Detroit Edison Company v. Department of Treasury
498 Mich. 28
| Mich. | 2015Background
- Detroit Edison (DTE) generates electricity and transmits/distributes it via an extensive electric system (transformers, lines, substations, meters). Voltage is stepped up for transmission and stepped down before consumer delivery.
- DTE claimed the Use Tax Act (UTA) industrial-processing exemption (MCL 205.94o) for tangible personal property located outside its generation plants; Treasury audited and assessed use tax for that property; DTE paid under protest and sued for refund in the Court of Claims.
- The Court of Claims granted summary disposition to DTE; the Court of Appeals affirmed, holding equipment used concurrently for distribution and industrial processing is fully exempt.
- The central statutory provisions: definition of “industrial processing” (MCL 205.94o(7)(a)), exclusions for distribution/shipping (MCL 205.94o(6)(b)), and an apportionment rule requiring exemption be limited to the percentage of exempt use to total use determined by a formula approved by Treasury (MCL 205.94o(2)).
- The Michigan Supreme Court majority held voltage alteration conditions electricity and thus constitutes industrial processing through final delivery, but because distribution/shipping also occur simultaneously the exemption must be apportioned using a reasonable method approved by Treasury; remanded for formula approval.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether altering voltage outside generation plants is "industrial processing" under MCL 205.94o(7)(a) | Altering voltage changes the quality/character of electricity and conditions it for retail use, so industrial processing continues until consumer delivery | Electricity’s fundamental nature isn’t changed after leaving the plant; voltage changes are distribution for efficiency, not processing | Majority: Altering voltage changes quality/character and conditions electricity; industrial processing continues until delivery to consumer |
| Whether distribution/ shipping exclusions in MCL 205.94o(6)(b) remove electric-system equipment from exemption | Concurrent use for industrial processing and distribution does not negate exempt processing | Distribution/shipping are expressly excluded from "industrial processing," so equipment used post-plant is nonexempt | Majority: Both exempt processing and nonexempt distribution occur simultaneously; exclusions do not automatically eliminate exemption |
| Whether Treasury rule (Rule 65(4)) making transmission/distribution taxable overrides the statute | Statute controls; Treasury cannot use rulemaking to override legislative exemption | Rule 65(4) deems property used in transmission/distribution taxable | Held: MCL 205.94o controls; Rule 65(4) invalid to extent it conflicts with statute |
| Measure of exemption when property is used for both exempt and nonexempt activities (apportionment under MCL 205.94o(2)) | DTE argued for full exemption (Court of Appeals had endorsed full exemption) | Treasury argued no exemption for equipment outside plants | Held: Exemption must be apportioned: compute percentage of exempt use to total use by a reasonable formula or method approved by Treasury; remand to Court of Claims for approval/review of formula |
Key Cases Cited
- Shepherd Montessori Ctr. Milan v. Ann Arbor Charter Twp., 486 Mich 311 (2010) (summary-disposition standard: de novo review)
- Klooster v. Charlevoix, 488 Mich 289 (2011) (statutory-interpretation de novo)
- Andrie Inc. v. Dep’t of Treasury, 496 Mich 161 (2014) (UTA imposes use tax on tangible personal property)
- Elias Bros. Restaurants, Inc. v. Treasury Dep’t, 452 Mich 144 (1996) (industrial-processing exemption avoids tax pyramiding; focus on activity not taxpayer’s business)
- Danse Corp. v. Madison Heights, 466 Mich 175 (2002) (requirements for agency rules to have force of law)
- In re Complaint of Rovas Against SBC Mich., 482 Mich 90 (2008) (agencies cannot change statutes by rulemaking)
- Mich. Allied Dairy Ass’n v. State Bd. of Tax Admin., 302 Mich 643 (1942) (pre-MCL 205.94o precedent on concurrent uses and exemptions)
- Detroit Edison Co. v. Dep’t of Treasury, 303 Mich App 612 (2014) (Court of Appeals decision affirming full exemption for concurrent-use equipment)