In this suit for a tax refund, defendant Department of Treasury (the Department) appeals as of right the Court of Claims order compelling the Department to refund the full amount of taxes paid by plaintiffs Granger Land Development Company and Granger Waste Management Company (collectively Granger). On appeal, the primary question is whether the personal property at issue was exempt from Michigan’s use tax. Because we conclude that the Court of Claims correctly determined that the property at issue was exempt, we affirm.
I. BASIC FACTS AND PROCEDURAL HISTORY
A. GRANGER’S LANDFILL AND GAS OPERATION
Granger owns and operates landfills. The waste Granger deposits in its landfills generates methane gas as it decomposes. In addition, the landfills generate significant amounts of wastewater as rainfall and other naturally occurring sources of water seep through the
In a typical landfill operation, the landfill operator will monitor the gas levels and react to unsafe levels as needed, which may include burning the gas off. Likewise, in a typical operation, the operator will capture the leachate and send it to a wastewater plant for treatment. However, Granger does not operate the landfills at issue in a typical fashion. Rather, Granger takes steps to encourage the decomposition process in order to generate gas with a particular composition. Granger recovers the gas and then sells it to a related company, which burns the gas to generate electricity. The related company then sells the electricity to a local utility. Granger also captures the leachate generated in the landfill and circulates it back into the landfill, which further promotes gas production.
In order to meet its pollution control and gas production needs, Granger establishes landfill cells for the waste. A cell consists of an impermeable hairier that is placed on an area of land that may span several acres. Granger establishes the barrier to ensure that liquids do not contaminate groundwater and to facilitate the capture and circulation of leachate. Granger will then place uniform layers of solid waste on the barrier. Before placing the waste in a cell, Granger uses heavy machinery to crush and compact the waste. This processing ensures that the solid waste is relatively uniform and anoxic, which encourages the anaerobic decomposition of the waste. Granger then uses loaders and bulldozers to distribute the waste uniformly in the cell.
As the solid waste accumulates in the cell, Granger lays pipelines — referred to as horizontal wells — at vari
Granger uses bulldozers and other equipment to construct the cells. Granger also sprays an organic cover over the cells to prevent the solid waste from blowing away between deposits and to inhibit the escape of gas from the cell or the infiltration of oxygen, which would inhibit the generation of methane gas. Granger also uses the bulldozers to lay gravel for access roads.
When a cell reaches its maximum capacity, Granger caps the cell with nonorganic material to reduce outside air infiltration and improve collection efficiency. Granger then places another impermeable barrier over the cell to prevent the escape of gas and the entry of water. Finally, Granger covers the barrier with two feet of soil and plants vegetation to prevent erosion. Even after Granger caps a cell, it will continue to monitor and recover gas from the cell. A typical cell has a lifespan of 60 to 75 years before being closed and will continue to generate gas for another 30 years after being closed. Although Granger has excavated the waste left after a cell ceases to generate commercial levels of gas in order to recover the horizontal wells and reuse the cell, it does not routinely do so.
In January 2005, the Department audited Granger’s landfill operations. The Department determined that Granger’s operation of the landfills constituted the design, construction, or maintenance of real property and did not involve the use of processing equipment. For that reason, it determined that Granger must pay sales or use tax on the materials and equipment — such as the tire shreds, gravel, liners, piping, and bulldozers — that it used or consumed during the operation of its landfills from May 2000 to January 2004. The Department determined that Granger Land Development Company owed $194,296.02 in taxes and that Granger Waste Management Company owed $84,069.32 in taxes. After making adjustments for various exemptions, the Department revised the assessments to $141,549 for Granger Land Development Company and to $5,858 for Granger Waste Management Company. Granger paid these assessments under protest.
In April 2005, Granger sued the Department for a refund of the assessments that it paid for the period at issue. In its complaint, Granger alleged, in part, that the materials and equipment that it used or consumed were used or consumed as part of an industrial process; namely, the processing of solid waste to generate gas. Because it used or consumed the materials and equipment as part of an industrial process, Granger argued that it was entitled to the exemption from sales and use taxation applicable to materials and equipment used in industrial processing.
In response, the Department argued that the materials and equipment were not used in an industrial process or, in the alternative, that they were nevertheless not entitled to the exemption because the materials
After a bench trial, the Court of Claims determined that the creation and maintenance of the landfill cells constituted an industrial process. It further determined that Granger did not affix the cells, including all the components of the cells, to its real property and did not intend that the cells become part of its real property. Accordingly, the Court of Claims concluded that the materials used or consumed in the creation of the cells qualified for the industrial process exemption. It also concluded that Granger did not use its heavy equipment, such as the bulldozers at issue, to design, construct, or maintain real property, but rather used the equipment as part of an industrial process. For these reasons, the Court of Claims determined that Granger was entitled to the industrial processing exemption for all the property at issue and ordered the Department to refund Granger’s tax payments.
This appeal followed.
