Electrical and Natural Gas Distribution Equipment Exempt as Industrial Processing Equipment

Wednesday, October 22nd, 2014

Natural gas oven.

The Michigan Court of Appeals ("Court") recently ruled that a utility company's distribution equipment was exempt.

The taxpayer was a utility company that provided natural gas and electricity. The taxpayer owned and operated distribution equipment for electricity and gas. This equipment included transmission lines, substations, compressor stations, and transformers. The equipment transmitted electricity and natural gas from generation plants to the customers' locations. It also modified the gas and electricity to make them usable and safe for customers.

Michigan exempts from use tax any tangible personal property that an industrial processor uses in industrial processing. "Industrial processing" is the 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. "Tangible personal property" includes electricity and gas.

The Court ruled that the taxpayer's distribution equipment was exempt. The taxpayer was an industrial processor because it converted or conditioned electricity and gas for sale at retail. Because the equipment modified the electricity and gas before they reached customers, it was used in industrial processing.


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