Revenue Administrative Bulletin 2024-7

SALES AND USE TAX – INDUSTRIAL PROCESSING EXEMPTION

(Replaces Revenue Administrative Bulletin 2000-4)

Approved: May 14, 2024

Note: A taxpayer may rely on this Revenue Administrative Bulletin (“RAB”) until it is revoked by Treasury or until a law on which this RAB is based is altered by legislation or by binding judicial precedent. See MCL 205.6a and RAB 2016-20.

RAB 2024-7. This RAB replaces RAB 2000-4 and is retroactive to all tax periods that are open under the statute of limitations provided in section 27a of the Revenue Act, MCL 205.27a, as of the approval date of this RAB. Syntex Laboratories v Dep’t of Treasury, 233 Mich App 286 (1998); Rayovac Corp v Dep’t of Treasury, 264 Mich App 441 (2004); JW Hobbs v Dep’t of Treasury, 268 Mich App 38 (2005); and Int’l Home Foods Inc v Dep’t of Treasury, 477 Mich 983 (2007).

BACKGROUND

This RAB generally describes the industrial processing exemption allowed under the General Sales Tax Act (“GSTA”) and Use Tax Act (“UTA”) under MCL 205.54t and MCL 205.94o, respectively. Accordingly, this RAB does not replace other RABs that address the industrial processing exemption as applied to a particular industry (e.g., RABs 2016-4 and 2018-4) or item of tangible personal property (e.g., RAB 2020-9). This RAB reflects legislation enacted after the issuance of RAB 2000-4, the most notable being 2004 PAs 172-173 (effective September 1, 2004), 2010 PAs 115-116 (effective July 13, 2010), 2012 PA 474 (amending the UTA and effective for tax years beginning on or after January 1, 2006), 2015 PAs 204-205 (effective November 30, 2015), and 2023 PAs 27 and 30 (effective May 8, 2023). For information regarding the taxpayer relief provisions under MCL 205.54t(7) and MCL 205.94o(7) as added by 2023 PAs 27 and 28, please refer to Treasury’s Notice Regarding Expansion of the Industrial Processing Exemptions to Address Property Used to Process Aggregates for Michigan Real Estate Projects, issued May 11, 2023. The Notice is posted at the “Reports and Legal” section available at www.michigan.gov/treasury.

In addition to legislative changes, this RAB incorporates legal principles from binding precedent decided after the issuance of RAB 2000-4, such as the Michigan Supreme Court’s decisions in Detroit Edison Co v Dep’t of Treasury (“DTE”), 498 Mich 28 (2015), and TOMRA of N America v Dep’t of Treasury (“TOMRA I”), 505 Mich 333 (2020), and the Michigan Court of Appeals’ published decisions in Granger v Dep’t of Treasury (“Granger”), 286 Mich App 601 (2009), Midamerican Energy Co v Dep’t of Treasury (“Midamerican”), 308 Mich App 362 (2014), Brunt Associates v Dep’t of Treasury, 318 Mich App 449 (2017) (“Brunt”), Jim’s Body Shop v Dep’t of Treasury (“Jim’s Body Shop”), 328 Mich App 187 (2019), TOMRA of N America v Dep’t of Treasury (“TOMRA II”), 342 Mich App 388 (2022) and Strata Oncology, Inc v Dep’t of Treasury (“Strata”), ___ Mich App ___; ___ NW2d ___; (2023)(Docket No. 362431). This RAB also reflects Treasury’s acquiescence to the holding in the unpublished per curium opinion of the Court of Appeals in Total Foundations LLC v Dep’t of Treasury (“Total Foundations”) issued March 22, 2016 (Docket No. 322983). Treasury first announced its acquiescence to Total Foundations in its June 2017 Treasury Update newsletter.

Key Definitions

Definitions for important terms used in this RAB are set forth below and in the related footnotes:

Aggregate: Common variety building materials like sand, gravel, crushed stone, slag, recycled concrete, recycled asphalt, and geosynthetic aggregates. MCL 205.54t(8)(a); MCL 205.94o(8)(a).

Industrial Processing: 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, for use in the manufacturing of a product to be ultimately sold at retail or to be affixed to and made a structural part of real estate located in another state, or for the exempt purposes described in MCL 205.54t(3)(l) or (4)(i) or MCL 205.94o(3)(l) or (4)(i) relating to aggregate products. 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 205.54t(8)(b); MCL 205.94o(8)(b).

Industrial Processor: A person who performs the activity of converting or conditioning tangible personal property for ultimate sale at retail, for use in the manufacturing of a product to be ultimately sold at retail or to be affixed to and made a structural part of real estate located in another state, or for the exempt purposes described in MCL 205.54t(3)(l) or (4)(i) or MCL 205.94o(3)(l) or (4)(i). MCL 205.54t(8)(c); MCL 205.94o(8)(c).

Person: An individual, firm, partnership, joint venture, association, social club, fraternal organization, municipal or private corporation whether or not organized for profit, company, limited liability company, estate, trust, receiver, trustee, syndicate, the United States, this state, county, or any other group or combination acting as a unit, and the plural as well as the singular number, unless the intention to give a more limited meaning is disclosed by the context. MCL 205.51(a); MCL 205.92(a).

Prewritten Computer Software: Computer software (commonly referred to as “canned” software), including prewritten upgrades, that is delivered by any means and that is not designed and developed by the author or other creator to the specifications of a specific purchaser. Prewritten computer software includes the following:
(i) Any combination of 2 or more prewritten computer software programs or portions of prewritten computer software programs.

(ii) Computer software designed and developed by the author or other creator to the specifications of a specific purchaser if it is sold to a person other than that specific purchaser.

(iii) The modification or enhancement of prewritten computer software or portions of prewritten computer software if the modification or enhancement is designed and developed to the specifications of a specific purchaser unless there is a reasonable, separately stated charge or an invoice or other statement of the price is given to the purchaser for the modification or enhancement. If a person other than the original author or creator modifies or enhances prewritten computer software, that person is considered to be the author or creator of only that person’s modifications or enhancements. MCL 205.51a(p); MCL 205.92b(p).

