Revenue Administrative Bulletin 2026-6

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.

Introduction: Electricity and the Industrial-Processing Exemption

The General Sales Tax Act, MCL 205.51 et seq., and the Use Tax Act, MCL 205.91 et seq., are complementary tax laws that levy a tax on the sale at retail, use, storage, or consumption of “tangible personal property.” Each act defines “tangible personal property” to include “electricity.” MCL 205.51a(r), MCL 205.92(1)(k). And each act generally taxes “the transmission and distribution of electricity … if the sale is made to the consumer or user of the electricity for consumption or use rather than for resale.” MCL 205.52(2)(a), MCL 205.93a(1)(e); see also MCL 205.51(1)(d)(xv), MCL 205.92(1)(f)(xv).

Each act also creates an exemption for “industrial processing.” That term is defined, in MCL 205.54t(8)(b) and MCL 205.94o(8)(b), as follows:

“Industrial processing” means 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 [certain exempt purposes relating to aggregate]. 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.

Tangible personal property eligible for the industrial-processing exemption “is exempt only to the extent that the property is used for the exempt purpose stated in” the statutes setting out the exemption. MCL 205.54t(2), MCL 205.94o(2). If property is used for both exempt and nonexempt purposes, the exemption must be “apportioned” -  that is, “the exemption is limited to the percentage of exempt use to total use determined by a reasonable formula or method approved by [Treasury].” Id. (Note, however, that the formula or method need not be “preapproved” by Treasury.) See, e.g., RAB 2024-7, Sales and Use Tax - Industrial Processing Exemption, Example 55 (illustrating apportionment where 30% of electricity purchased at retail is consumed in an industrial process); see also RAB 2016-20, Issuance of Bulletins, Letter Rulings, and Other Guidance for Taxpayers (explaining how to request guidance from Treasury).

Under the industrial-processing exemption, electricity is exempt when it constitutes “energy used or consumed in an industrial processing activity.” MCL 205.54t(4)(e), MCL 205.94o(4)(e). See, e.g., RAB 2024-7, Example 5 (illustrating exemption for “electricity consumed”).

The exemption also applies to tangible personal property used in generation, transmission, and distribution activities involving electricity for ultimate sale at retail insofar as those activities constitute industrial processes. As for generation activities, property “used for the generation of electricity to be sold at retail is eligible for a 100% exemption for industrial processing.” RAB 2024-7, Example 50.

The industrial-processing exemption for transmission and distribution activities is described in RAB 2018-4, Sales and Use Tax - Apportionment of the Industrial Processing Exemption for Electric and Gas Providers. Those activities are performed by transmission and distribution systems, which are defined in Part I.A of RAB 2018-4 as follows:

The transmission system generally refers to the network of assets [i.e., property or equipment] that supports the bulk transport of electricity at high voltages for the purpose of efficiently moving electricity across long distances throughout the electrical grid [i.e., the interconnected system comprising the generation, transmission, and distribution systems]. The process of transmission generally begins when electricity voltage is “stepped up” to several thousand volts by transformers located at a generation plant…. Thus, the transmission system generally includes transformers, high-voltage transmission lines, transmission towers and poles, and other related equipment that alters or moves electricity up to the point where electricity is converted to distribution voltages.

The distribution system refers to the network of assets that supports the movement and delivery of electricity to individual and business consumers. The distribution system generally begins at local distribution substations where electricity is first “stepped down” from high-voltage transmission levels. This stepped-down electricity may be delivered directly to certain consumers or it may pass through additional distribution transformers that further reduce voltage levels as necessary for consumer use…. The distribution system therefore includes substations, transformers, distribution lines, and other assets that are responsible for the alteration and subsequent delivery of electricity at levels safe for consumer use.

