Detroit Edison Co. v. Dep't of Treasury

• Decision Date: 09 January 2014
• Docket Number: Docket No. 309732.
• Citation: 303 Mich.App. 612,844 N.W.2d 198
• Parties: DETROIT EDISON COMPANY v. DEPARTMENT OF TREASURY.
• Court: Court of Appeal of Michigan — District of US

303 Mich.App. 612

844 N.W.2d 198

DETROIT EDISON COMPANY

v.DEPARTMENT OF TREASURY.

Docket No. 309732.

Court of Appeals of Michigan.

Submitted Dec. 4, 2013, at Lansing.

Decided Jan. 9, 2014, at 9:05 a.m.

Honigman Miller Schwartz and Cohn LLP, Lansing, (by John D. Pirich, Patrick R. Van Tiflin, Lynn A. Gandhi, and June Summers Haas) for plaintiff.

Bill Schuette, Attorney General, Aaron D. Lindstrom, Solicitor General, Richard A. Bandstra, Chief Legal Counsel, and Julius O. Curling, Assistant Attorney General, for defendant.

Before: MURPHY, C.J., and FITZGERALD and BORRELLO, JJ.

MURPHY, C.J.

Defendant, Department of Treasury (Department), appeals as of right the Court of Claims' order granting summary disposition in favor of plaintiff, Detroit Edison Company (DTE). This action involves the question whether DTE's machinery and equipment located outside its generation plants and indisputably used to transmit and distribute electricity are subject to taxation under the Use Tax Act (UTA), MCL 205.91 et seq. The tax period at issue is January 1, 2003, through September 30, 2006. DTE claims that it is entitled to the UTA's “industrial processing” exemption pursuant to MCL 205.94o, asserting that the machinery and equipment located outside its generation plants are used both to transmit and distribute electricity and to continue the “processing” of electricity. According to DTE, electricity is not a finished good ready for sale and in a usable form for its customers absent the ongoing industrial processing beyond the generation-plant walls, because the electricity leaves the plants at extremely high and unusable voltage levels. DTE further maintains that the machinery and equipment at issue are used to inspect, control the quality of, and test the electricity, which activities all constitute industrial processing that occurs before the electricity takes the form of a finished good. The Department contends that the machinery and equipment alleged to be subject to use tax are employed solely for purposes of distributing and delivering electricity and not for industrially processing the electricity, i.e., the machinery and equipment do not change the quality, form, and character of the electricity. The Department maintains that, given those circumstances, the Legislature clearly did not provide for the exemption being claimed by DTE. We agree with DTE's arguments and hold that DTE is entitled to the claimed “industrial processing” exemption. Accordingly, we affirm the ruling of the Court of Claims.

I. BACKGROUND

DTE is an electric utility that provides electricity to residential, commercial, and industrial customers. DTE's operations include the production and generation of electricity at its generation plants, along with the transmission and distribution of electricity. The transmission and distribution system, or electric system, is an integrated, interconnected, and interrelated network of machinery and equipment, including, but not limited to, substations, transformers, high-voltage towers, cables, and poles. In its complaint, DTE alleged that the electric system “continues to process the electricity up to, and including, the final transformer prior to the customer's location;” that this “processing of the electricity involves changes to its quality, such as changes in voltage and volt amp reactive levels (‘VARs');” that “customers cannot use the electricity until certain levels of voltage and VARs are achieved,” which is not met “until the electricity leaves the final transformer in a consumable form at the customer's location;” and that the various items of machinery and equipment in the electric system are used to produce, process, monitor, test, and maintain the electricity, as well as to protect, test, inspect, and control other equipment in the electric system.