Product: As used in the definition of “research and experimental activity,” includes, but is not limited to, a prototype, pilot model, process, formula, invention, technique, patent, or similar property, whether intended to be used in a trade or business or to be sold, transferred, leased, or licensed. MCL 205.54t(8)(d); MCL 205.94o(8)(d).

Remanufacturing: The activity of overhauling, retrofitting, fabricating, or repairing a product or its component parts for ultimate sale at retail. MCL 205.54t(8)(e); MCL 205.94o(8)(e).

Research or Experimental Activity: The activity incident to the development, discovery, or modification of a product or a product related process. Research or experimental activity also includes activity “necessary” (which means absolutely needed or required – See Strata at 10) for a product to satisfy a government standard or to receive government approval. Research or experimental activity does not include the following:
  (i) Ordinary testing or inspection of materials or products for quality control purposes.

  (ii) Efficiency surveys.

  (iii) Management surveys.

  (iv) Market or consumer surveys.

  (v) Advertising or promotions.

  (vi) Research in connection with literacy, historical, or similar projects. MCL 205.54t(8)(f); MCL 205.94o(8)(f).

Tangible Personal Property: Personal property that can be seen, weighed, measured, felt, or touched or that is in any other manner perceptible to the senses and includes electricity, water, gas, steam, and prewritten computer software. MCL 205.51a(r); MCL 205.92(k).

LAW AND ANALYSIS

To the extent that an example used in this RAB concludes that the tangible personal property is exempt as being used in industrial processing, it is assumed that the tangible personal property is not property affixed to and made a structural part of real estate in Michigan under MCL 205.54t(5)(a) or MCL 205.94o(5)(a).

A. General Principles Governing the Application and Interpretation of the Industrial Processing Exemption

The GSTA and the UTA provide exemptions to the sales tax and use tax, respectively, for certain tangible personal property sold to certain persons for use in an industrial processing activity. Various principles have been established through case law which govern the application and interpretation of the industrial processing exemption. For example, consideration of the activity in which the tangible personal property is used and not the character of the property owner’s business is determinative as to whether the industrial processing exemption applies. DTE, 498 Mich at 37.

Regarding the temporal limitation in the second sentence of the definition of “industrial processing,” which states that 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,” it does not apply to any of the enumerated activities in MCL 205.54t(3) or MCL 205.94o(3). TOMRA I, 505 Mich at 393.

Finally, the industrial processing exemption does not apply to the sale of services such as auto body repair (Jim’s Body Shop, 328 Mich App at 203-204) or to the use tangible personal property to “produce some other product that is not tangible personal property” (e.g., telecommunication signals). Midamerican, 308 Mich App at 373.

B. Apportionment of the Industrial Processing Exemption

There are instances where tangible personal property is used in both a taxable and nontaxable manner for purposes of the industrial processing exemption. Under MCL 205.54t(2) and MCL 205.94o(2), any tangible personal property that is eligible for the industrial processing exemption “is exempt only to the extent that the property is used for the exempt purpose” stated in MCL 205.54t or MCL 205.94o. Accordingly, the exemption does not apply to tangible personal property “not ‘used for the exempt purpose’” such that the exemption “must, therefore, be ‘apportioned’ on the basis of the use of the property.” See DTE, 498 Mich at 47, n 10. Under certain circumstances, the taxable and exempt use may occur simultaneously, thereby resulting in the need for apportionment. See DTE, 498 Mich at 55 and RAB 2018-4. Where apportionment applies, the exemption “is limited to the percentage of exempt use to total use determined by a reasonable formula or method approved by [Treasury].” MCL 205.54t(2); MCL 205.94o(2). Notably, the formula or method does not require “preapproval” from Treasury.

Some of the areas that are commonly apportioned between taxable and exempt consumption include material handling (e.g., forklifts, cranes, pallet jacks, conveyors, propane, and repair parts), utilities (e.g., natural gas, electricity, steam, and propane), and computer usage (e.g., administrative, CAM, design, engineering, communication, etc.).

Examples of methods/formulas that can be employed to determine the taxable percentages include, but are not limited to, the following:

(i) number of taxable movements compared to the total number of movements;

(ii) amount of time used in the taxable movements to the total time for all movements;

(iii) specific allocation (e.g., number of pieces of material handling equipment in the taxable areas compared to the total number of pieces of material handling equipment);

(iv) specific identification with a taxable area or department (if specific use can be determined, it would not be allocated);

(v) square/cubic footage (e.g., taxable area to total area) related to heating (natural gas, propane, steam, electricity);

(vi) head count (e.g., taxable users to total users); and;

(vii) production hours (compared to total hours). See RAB 2018-4 for the apportionment percentages applicable to electric and gas providers.

Example 1. An industrial processor uses a forklift 60% of the time in its plant moving in-process parts from one press to another press; this usage is exempt under industrial processing. The forklift is used the remaining 40% of the time in taxable activities such as shipping and receiving. The industrial processor would be eligible to claim an industrial processing exemption equal to 60% of the cost of the forklift.

Example 2. An industrial processor makes castings of steel bolts at one of its plant sites. These bolts are taken by a forklift to another building at its plant site for hardening. In this example, if the forklift was used 30% of the time in moving bolts from one building to another building, and 70% of the time in non-industrial processing activities, the forklift would qualify for a 30% industrial processing exemption. See also Examples 14, 23, 51, 55-57, 65-66, 68, 71, 77, and 82 in this RAB, which demonstrate apportionment of the exemption.

C. Persons Eligible to Claim the Industrial Processing Exemption

The industrial processing exemption may not be claimed by any person simply because that person uses tangible personal property in an industrial processing activity. Under MCL 205.54t(1) and MCL 205.94o(1), the industrial processing exemption only applies to tangible personal property sold to any of the following:

(a) An industrial processor for use or consumption in industrial processing.