II. THE INDUSTRIAL PROCESS EXEMPTION
A. STANDARD OF REVIEW
On appeal, the Department argues that the Court of Claims erred when it determined that the personal property at issue wag exempt from taxation under the Use Tax Act, MCL 205.91 et seq. Specifically, the Department argues that the property used or consumed in the construction of Granger’s landfill cells is not exempt because Granger affixes the personal property to its real property. Similarly, the Department argues that Granger uses the bulldozers and other heavy equipment to design or maintain the landfills and, for that reason, the equipment is also not exempt.
B. MICHIGAN’S USE TAX
The Michigan Legislature has imposed a use tax on consumers for the “privilege of using, storing, or consuming tangible personal property in this state ....” MCL 205.93(1); see
World Book, Inc v Dep’t of Treasury,
On appeal, the Department does not challenge whether Granger engaged in industrial processing during the relevant taxing period.
2
For that reason, we shall assume that the erection and maintenance of landfill cells — including the modification of the waste
C. PERSONAL PROPERTY AFFIXED AND BECOMING PART OF REAL ESTATE
Beginning with the enactment of
There are innumerable ways that a person can affix personal property to real estate; some items may be physically attached to the real estate whereas other items may be put in place with the intent that the property will become part of the real estate through its size and character. See, e.g.,
Velmer v Baraga Area Schools,
(1) whether the property was actually or constructively annexed to the real estate; (2) whether the property was adapted or applied to the use or purpose of that part of the realty to which the property in question is connected or appropriated; and (3) whether the property owner intended to make the property a permanent accession to the realty. [Id.]
Determining whether Granger actually or constructively annexed its landfill cells to the real estate is somewhat complicated by the scale of the processing activity at issue — the sizeable area involved, the depth of the cells, and the decades throughout which the processing activity occurs. It is perhaps counterintuitive to entertain the idea that, under some factual scenarios, the waste deposited in a landfill to a depth of tens of feet and spanning several acres might not be constructively annexed to the underlying real estate, especially considering that Granger admitted that the cells would remain in place for decades. Indeed, if Granger were bringing in similar volumes of soil to fill low areas and shape its property in order to facilitate the property’s use for a particular purpose over the same time span, one might readily conclude that the fill became part of the real estate by virtue of its volume and character. However, under the unique facts of this case, we conclude that Granger did not actually or constructively annex the cells or their components to its real property.
In order to generate methane gas, Granger must process the waste somewhere. And, given the volume of the material used, the nature of the process itself,
For the same reasons, we conclude that the erection and maintenance of the cells does not amount to an adaptation of the land under the second test. Granger adapts the land to facilitate the erection of cells; it does not erect the cells to facilitate the use of the land.
The Court of Claims correctly determined that the materials used to erect the cells at issue were exempt from use tax as property used or consumed in industrial processing. 4
Industrial processing is broadly defined to apply to the conversion or conditioning of personal property rather than real property. See MCL 205.94o(7)(a). Additionally, MCL 205.94o(6)(d) clarifies that industrial processing does not include activities involving the “[d]esign, engineering, construction, or maintenance of real property ----” Therefore, personal property used or consumed in the design, engineering, construction, or maintenance of real property will not fall within the exemption applicable to personal property used or consumed during industrial processing.
In this case, Granger uses bulldozers, compactors, and Trashmasters to process the waste used in the cells. Granger sorts and compacts the waste in order to make it as uniform as possible and to remove pockets of air. It then uses the machines to transport and spread the waste within the cells. Granger also uses the bulldozers to make it possible to access the cells during the period within which the cells are actively being filled and to erect the structural components of the cells. As we have already noted, the individual cells and their internal components do not become a part of the real estate during the cells’ commercial life. Because Granger uses the heavy equipment at issue to physically transport and process the waste and to erect the cells, the heavy machinery is clearly being used as part of the industrial processing of the waste and not to design, engineer, construct, or maintain real property. See MCL 205.94o(3)(f) (defining industrial processing to include the design, construction, or maintenance of production); MCL 205.94o(4)(b) (defining exempt property to include machinery used in an industrial processing activity); MCL 205.94o(4)(f) (defining exempt property to include machinery used to move property in
III. CONCLUSION
The Court of Claims did not err when it determined that the personal property at issue was not subject to Michigan’s use tax. Accordingly, the Court of Claims did not err when it ordered the Department to refund the use taxes paid by Granger.
Affirmed.
Notes
The industrial processing exemption has existed since at least 1939 in both the General Sales Tax Act and the Use Tax Act. See
Industrial processing means “the activity of converting or conditioning tangible personal property by changing the form, composition,
The Department also limits its analysis to application of the Use Tax Act. Therefore, we shall limit our analysis accordingly
We also find it noteworthy that our resolution of this issue prevents the type of pyramiding that the Legislature intended to alleviate by enacting an industrial processing exemption.
Elias Bros Restaurants, Inc,