Voltage levels at a generation plant range from 15,000 to 25,000 volts, while standard usable levels are from 120 to 240 volts, with some industrial customers running on as much as 480 volts. One DTE expert averred in his affidavit that “[i]t is not practical under the laws of physics ... for generation plants to produce electricity at the 120/240 volt level as it would require a wire that is 46 [times] greater in circumference than what is available.” There is no dispute that once electricity leaves a generation plant, the voltage must be both increased to allow for transmission and decreased to allow for use, which increases and decreases are accomplished through the use of the machinery and equipment at issue.¹

The parties submitted documentary evidence consisting of detailed expert opinions, observations, and explanations regarding the nature of electricity, its generation and production, and its transmission and distribution. Of primary significance, the Department's expert opined that “[t]hrough the use of transformersstepping up and stepping down the voltage, the composition and character of the electricity is not changed.” (Emphasis added.) He indicated that, although transformers and other electrical equipment assist in distributing, transmitting, and delivering electricity to DTE's customers, they do not alter the nature, composition, and character of the electricity. DTE's experts generally opined that the characteristics and quality of electricity continue to change in the transmission and distribution phase as brought about by the machinery and equipment located outside DTE's generation plants. In an affidavit, one DTE expert explained, “As it moves through the [e]lectric [s]ystem, the characteristics of electricity continue to change as the [e]lectric [s]ystem experiences load changes (electricity demand), faults and switching spikes.” He further averred that after electricity passes through a customer's meter, “the electricity becomes a finished good and is sold to the end user as a retail product.” Another DTE expert stated that DTE, in providing electricity to its customers, “engage[s] in continuous processing of the electricity” and “must continuously adjust the voltage and current of the electricity.” A DTE expert emphasized that “[a]t no time does the electric power reach the form, character, composition or specific parameters at which it is usable by the customer of the utility until it reaches the customer's meter.”

The relevance of the differences in the experts' positions is that for purposes of the industrial-processing exemption to the use tax, “industrial processing” was defined during the pertinent tax period as follows:

[T]he activity of converting or conditioning tangible personal property by changing the form, composition, quality, combination, or character of the property for ultimate sale at retail or for use in the manufacturing of a product to be ultimately sold at retail. Industrial processing begins when tangible personal property begins movement from raw materials storage to begin industrial processing and ends when finished goods first come to rest in finished goods inventory storage. [MCL 205.94o(7)(a), as added by 1999 PA 117, as amended by 2004 PA 172 (emphasis added).]

In 2009, the Department determined that there had been a use tax deficiency in DTE's payments for the period of January 1, 2003, through September 30, 2006, which adjudged deficiency was based in part on disallowance of DTE's claimed exemptions under MCL 205.94o for machinery and equipment used in industrial processing. Subsequently, DTE paid the use tax bill in full and under protest and it proceeded to file the instant suit for a refund of the use tax payments, alleging that it had been erroneously assessed for the years in dispute.² We note that a separate issue in the lawsuit concerned whether the Department had improperly assessed use taxes against DTE with respect to purchases allowing access to certain Internet databases for purposes of research and training. This claim was summarily dismissed, and the ruling is not being challenged on appeal. On competing motions for summary disposition filed by the parties, the Court of Claims ruled that DTE was entitled to summary disposition in regard to its claim demanding a tax refund predicated on the UTA's industrial-processing exemption. The Court of Claims stated and explained:

At the end of the distribution system, the electricity is processed through a final step down transformer at or near the customer's meter, where the voltage is reduced to the 120/240 volt range, which is the range at which the electricity is usable by the customer. The electricity then finally moves through the customer's meter, where it undergoes a final monitoring process to ensure its compliance with regulations.

[The Department] does not dispute the veracity of this process. It is clear that electricity is continuing to be processed up until the point where it reaches the customer's meter, because the voltage and current levels are drastically changed multiple times at set points, the last being at to near the customer's meter, and in between these changes the voltage and current levels are constantly being adjusted to keep them constant. Certainly these types of changes constitute changes to the form, composition, quality, combination, or character of the property.

This conclusion is further solidified by the affidavits of many of [DTE's] witnesses, who have uniformly attested to the fact that the electricity continues to be processed, controlled, and monitored, and that the characteristics and quality of the electricity continue to change up until the point it is finally converted to 120/240 volts at or near the customer's meter.

II. ANALYSIS

A. STANDARD OF REVIEW AND SUMMARY DISPOSITION UNDER MCR 2.116(C)(10)

This Court reviews de novo a ruling by the Court of Claims on a motion for summary disposition in a case involving the UTA. Guardian Indus. Corp. v. Dep't of Treasury, 243 Mich.App. 244, 248, 621 N.W.2d 450 (2000). Issues relating to the construction of the UTA are likewise reviewed de novo on...