(b) A person, whether or not 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.

Example 3. ABC Corp is a holding company for several manufacturing entities. ABC Corp is not an industrial processor but purchases a press to be used at no cost by one of its subsidiary corporations. The press would qualify for the industrial processing exemption.

(c) A person, whether or not 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.

Example 4. An industrial processor hires a company that repairs exempt industrial processing equipment such as in-process assembly lines. The company's equipment and supplies used or consumed in this repair work qualify for the industrial processing exemption.

Example 5. A die repair company is hired by an industrial processor to repair dies used in exempt industrial processing functions. The equipment and supplies used or consumed by the die repair company qualify for the industrial processing exemption. Consumed supplies would include supplies used directly in the repair work as well as other indirect supplies such as natural gas and electricity consumed in the repair work. The equipment and supplies are exempt whether the actual repair work is done at the repair company’s location, or at the industrial processor’s location.

(d) A person, whether or not the person is an industrial processor, if the tangible personal property is 1 of the following:

(i) A computer used in operating industrial processing equipment.

Example 6. A computer operating robotics on an assembly line, and robotics on the assembly line used by a servicer operating the equipment on behalf of the manufacturer, are exempt.

(ii) Equipment used in a computer assisted manufacturing system.

(iii) Equipment used in a computer assisted design or engineering system integral to an industrial process.

Example 7. Company purchases computers that it uses to design the final products or any component parts of the final products on behalf of ACME Manufacturing Company. The computers are exempt.

(iv) A subunit or electronic assembly comprising a component in a computer integrated industrial processing system.

(v) Computer equipment used in connection with the computer assisted production, storage, and transmission of data if the equipment would have been exempt had the data transfer been made using tapes, disks, CD-ROMs, or similar media by a company whose business includes publishing doctoral dissertations and information archiving, and that sells the majority of the company’s products to nonprofit organizations exempt under MCL 205.54q or MCL 205.94(1)(w).

(vi) Equipment used in the production of prewritten computer software or software modified or adapted to the user’s needs or equipment by the seller, only if the software is available for sale from a seller of software on an as-is basis or as an end product without modification or adaption.

D. General Framework for Determining Whether Activities Constitute “Industrial Processing”

The definition of “industrial processing” provides a general framework for evaluating whether an activity qualifies for the industrial processing exemption by requiring that the activity convert or condition tangible personal property for ultimate sale at retail or for use in the manufacturing of a product to be ultimately sold at retail. To “convert” means to alter the physical or chemical nature or properties; to change from one form or function to another; alter for more effective utilization. See https://www.merriam-webster.com/ (accessed 10.17.23). To “condition” property means “to put in a fit or proper state.” See DTE, 498 Mich at 40.

As previously noted, the industrial processing exemption also includes property that is affixed to and made a structural part of real estate located in another state. The application of the industrial processing exemption in that context is described further in RABs 2016-24 and 2019-15.

Under MCL 205.54t(8)(b) and MCL 205.94o(8)(b), converting or conditioning tangible personal property is demonstrated by changing any of the following aspects of the tangible personal property:

Form: The shape and structure of the property as distinguished from its material.
Composition: The manner in which something is composed; general make-up; the qualitative and quantitative makeup; the result or product of mixing or combining; compound. See https://www.merriam-webster.com/ (accessed 10.17.23).
Quality: An essential characteristic, property, or attribute. See DTE, at 40.
Combination: The quality or state of being combined. See https://www.merriam-webster.com/ (accessed 10.17.23).
Character: The aggregate of features and traits that form the nature of a thing. See DTE, at 40.

For an activity to qualify under the general definition of “industrial processing” in the first sentence of MCL 205.54t(8)(b) and/or MCL 205.94o(8)(b), the activity must occur within the temporal limitation between raw materials storage and finished goods inventory storage described in the second sentence of MCL 205.54t(8)(b) and/or MCL 205.94o(8)(b).

Example 8. A manufacturer purchases bins in which raw materials will be stored prior to the initiation of its production process. The bins are taxable.

Example 9. An inventory service company is hired to inventory an industrial processor’s finished goods within the industrial processor’s finished goods inventory storage. The equipment and supplies which are used or consumed are taxable.

Example 10. An industrial processor purchases computers to manage its finished goods inventory after that inventory has come to rest in finished goods inventory storage. The computers are taxable.

E. Statutorily Enumerated Industrial Processing Activities

The industrial processing exemption enumerates certain activities in MCL 205.54t(3) and MCL 205.94o(3) that constitute industrial processing regardless of whether: (i) the activities constitute the “converting or conditioning” of tangible personal property as described in the first sentence of the definition of “industrial processing” under MCL 205.54t(8)(b) and MCL 205.94o(8)(b); or (ii) the activities occur within the temporal limitation set forth in the second sentence of MCL 205.54t(8)(b) and/or MCL 205.94o(8)(b), i.e., between the time raw materials are removed from raw materials storage to begin processing and the time the finished goods come to rest in finished goods inventory. See DTE, 498 Mich at 39 and 49, n 13; TOMRA I, 505 Mich at 351.

The word “includes” in MCL 205.54t(3) and MCL 205.94o(3) is a word of limitation such that MCL 205.54t(3) and MCL 205.94o(3) provide an exhaustive list of activities that qualify as “industrial processing” activities even if they do not otherwise meet the general definition of “industrial processing” under MCL 205.54t(8)(b) and MCL 205.94o(8)(b). See Frame v Nehls, 452 Mich 171, 178-179 (1996).

These activities are as follows:

(a) Production or assembly.

Example 11. A manufacturer purchases robots and computers which operate and control the robots for use in its product manufacturing and assembly processes. The robots and related computers are used in a qualifying industrial processing activity.

Example 12. A manufacturer of pre-cooked ham purchases a steamer that initiates the cooking of the hams and a chiller that is used to cease the cooking process for pre-cooked hams that are sold to supermarkets. Both the steamer and the chiller are exempt.

(b) Research or experimental activities.

