Revenue Administrative Bulletin 2020-9

SALES AND USE TAX INDUSTRIAL PROCESSING EXEMPTION

RELATED TO INFECTIOUS DISEASE

PERSONAL PROTECTIVE EQUIPMENT AND SAFETY EQUIPMENT

Approved: July 20, 2020[1]

 

Pursuant to MCL 205.6a, a taxpayer may rely on a Revenue Administrative Bulletin issued by the Department of Treasury after September 30, 2006, and shall not be penalized for that reliance until the bulletin is revoked in writing. However, reliance by the taxpayer is limited to issues addressed in the bulletin for tax periods up to the effective date of an amendment to the law upon which the bulletin is based or for tax periods up to the date of a final order of a court of competent jurisdiction for which all rights of appeal have been exhausted or have expired that overrules or modifies the law upon which the bulletin is based.

I. BACKGROUND 

This Revenue Administrative Bulletin (RAB) specifically addresses application of the sales and use tax industrial processing exemption to personal protective equipment (PPE) and safety equipment used to prevent the spread of infectious diseases, such as COVID-19.

The General Sales Tax Act (GSTA) imposes a 6% sales tax on the gross proceeds of “all persons engaged in the business of making sales at retail, by which ownership of tangible personal property is transferred for consideration…”[2]  The Use Tax Act (UTA) imposes a 6% tax “for the privilege of using, storing, or consuming tangible personal property in this state…”[3] 

However, the Acts exempt the sale of eligible[4] tangible personal property to the following:

  1. An industrial processor for use or consumption in industrial processing.
  2. A person, whether the person is an industrial processor, if the tangible personal property is intended for ultimate use in and is used in industrial processing by an industrial processor.
  3. A person, whether the person is an industrial processor, if the tangible personal property is used by that person to perform an industrial processing activity for or on behalf of an industrial processor.
  4. A person, whether the person is an industrial processor, if the property is certain specified computer equipment used in an industrial processing activity.[5]

The Acts define “industrial processor” as “a person who performs the activity of converting or conditioning tangible personal property for ultimate sale at retail or use in the manufacturing of a product to be ultimately sold at retail.”  For purposes of the UTA, an “industrial processor” also includes a person who converts or conditions tangible personal property that is ultimately affixed to real estate located in another state.[6] 

The Acts define “industrial processing” as, “[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.” For purposes of the UTA, property used to manufacture a product that is ultimately affixed to real estate located in another state is also eligible for the exemption even if it is not sold at retail.

In addition to the above requirements, the Acts list specific activities that qualify as industrial processing.[7] Unless property is used or consumed in one of these listed activities, it must be used or consumed in an activity that satisfies the general definition of industrial processing in order to qualify for exemption. [8]  For purposes of that definition, the Acts provide a temporal limitation on the activities that qualify as industrial processing. Specifically, they state, “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.”[9] Property used or consumed outside of this timeframe, if not used or consumed in an activity specifically identified as an industrial processing activity under the Acts,[10] will be considered to be used or consumed in a nonexempt activity.  Moreover, the Acts also exclude certain other activities from qualifying for “industrial processing.”[11]

PPE or safety equipment purchased by a person eligible for the industrial processing exemption is exempt if used or consumed in an exempt industrial processing activity, as it is “equipment…used”[12] or “property…consumed,”[13] in an industrial processing activity.

II.  CONCLUSIONS

A.  Eligible PPE and safety equipment.  PPE or safety equipment is eligible for the industrial processing exemption if it meets all the following criteria:

  1. It is purchased by the industrial processor or another person engaged in an industrial processing activity on behalf of an industrial processor, including purchases made directly by an employee of an industrial processor;
  2. It is used for the safety of employees or other authorized personnel; and
  3. It is used in an industrial processing activity. 

