary Beth Kelly,
joined by Justice Brian Zahraand Justice Bridget McCormack,
would have found for the state, arguing that the industrial processing ends
once the electricity leaves the plant.
While the actual voltage may change,
the basic nature of the electricity does not, she wrote. Once electricity
leaves the plant, only distribution and shipping are involved, and
apportionment between exempt and non-exempt actions is not appropriate.
This story was published by Gongwer News Service. To
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