Example 13. The research division of a vehicle manufacturer designs a new prototype of an engine. The equipment and supplies consumed in the development of the prototype are exempt as the activity would qualify as “research or experimental activities.”

Example 14. A manufacturer of plastics develops several new plastics. The manufacturer then hires an independent research company (ABC Co) to test the fire-retardant capabilities of the new plastics. ABC also conducts its own private research of the tensile strength of several new steel alloys. ABC does not manufacture any product, nor does it actually sell the steel alloys. Instead, ABC aims to develop a new patent on the steel alloys and sell or license the patent. About 20% of ABC’s equipment and supplies are consumed in the research it conducts for the plastics manufacturer with the remaining 80% being consumed in its own private research of tensile strength. Even though ABC is not an industrial processor, ABC would qualify for a 20% industrial processing exemption because the tangible personal property is used by ABC to perform an industrial processing activity for or on behalf of manufacturer (i.e., an industrial processor). But, ABC would not qualify for an industrial processing exemption on the remaining 80% because it is not an industrial processor (nor is it consuming that tangible personal property to perform an industrial processing activity for or on behalf of an industrial processor).

Example 15. A manufacturer of cooking spices designs a new package for its product and makes 20 prototypes of the packaged spices for testing purposes. The materials, supplies, and equipment used to make the prototypes would be exempt.

Example 16. ACME LLC is paid by pharmaceutical companies to identify patients with particular DNA and RNA traits in order to provide a targeted population for the pharmaceutical companies’ clinical drug trials. To identify such patients, ACME LLC sequences patient specimens’ DNA and RNA. Those results are reported to the patients’ oncologists who may, after consultation with the patient, recommend enrolling in the drug trial. ACME LLC is paid by the pharmaceutical companies based on the number of patients that ultimately enroll in the drug trial. ACME LLC’s process of genomic sequencing does not undergo development, discovery, or modification and ACME LLC’s genomic sequencing process during these trials does not undergo any transformation. In addition, ACME LLC’s trials identify some, but not all, patients as candidates for the pharmaceutical companies’ drug trials and ACME LLC is not the sole provider of patients for these pharmaceutical trials. ACME LLC’s activities do not contribute to the development, discovery, or modification of the trial drug since the drug being tested has already been manufactured and, in most cases, the drug compound will be the same before and after the trial. Finally, the traditional method of identifying patients remained available to the pharmaceutical companies notwithstanding ACME LLC’s service or trials such that ACME LLC’s trials and services are not “necessary” to obtain governmental (e.g., FDA) approval. Accordingly, ACME LLC is not engaged in “research or experimental activities” for purposes of the industrial processing exemption.

Example 17. An outside company is hired by an industrial processor to provide on-going production engineering for the industrial processor. Equipment purchased by this company to perform these functions qualifies for the exemption.

(d) 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.

Inspection, testing and quality control activities are taxable once finished goods have come to rest and are placed in finished goods inventory storage. The reference to “materials or products” refers to the finished good that is ultimately sold to the consumer such that for exempt “inspection, quality control, or testing” to occur, “it must be performed on the objects that will be ‘com[ing] to rest in finished goods inventory storage.” See TOMRA II, 342 Mich App at 398.

Example 18. A lawnmower manufacturer performs quality control by inspecting the wiring on a particular lawnmower model during the assembly process, but before the lawnmower is placed in finished good inventory. Equipment and supplies used to perform this inspection are exempt. See TOMRA II, 342 Mich App at 398-399.

Example 19. ACME, LLC manufactures a product, and the completed product is placed in finished goods inventory storage. Before shipment of the product to its customers, ACME performs testing and quality control activities on the product to ensure that proper standards are being met. Equipment and supplies used or consumed by ACME are taxable because they are being used for performing quality control and testing after the products have come to rest in finished goods inventory.

Example 20. A manufacturer performs tests on its raw materials to ensure the materials are within acceptable specifications prior to production. The equipment and supplies used or consumed in this testing and quality control function are taxable. See TOMRA II, 342 Mich App at 398.

Example 21. An inspection firm is hired by an industrial processor to inspect “in process” materials related to the industrial processor’s finished goods that will be sold at retail. The equipment and supplies used or consumed in this inspection would be exempt because the “in process” materials are “materials or products” as they are related to the objects that will be “com[ing] to rest in finished goods inventory storage.” Id.

(e) Planning, scheduling, supervision, or control of production or other exempt activities.

Example 22. A computer used by an industrial processor to schedule maintenance on exempt equipment is eligible for the industrial processing exemption.

(f) Design, construction, or maintenance of production or other exempt machinery, equipment, and tooling.

Example 23. An industrial processor uses drafting software 40% of the time to draft plans for exempt equipment and 60% of the time for drafting plans for building expansion. The drafting software would qualify for a 40% industrial processing exemption.

Example 24. An industrial processor purchases computers that will be used in the design of the final product or any component part of the final manufactured product to be sold at retail. The computers are exempt.

Example 25. Prewritten computer software is used by an engineering firm to design floor plans for an industrial processor’s equipment and machinery used in the industrial processor’s manufacturing facilities. The software is exempt.

(g) Remanufacturing.

Example 26. 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 qualifies for the industrial processing exemption 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.

Example 27. A company purchases used driveshafts to be sold to automobile parts retailers. The company only cleans the driveshafts and then resells the driveshafts to the automobile parts retailers. The equipment and supplies consumed in the cleaning of the driveshafts would not qualify for the industrial processing exemption because the activity of merely cleaning the driveshafts would not qualify as remanufacturing.

Example 28. XYZ Tire LLC purchases equipment and supplies used to retread old tires, which are then sold at retail. The equipment and supplies are exempt.

Example 29. ABC Body Shop is primarily engaged in the business of providing auto-body repairs to vehicles involved in collisions. ABC uses paint when making these repairs. ABC does not sell the repaired automobile parts or repaired vehicles at retail (or to others for resale at retail) but charges for the new paint it applies to the repaired parts as part of the overall price for its repair services. ABC is not an “industrial processor” and is not engaged in “industrial processing” as its transactions involve the sale of a service. Therefore, the equipment and supplies purchased by ABC to perform the repair services are not eligible for the industrial processing exemption.

