When property is simultaneously used for both exempt and non-exempt purposes, the taxpayer is entitled to an industrial-processing exemption only to the extent that the property is used for industrial processing, and the exemption is therefore limited to the percentage of exempt use to total use determined by a reasonable formula or method approved by the Department of Treasury. Such was the rule laid down by the Michigan Supreme Court in Detroit Edison Co. v. Dep't of Treasury, No. 148753. On this basis, the Court invalidated the Treasury’s rule that the sale of all tangible personal property consumed or used in the transmission or distribution of electricity is taxable, and remanded the case to the Court of Claims to determine the property’s percentage of exempt use under a reasonable formula approved by the Treasury.
Detroit Edison brought an action in the Court of Claims against the Department of Treasury, seeking, in part, a refund of use taxes paid under protest. Under the industrial-processing exemption, MCL 205.94o, the six-percent use tax for a consumer’s use, storage, and consumption of all tangible personal property in Michigan does not apply to property sold to an industrial processor for use or consumption in industrial processing. Plaintiff brought an action alleging that certain of its property had been improperly subjected to the use tax when it was actually exempt from the tax under the industrial-processing exemption because the property was used to continue the processing of electricity. The Court of Claims granted summary disposition in favor of plaintiff. Defendant appealed. The Court of Appeals affirmed, reasoning that Detroit Edison’s electric system is simultaneously used for both exempt and non-exempt activities. The Court of Appeals concluded that Detroit Edison was entitled to the industrial-processing exemption for the entire electric system, and the Treasury sought leave to appeal.
The Michigan Supreme Court affirmed in part, reversed in part, and remanded to the Court of Claims for defendant to approve a reasonable formula or method for determining the percentage of exempt use to total use of the property. The Court held that the Court of Appeals correctly determined that the electric system is simultaneously used for both exempt and non-exempt activities and correctly held that the Treasury’s rule taxing all tangible personal property consumed or used in the transmission or distribution of electricity was invalid to the extent it taxed an exempt use; but the Court of Appeals erred by granting an industrial-processing exemption for the entire electric system because the exemption is limited to the percentage of exempt use to total use.