B.  Apportionment.  If property is used for both an exempt and nonexempt activity, the exemption must be apportioned based on the percentage of exempt use to total use determined by a reasonable formula approved by Treasury.[14]  Apportioning dual-use property is a fact-intensive inquiry and formulas will vary depending on any given situation. The taxpayer bears the burden of proving the total exempt use of the property in any request to apportion the industrial processing exemption.[15]   For safety equipment used by employees in the context of electric and gas providers, please see RAB 2018-4, which addresses equipment used in those industries that are simultaneously used for both exempt and nonexempt activities throughout the utility systems.[16]

C.  Examples

Example 1:  Industrial Processor purchases face masks for employees to wear while working on the production line (and engaged in an industrial processing activity) to help stop the spread of infectious disease.[17]  The masks are exempt.

Example 2:  Industrial Processor purchases face masks for employees to wear during receipt of unprocessed metals for vehicle manufacturing before the metals are placed in raw materials storage, to help stop the spread of infectious disease.  Receipt and storage of raw materials is not an industrial processing activity.[18]  The masks are taxable.

Example 3:  Industrial Processor purchases face masks for employees in its marketing department to wear to stop the spread of infectious disease.  Marketing is not an industrial processing activity.[19]  The masks are taxable.

Example 4:  Industrial Processor purchases a thermometer to screen production employees for high body temperature prior to allowing them to enter the facility, where industrial processing activity occurs.  The thermometer is exempt, but only to the extent used to scan employees engaged in an industrial processing activity.  That is, the exemption must be apportioned. 

Example 5:  Industrial Processor purchases signage to encourage all of its employees to practice good hand hygiene and social distancing.  The signage is taxable.

Example 6:  Industrial Processor purchases hand sanitizer for use by production line employees prior to entering, and while working on, the production line (and engaged in an industrial processing activity) and for employees that are not engaged in an industrial processing activity. The hand sanitizer is exempt when used by production line employees,[20] but taxable when used by nonproduction employees; therefore, the exemption must be apportioned.


[1] As an interpretation of existing law rather than the implementation of a new policy, this RAB applies to all open periods, subject to MCL 205.27a and 205.22.   

[2] MCL 205.52(1).

[3] MCL 205.93(1).  For purposes of this RAB, “Acts” refers to both the GSTA and the UTA.

[4] See MCL 205.54t(4) and MCL 205.94o(4).  For specific property that is not eligible for the exemption, see MCL 205.54t(5) and MCL 205.94o(5).

[5] MCL 205.54t(1)(a)-(d) and MCL 205.94o(1)(a)-(d).

[6] MCL 205.54t(7)(b) and MCL 205.94o(7)(b).

[7] MCL 205.54t(3) and MCL 205.94o(3).

[8] MCL 205.54t (3) and MCL 205.94o(3).  See also TOMRA of North America, Inc v Dep’t of Treasury, _____ Mich _____; _____ NW2d _____(2020) (Docket Nos. 158333, 158335).

[9] MCL 205.54t(7)(a) and MCL 205.94o(7)(a).

[10] MCL 205.54t(7)(a) and MCL 205.94o(7)(a).

[11] MCL 205.54t(6) and MCL 205.94o(6).

[12] MCL 205.54t(4)(b) and MCL 205.94o(4)(b).

[13] MCL 205.54t(4)(c) and MCL 205.94o(4)(c).

[14] MCL 205.54t(2) and MCL 205.94o(2). The formula or method used does not have to be pre-approved by the Department.

[15] General Motors Corp v Dep’t of Treasury, 290 Mich App 355, 369 (2010).

[16] See also Detroit Edison Co v Dep’t of Treasury, 498 Mich 28 (2015). 

[17] MCL 205.54t(3)(a) and MCL 205.94o(3)(a).

[18] MCL 205.54t(6)(a) and MCL 205.94o(6)(a). 

[19] MCL 205.54t(6)(b)-(c) and MCL 205.940(6)(b)-(c).

[20] MCL 205.54t(3)(a), MCL 205.54t(4)(b), MCL 205.94o(3)(a), and MCL 205.94o(4)(b).