(h) Processing of production scrap and waste up to the point it is stored for removal from the plant of origin.

Example 30. A heat treating company uses chemicals in performing its industrial 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 because they are used to treat production waste up to the point it is stored for removal from the plant of origin.

Example 31. An industrial processor collects its own production waste from several small containers near the industrial processing equipment and stores this waste in a large container for pickup by a waste removal company or a recycler. The waste removal company or recycling company dumps the waste from the large container into its own trucks. The small containers located near the industrial processing equipment are exempt and the large container is taxable.

Example 32. An industrial processor collects its own production waste from several small containers near the industrial processing equipment and stores this waste in a large container. The industrial processor then bales the production waste into bundles and places these bundles in a storage area to be picked up by a recycling company. The equipment and supplies used or consumed in the baling of the production waste qualifies for the exemption. As in the prior example, the small containers located near the industrial processing equipment are exempt. In this example, however, the large container is also exempt because the scrap has not come to rest until it is placed in bundles and put in a storage area.

Example 33. A waste removal company is hired to remove waste or scrap from an industrial processor after the waste and scrap have come to rest in storage for removal. The equipment and supplies used or consumed by the waste removal company are taxable.

(i) Recycling of used materials for ultimate sale at retail or reuse.

MCL 205.54t(3)(i) and MCL 205.94o(3)(i) limit exempt recycling to that which is performed upon used materials for ultimate sale at retail or reuse such that “the recycled materials must themselves be sold at retail or reused.” TOMRA II, 342 Mich App at 400.

Example 34. A plastics manufacturing company grinds up production scrap to be reused for two purposes, first as a raw material in its own industrial process, and second, as a raw material to be sold to other industrial processors. The grinding equipment used in the first process and the second process would qualify for the industrial processing exemption.

Example 35. ABC purchases reverse vending machines (e.g., bottle return machines) through which the returned containers are essentially destroyed and subsequently used as raw material for different products rather than being sold at retail or reused by ABC. The reverse vending machines are not engaged in exempt recycling for purposes of the industrial processing exemption and are taxable.

(j) Production material handling.

Example 36. An industrial processor manufactures steel bolt castings at one of its plants. These castings are taken by a forklift to another building at its plant site for grinding. The forklift is exempt because production material handling includes in-process movement of production materials (and interplant movement of in-process materials within the same legal entity). See also TOMRA II, 342 Mich App at 400-401 and n 5 for discussion of “production material” and production material handling, generally.

Example 37. An industrial processor manufactures steel bolt castings at one of its plants. These castings are taken by a forklift to a nearby plant of one of its subsidiary corporations for grinding. The forklift would not qualify for the exemption because the bolts are not shipped within the same legal entity.

Example 38. An industrial processor manufactures steel bolt castings at its primary plant. These castings are shipped by truck to one of its own divisions located several miles away. The division performs grinding operations on the castings and then returns the castings to the primary plant for further processing. In-process shipping and receiving within the same legal entity is exempt. Therefore, any equipment or supplies consumed by either the primary plant or the division in the shipping and receiving of in-process parts is exempt. The truck would not qualify for an industrial processing exemption, regardless of whether it is owned by the company or a third party, because it is a licensed highway vehicle.

(k) Storage of in-process materials.

Example 39. 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. See also TOMRA II, 342 Mich App at 400-401 and n 5 for discussion of “in-process materials” and storage of in-process materials generally.

(l) Production, manufacturing, or recycling of aggregate by the property, and for the purpose, described in MCL 205.54t(4)(i) or MCL 205.94o(4)(i) if that aggregate is subject to use tax. See Examples 60-64.

F. Statutorily Enumerated Activities that Do Not Constitute Industrial Processing

As with the specific statutorily enumerated activities that constitute industrial processing, the industrial processing exemption also lists specific activities under MCL 205.54t(6) and MCL 205.94o(6) that generally do not qualify as industrial processing regardless of whether the activity meets the general definition of “industrial processing.” Under certain circumstances, the taxable use (e.g., under subsection (6)) and exempt use (e.g., under subsection (3) or (8)(b)) may occur simultaneously, thereby requiring apportionment of the exemption as explained further in Part B of this RAB. See DTE, 498 Mich at 55, and RAB 2018-4.

These statutorily enumerated non-industrial processing activities are as follows:

(a) Purchasing, receiving, or storage of raw materials.

Example 40. Manufacturer purchases prewritten computer software to manage its receipt and storage of raw materials inventory. The software is not eligible for the industrial processing exemption.

Example 41. A chrome plating company receives parts from another industrial processor. The chrome plating company applies chrome finish to the industrial processor’s parts and then ships the parts back to the industrial processor. The receiving and shipping activities of the chrome plating company are taxable activities because the company is receiving raw material. The receiving and shipping activities of the industrial processor are also taxable activities because the in-process movement of materials is not within the same legal entity. If the plating company and the industrial processor were separate divisions or plants of the same legal entity, the receiving and shipping activities of the separate divisions or plants would be exempt.

(b) Sales, distribution, warehousing, shipping, or advertising activities.

Example 42. ABC purchases equipment for an automated system to efficiently handle its customer fulfillment processes in its warehouse for products ultimately sold at retail. The equipment is not eligible for the industrial processing exemption.

Example 43. A public relations firm is hired by an industrial processor to conduct a market and consumer survey to forecast future consumer demand for its products and the survey is used by the industrial processor in its production scheduling. The equipment and supplies used or consumed by the public relations firm in conducting the survey are taxable.

Example 44. A computer used by an industrial processor to schedule employees’ overtime equalization in the plant is taxable as an administrative function. The computer is taxable regardless of whether the employees are working with exempt industrial processing equipment or in a taxable administrative function.

