ESA Topic: Industrial Processing

Under MCL 211.9m and MCL 211.9n Qualified New Personal Property and Qualified Previously Existing Personal Property is exempt from taxation under the General Property Tax Act.  Key to the definition of both Qualified New and Qualified Previously Existing Personal Property is that the personal property must be Eligible Manufacturing Personal Property (EMPP), defined as "all personal property located on occupied real property if that personal property is predominantly used in industrial processing or direct integrated support."

Section 9m defines "industrial processing" as that being used in section 4t of the General Sales Tax Act, 1933 PA 167, MCL 205.54t, and section 4o of the Use Tax Act, 1937 PA 94, MCL 205.94o. Both acts define industrial processing as "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 or for use in the manufacturing of a product to be ultimately sold at retail."

The General Sales Tax Act and the Use Tax Act include the following as specific activities that fall under the statutory definition of “Industrial processing”:

1. Production or assembly
   1. Example:
      1. An appliance manufacturer receives parts from multiple suppliers and assembles those parts into complete washing machines to be shipped and sold in retail shops around the country.
2. Research or experimental activities
   1. Example:
      1. The research division of an automobile manufacturer designs a new prototype of an engine. The equipment and supplies consumed in the development of the prototype would qualify under research and development. The manufacturer qualifies for an industrial processing exemption because the "tangible personal property is used by that person to perform an industrial processing activity."
3. Engineering related to industrial processing.
4. Inspection, quality control, or testing to determine whether particular units of materials or products or processes conform to specified parameters at any time before materials or products first come to rest in finished goods inventory storage.
   1. Example:
      1. An industrial processor performs tests on its raw materials. The equipment and supplies used or consumed by an industrial processor in this testing and quality control function meet the definition of industrial processing.
5. Planning, scheduling, supervision, or control of production or other exempt activities.
   1. Example:
      1. A computer used by an industrial processor to schedule maintenance on industrial processing equipment.
6. Design, construction, or maintenance of production or other exempt machinery, equipment, and tooling.
7. Remanufacturing.
   1. Example:
      1. A company purchases used carburetors and other parts and refurbishes the carburetors by installing new gaskets on the carburetors. The company then resells the carburetors. The company would qualify for industrial processing on the equipment and supplies used or consumed in restoring the carburetors. Remanufacturing includes the activities of disassembly, sorting, and reassembly of parts when that activity accompanies overhauling.
8. Processing of production scrap and waste up to the point it is stored for removal from the plant of origin.
   1. Example:
      1. A heat treating company uses chemicals in performing its processing functions. These chemicals must be disposed of after being used. The taxpayer purchases equipment and supplies to treat the used chemicals before the chemicals are shipped to a landfill. The equipment and supplies used to treat the chemicals are exempt for industrial processing because they are used to treat production waste up to the point it is stored for removal from the plant of origin.
9. Recycling of used materials for ultimate sale at retail or reuse.
   1. Example:
      1. A plastics manufacturing company grinds up production scrap to be reused for two purposes, first as a raw material in its own process, and second, as a raw material to be sold to other industrial processors. The grinding equipment used in these processes would qualify for the industrial processing exemption.
10. Production material handling.
    1. Example:
       1. An industrial processor manufactures steel bolt castings at one of its plants. These castings are taken by a forklift truck to another building at its plant site for grinding. The forklift truck would be exempt under industrial processing. Production material handling includes in-process movement of production materials and interplant movement of in-process materials within the same legal entity.
11. Storage of in-process materials.
    1. Example:
       1. An industrial processor manufactures automobiles. One of its divisions manufactures plastic handles which are then shipped to its primary assembly plant. The handles are received at the assembly plant and placed into in-process storage utilizing an automated storage/retrieval system that consists of a computer system, bins, portable storage racks, and material handling equipment. The handles are retrieved as needed and sent to the production line using an automatic guided vehicle system. The computer system, bins, portable storage racks, material handling equipment, and automatic guided vehicle system are exempt.

Exclusions from the definition of “Industrial Processing”

The General Sales Tax and Use Tax Acts explicitly exclude several activities. These include:

• Purchasing, receiving or storage of raw materials
• Sales, distribution, warehousing, shipping or advertising activities
• Administrative, accounting or personnel services
• Design, engineering, construction or maintenance of real property and non-processing equipment
• Plant security, fire prevention, medical or hospital services

In addition, statute sometimes excludes specific activities from the definition that would otherwise appear to fit the statutory definition.  For example, under MCL 333.9121(2):

“The procurement, processing, distribution, and use of whole blood, blood plasma, blood products, blood derivatives, and human and artificial tissues including, but not limited to, corneas, bones, organs, or parts of organs for the purpose of injecting, transfusing, or transplanting into a human body, is for all purposes the rendition of a service by a person participating therein and, whether or not remuneration is paid to the person, is not a sale for any purpose.”

In this instance, because the activity is defined by statute to be a service and not a sale, it cannot be considered “industrial processing” as industrial processing involves the activity resulting in a product ultimately sold at retail.  Claimants and assessors are advised to speak to legal counsel or the ESA unit to determine if a specific activity would qualify as “industrial support” or “direct integrated support” under statute.

Several activities that do not fall under the definition of “industrial processing,” though not necessarily all, may fall under the definition of “direct integrated support” as defined under MCL 211.9m. Taxpayers and assessors are advised to review the ESA Topic on Direct Integrated Support available on the ESA website for more information.

As a reminder, although the ESA unit may provide general guidance on activities that may qualify as an eligible activity under sections 9m and 9n, the unit cannot and will not provide an opinion as to whether a specific activity or  property qualifies for the exemption.

For a more detailed definition of industrial processing and exclusions please review:

• RAB 2000-4  
• MCL 205.54t

For additional ESA information, links to statutes, forms, and to sign up for the ESA List Serv, please visit the ESA Website.

This information constitutes an interpretation of one or more statutes administered by the Bureau of Local Government and School Services and not legal advice. As the interpretation reached in these examples are limited to the facts provided, any variation in those facts might result in a different interpretation being reached. Therefore, a taxpayer may wish to consult counsel before proceeding in this matter.