Example 45. Computer software used by a manufacturer to manage payroll and accounting for plant operations and personnel is taxable as accounting or administrative activities.

(d) Design, engineering, construction, or maintenance of real property and nonprocessing equipment.

Example 46. A vehicle parts manufacturer purchases a small tractor to install and maintain landscaping at its manufacturing facility. The tractor would not be exempt as it is being used for construction or maintenance of real property.

Example 47. Computers used by an architectural firm to design a building for an industrial processor’s manufacturing plant are not exempt.

Example 48. Computers used by lumber wholesalers or lumberyards to determine the stress loads for floor joists on load bearing walls are not exempt.

(e) Plant security, fire prevention, or medical or hospital services.

Example 49. An industrial processor has a fire protection sprinkler system installed in the ceiling in their plant. The sprinkler system is excluded from the industrial processing exemption as realty. The fact that the sprinkler system serves to protect the industrial processing area does not exempt the sprinkler system under industrial processing.

G. Property that is Eligible for the Industrial Processing Exemptions

The industrial processing exemption provides that certain property is eligible for the exemption regardless of whether the property might otherwise fall under the list of excluded property in MCL 205.54t(5) or MCL 205.94o(5). See Total Foundations, p 4-5. The following property enumerated under MCL 205.54t(4) and MCL 205.94o(4) fits within this category:

(a) Property that becomes an ingredient or component part of the finished product to be ultimately sold at retail or affixed to and made a structural part of real estate located in another state.

(b) Machinery, equipment, tools, dies, patterns, foundations for machinery or equipment, or other processing equipment used in an industrial processing activity and in their repair and maintenance.

Example 50. A contractor purchases photovoltaic panels, racking systems, and various anchoring hardware, such as ground screws and steel piles, in connection with the installation of solar panels for its client that will be used exclusively for the generation of electricity to be sold by its client at retail. Because the anchoring hardware will constitute a “foundation” for the solar panels and related equipment, these purchases are eligible for the industrial processing exemption. Equipment that is used for the generation of electricity to be sold at retail is eligible for a 100% exemption for industrial processing.

Example 51. Same facts as Example 50, but instead of the electricity that is generated being exclusively sold at retail, the contractor’s client will use some of the electricity to power an electric vehicle charging station that is not available to the public but used to recharge the client’s own vehicles. In addition, the contractor purchases batteries, that will be placed on foundations, that will be used by the client for storing the electricity it generates until needed and also used in connection with the client’s electrical system’s transmission or distribution phases. The equipment purchased by the contractor is subject to apportionment to account for the non-exempt use related to the vehicle charging station and the transmission and distribution. As explained in RAB 2018-4, equipment that is used for the transmission of electricity to be sold at retail is eligible for a 60% exemption for industrial processing and equipment used for distribution of electricity to be sold at retail is eligible for a 50% or 25% industrial processing exemption.

Example 52. XYZ Homes is a manufacturer of lighting components that are installed in modular homes sold at retail through dealers. Equipment purchased by XYZ Homes that are used to produce these components are eligible for the exemptions.

Example 53. An industrial processor uses lubricating oils in the processing equipment. The lubricating oils are exempt.

Example 54. A taxidermist purchases materials which it uses or consumes for developing molds, tanning, and treating animal skins, and crafting artificial eyes, teeth, etc. for the animal mounts and displays it creates for retail sale. These materials qualify for the industrial processing exemption as they are used or consumed in the process of mounting or producing the taxidermist’s products.

(d) Tangible personal property not permanently affixed and not becoming a structural part of real estate in Michigan, that becomes a part of, or is used and consumed in installation and maintenance of, systems used for an industrial processing activity.

(e) Fuel or energy used or consumed for an industrial processing activity

Example 55. An industrial processor consumes electricity in its industrial processing activities and its taxable non-industrial processing activities. The industrial processor is billed a lump sum for the electricity. If the industrial processor consumes 30% of the electricity in an industrial processing function, 30% of the total amount billed for electricity would be exempt as industrial processing.

Example 56. ABC Concrete Manufacturing Co purchases fuel for its concrete mixer trucks that are used to mix and agitate sand, gravel, water, and cement as part of its concrete manufacturing business. The fuel is used both to propel the concrete mixer trucks on the roads and to turn the drum which mixes and agitates the various substances described above. The concrete is either sold at retail by ABC to other contractors or is used by ABC to pour foundations for industrial processing machinery and equipment in its own construction contracts. ABC may claim a limited industrial processing exemption for its fuel purchases by apportioning the exemption between the fuel used to propel the truck (taxable) and the fuel used to turn the drum (exempt).

Example 57. Same facts as Example 56, except that ABC also consumes some of the concrete to pour driveways and parking lots for its construction projects located in Michigan. ABC remits use tax on the concrete used in these projects. With the enactment of 2023 PAs 27 and 28, ABC may also claim a limited industrial processing exemption for its fuel purchases by apportioning the exemption between the fuel used to propel the truck (taxable) and the fuel used to turn the drum (exempt) to mix and agitate the concrete used for this purpose because it remitted use tax on the concrete.

(f) Machinery, equipment, or materials used within a plant site or between plant sites operated by the same person for movement of tangible personal property in the process of production. Property exempt under this subdivision includes front end loaders, forklifts, Pettibone lifts, skid steers, multipurpose loaders, knuckle-boom log loaders, tractors, and log loaders used to unload logs from trucks at a sawmill site for the purpose of processing at the site and to load lumber onto trucks at a sawmill site for purposes of transportation from the site.

Example 58. Industrial Processor uses portable racks in shipping in-process materials between plant sites operated by Industrial Processor. Sometimes this involves placing the racks on licensed highway vehicles for transportation to the other plant sites. In the first situation, the racks are exempt. However, racks that are only used when attached to licensed highway vehicles are taxable because the racks are part of the vehicle and are excluded from the exemption.

(g) Office equipment, including data processing equipment, used for an industrial processing activity.

Example 59. An engineer for an industrial processor uses a hand-held calculator in the plant to verify tolerances on in-process parts. The calculator is exempt.

(h) Tangible personal property used or consumed in an industrial processing activity to produce alcoholic beverages that are sold at retail by that industrial processor through its own locations. See Example 75.

(i) Property, regardless of MCL 205.54t(6)(d) or MCL 205.94o(6)(d), that performs an industrial processing activity upon an aggregate product or material that will be used as an ingredient or component part for the construction, maintenance, repair, or reconstruction of real property in Michigan if that aggregate product or material is subject to use tax.

Example 60. ABC Construction Co seeks to purchase an aggregate crusher that will process reclaimed asphalt into a quality and grade that will be used by ABC to manufacture new aggregate products. ABC will use the new aggregate products in its road and bridge construction and repair projects in Michigan. The crusher is exempt because ABC, as a manufacturer contractor, will be liable for use tax on the aggregate products as the consumer of those products. ABC is an industrial processor using the crusher for an industrial processing activity.

Example 61. Acme Corp is a contractor hired by a Michigan municipality to repave various parking lots located in Michigan which are owned by the municipality. Acme Corp hires Service LLC to tear up the old pavement in the parking lots to reclaim the old concrete and then crush and screen the reclaimed concrete into a useful material from which Acme Corp will manufacture new concrete that it will use for paving the parking lots. Acme Corp is an industrial processor. The equipment used by Service LLC is exempt because it is being used to perform an industrial processing activity (under MCL 205.54t(3)(l) or MCL 205.94o(3)(l)) for or on behalf of Acme Corp, an industrial processor, and the new concrete manufactured by Acme Corp and used in repaving the parking lots is subject to use tax as Acme Corp is the consumer of the concrete as a manufacturer-contractor.

Example 62. Road Builder LLC has numerous contracts with local government road commissions and uses its machinery and equipment solely for such contracts and under the circumstance described in this example. Road Builder LLC is hired by the road commission for a Michigan county government to crush reclaimed road materials into aggregate products that the road commission will use to reconstruct a county highway. Once the aggregate materials are processed by Road Builder LLC, they are used by road commission to produce a final aggregate product. After road commission produces this product, it will repair, resurface, or reconstruct the county roads with its own machinery and equipment. Road Builder’s machinery and equipment is not exempt because the aggregate materials are not subject to use tax under these facts as they are being used and consumed by an exempt entity (e.g., county government, see MCL 205.94(1)(g)).

Example 63. New Paths, Inc. is a construction contractor hired by a Michigan golf course to repave the cart paths on the golf course. New Paths uses various machines on this project. The first machine scrapes off 2” of the old asphalt from the top layer of the paths, crushes and processes the asphalt into smaller pieces and immediately deposits these smaller asphalt pieces back down on the paths rather than having them used as an ingredient to manufacturer a new asphalt product. A second machine applies various substances on these asphalt pieces and a third machine follows up to flatten and roll these treated asphalt pieces into new, smooth golf cart paths. The machines are eligible for the industrial processing exemption because the asphalt materials are subject to use tax under these facts even though the tax base is negligible.

Example 64. A road builder purchases equipment to manufacture asphalt that it will use to construct a highway in Michigan. Although there is no ultimate sale at retail of the manufactured asphalt, the road builder will pay use tax on the asphalt it consumes in constructing the highway. Therefore, the equipment is exempt.

H. Property Excluded from Eligibility for the Industrial Processing Exemption

The industrial processing exemption provides that the following property is generally not eligible for the exemption regardless of whether the property might otherwise be used in industrial processing activities, MCL 205.54t(5); MCL 205.94o(5):

(a) Tangible personal property permanently affixed and becoming a structural part of real estate in Michigan including building utility systems such as heating, air conditioning, ventilating, plumbing, lighting, and electrical distribution, to the point of the last transformer, switch, valve, or other device at which point usable power, water, gas, steam, or air is diverted from distribution circuits for use in industrial processing. See Brunt.

Please note Total Foundations and Examples 50-51 of this RAB, which illustrate that a foundation (and materials used to fabricate the foundation) for eligible industrial processing machinery or equipment is exempt, and the eligible machinery or equipment affixed to that foundation are exempt, notwithstanding that the foundation is affixed to and made a structural part of real estate.

Please also note that materials (e.g., tire shreds, gravel, liners, and piping) and equipment (e.g., bulldozers and compactors) used to erect landfill waste cells or to transport or process waste for the operation of a landfill may be eligible for the industrial processing exemption. See Granger.

Example 65. An industrial processor purchases an electrical transformer which converts electricity to usable voltage. This transformer then feeds a press used for industrial processing and also feeds the general lighting system of the office area. This transformer is not eligible for the exemption as it falls within the exclusion for building utility systems.

Example 66. This same industrial processor purchases a second transformer which converts electricity to usable voltage. Forty percent of the energy from this transformer feeds exempt industrial processing equipment and the remaining sixty percent feeds taxable equipment used in the shipping department. This transformer is subject to apportionment. Therefore, this transformer is 40% exempt for industrial processing and 60% taxable.

(b) Office equipment, including data processing equipment used for nonindustrial processing purposes.

Example 67. A plant supervisor’s desk is taxable as office furniture.

(d) An industrial processor’s own product or finished good that it uses or consumes for purposes other than industrial processing.

Example 68. A printing company uses its printing equipment 10% of the time to produce promotional brochures and office supplies which are used internally and 90% of the time to produce brochures for ultimate sale at retail. The printing company may claim the industrial processing exemption on 90% of property that is eligible for the industrial processing exemption.

(e) Tangible personal property used for receiving and storage of materials, supplies, parts, or components purchased by the user or consumer.

(f) Tangible personal property used for receiving or storage of natural resources extracted by the user or consumer.

(g) Vehicles, including special bodies or attachments, required to display a vehicle permit or license plate to operate on public highways, except for a vehicle bearing a manufacturer's plate or a specially designed vehicle, together with parts, used to mix and agitate materials at a plant or job site in the concrete manufacturing process.

Example 69. An automobile manufacturer allows some of its manufactured vehicles to be used by its engineers for testing and analytical purposes. These vehicles bear a manufacturer’s plate. The vehicles qualify for the industrial processing exemption. The manufacturer should maintain records such as daily logs, analytical reports, etc. to substantiate this exempt use.

Example 70. An automobile manufacturer allows some of its manufactured vehicles to be used by its officers or other key executives for personal use and also to be used by dignitaries at sporting or other events. The automobiles used for these purposes would not qualify for the industrial processing exemption even if the vehicles bore a manufacturer’s plate because they are not used for an industrial processing purpose.

Example 71. Contractor purchases a cement mixer truck to be used at a plant or job site for the purpose of manufacturing concrete that is sold at retail. The cement mixer, including tires and repair parts attached to the concrete mixer truck or to the mixer, are exempt. Supplies used or consumed by the concrete mixer truck such as oil, antifreeze, windshield washer solvent, transmission fluid, brake fluid, etc., are subject to tax. That portion of fuel used by the concrete mixer truck to propel the vehicle on the roads is subject to tax, while fuel used to turn the drum on the concrete mixer truck may be exempt depending on the use of the cement. See Examples 56 and 57.

(h) Tangible personal property used for the preparation of food or beverages (except alcohol, see MCL 205.54t(4)(h) or MCL 205.94o(4)(h)) by a retailer for ultimate sale at retail through its own locations.

Example 72. A company has a central commissary where it prepares much of the food that will be sold through its several restaurants. The restaurants are separate divisions of the company, and each division maintains its own records. The central commissary ships the prepared food to the various restaurant locations. The corporation does not qualify for an industrial processing exemption because the food is sold through its own locations.

Example 73. A bakery makes retail sales of its baked goods at its own location. The property and equipment used to prepare these baked goods for retail sale are taxable.

Example 74. A distributor of produce purchases equipment used to hasten the ripening of bananas that it sells to retailers. The equipment qualifies for the industrial processing exemption.

Example 75. A vineyard sells its wine to consumers at its own retail locations. The property and equipment used by the vineyard to prepare the wine is exempt.

(i) Tangible personal property used or consumed for the preservation or maintenance of a finished good once it first comes to rest in finished goods inventory storage.

Example 76. An industrial processor of perishable food products purchases dry ice, refrigerators, and freezers to keep its finished products from spoilage while in finished goods inventory storage. The dry ice, refrigerators and freezers are not eligible for the industrial processing exemption.

Example 77. Same facts as Example 76, except the dry ice, refrigerators, and freezers are used 75% of the time to preserve perishable food items while they are “in process” and used 25% of the time to keep those food items from spoilage after they come to rest in finished goods inventory storage. The dry ice, refrigerators, and freezers are eligible for a limited exemption of 75% to apportion between their exempt use and non-exempt use.

Example 78. A manufacturer shrink-wraps its products before the product is placed in finished goods inventory (inventory has come to rest). This use of the shrink-wrap equipment and materials is eligible for the industrial processing exemption.

Example 79. When a manufacturer of meat products receives an order from its customers (e.g., restaurants) it removes products from its finished goods inventory, packs them with dry ice, and shrink-wraps the products for shipment on nonreturnable pallets. This use of the shrink-wrap equipment and materials (e.g., shrink-wrap and dry ice) is not eligible for the exemption.

(j) Returnable shipping containers or materials, except as provided in MCL 205.54t(4)(f) or MCL 205.94o(4)(f) regarding equipment or materials used within a plant site or between plant sites operated by the same person for the movement of tangible personal property in the process of production.

A “container” means the articles and devices in which tangible personal property is placed for shipment and delivery, such as wrapping materials, bags, cans, twines, gummed tapes, barrels, boxes, tote boxes, pallets, racks, bottles, drums, carboys, cartons, sacks, and materials from which the containers are manufactured. Mich Admin Code, R 205.68(1). Non-returnable containers used to ship and deliver products to a sub-processor that is a separate person are taxable, while non-returnable containers and other shipping supplies used to ship and deliver products to a sub-processor that is the same person (e.g., a corporate division) are not taxable because they are used for “in-process” material handling. If the same container is used for both taxable and non-taxable movements, the exemption is subject to apportionment as described in Part B of this RAB.

Example 80. An industrial processor uses specially designed totes to ship certain types of its finished goods to its vendors. This industrial processor also has a beer brewing business and uses kegs to ship its beer to its vendors. As part of its contracts with these vendors, the totes and kegs are returned to the industrial processor to be used for future deliveries. The totes and kegs are not eligible for the industrial processing exemption.

Example 81. An industrial processor uses containers for shipment of in-process parts from one of its plant sites to another of its plant sites. These containers, when used in in-process storage, or movement within or between plant sites operated by the same person, are exempt. This includes “dunnage,” which is defined in Treasury’s rules as being for a single use only, of bracings, blocking, skidding, shoring, and other materials.” Mich Admin Code, R 205.68(5). But, dunnage, when used in shipment of a product to a customer, is taxable. Treasury does not consider one-time use of packaging material (e.g., popcorn, Styrofoam, peanuts) to be “dunnage.”

Example 82. An industrial processor uses pallets. Forty percent of the time, the pallets are used in the plant to move in-process materials. The remaining 60% of the time the pallets are used in shipping the finished product to its customers. The pallets would qualify for a 40% industrial processing exemption.

(k) Tangible personal property used in the production of computer software originally designed for the exclusive use and special needs of the purchaser.

Example 83. Production of customized software is considered a service and therefore the industrial processing exemption is not allowable on the equipment or supplies used in the production of custom software. Also, as a service, the equipment, supplies, and direct material costs are taxable.

In addition to the statutory list of ineligible property set forth above, reverse vending machines (commonly known or referred to as bottle return machines) may also be ineligible for the exemption as discussed in TOMRA II. See also Example 35 of this RAB .

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