In contrast with property used exclusively in electricity generation, which is fully exempt, property used in transmission or distribution must be apportioned because transmission and distribution include nonexempt “distribution” and “shipping” activities. MCL 205.54t(6)(b), MCL 205.94o(6)(b); accord Detroit Edison v Treasury, 498 Mich 28, 48 (2015). Apportionment percentages for property used in a transmission system or a distribution system depend on two considerations: (1) “the relative location of assets” and (2) “the voltage levels by which assets interact with electricity in the system.” RAB 2018-4, Part I.A.

Based on those considerations, property used in a transmission system may be apportioned as 60% exempt. See RAB 2018-4, Part I.A.a. For property in a distribution system, the apportionment percentage depends on whether the property carries electricity (or, like a utility pole, is inextricably involved in carrying electricity) and whether it substantially alters a quality or character of the electricity. See RAB 2018-4, Part I.A.b; cf. Detroit Edison, 498 Mich at 41 (noting that “altering the voltage [of electricity] constitutes an industrial-processing activity” because “altering the voltage transforms the ‘quality’ and ‘character’ of the electricity”). RAB 2018-4 thus permits the following exemptions:

• A 90% exemption applies for property that carries electricity and substantially alters voltage, like stations, substations, transformers, and related components.
• A 25% exemption applies for property that carries electricity and does not substantially alter voltage, like poles and pole-top equipment as well as meters, wires, cabling, and related equipment.
• A 50% exemption applies for equipment that doesn’t carry electricity, like tools and supplies used in installation, repair, and maintenance as well as property used for supervision, quality control, and personal safety.

Apportionment in the context of generation, transmission, and distribution is illustrated in Example 51 of RAB 2024-7.

Be aware that this RAB focuses only on the application of the industrial-processing exemption from the taxes imposed by the GSTA and the UTA in the context of electricity derived from solar power. This RAB does not describe an exemption from the tax imposed by the General Property Tax Act, MCL 211.1 et seq. For guidance on claiming an exemption, see RAB 2024-11, Sales and Use Tax Exemption Claim Procedures and Formats. (Note that activities involving electricity, including electricity to be ultimately sold at retail, might also be subject to laws not administered by Treasury. See, e.g., 1939 PA 3, MCL 460.1 et seq.)

Electricity Derived From Solar Power and the Industrial-Processing Exemption

1. How does the industrial-processing exemption apply in the context of electricity derived from solar power?

The industrial-processing exemption applies in the context of electricity derived from solar power the same way it applies in the context of electricity derived from other energy sources. That is, the energy source driving the generation of electricity (e.g., carbon-based fuel, wind, sunlight, geothermal, nuclear) does not change how the industrial-processing exemption applies, including that the electricity must be consumed in an industrial process or ultimately sold at retail and that the exemption may be subject to apportionment.

2. Does the availability of the industrial-processing exemption depend on whether the person claiming the exemption is a public utility?

No. The availability of the industrial-processing exemption doesn’t depend on whether the person claiming the exemption is a public utility. In other words, the exemption doesn’t distinguish between public utilities and other persons.

3. What tangible personal property involved in deriving electricity from solar power is eligible for the industrial-processing exemption?

Tangible personal property involved in deriving electricity from solar power is eligible for the industrial-processing exemption under the same terms as tangible personal property involved in deriving electricity from other power sources. For example, photovoltaic (aka “solar”) panels, which absorb sunlight and convert it to electricity, are eligible for the exemption when used to generate electricity consumed in an industrial process or ultimately sold at retail.

Property that constitutes “foundations” for the tangible personal property involved in deriving electricity for solar power also is eligible for the industrial-processing exemption. MCL 205.54t(4)(b), MCL 205.94o(4)(b); see also RAB 2024-7, Example 50 (illustrating treatment of “anchoring hardware” for solar panels). For more information on what constitutes an exempt “foundation,” see Part G of RAB 2024-7.

4. Is solar-power equipment that powers an electric-vehicle charging station eligible for the industrial-processing exemption?

Yes, the industrial-processing exemption applies to tangible personal property that generates electricity dispensed from an electric-vehicle charging station, if the electricity dispensed is ultimately sold at retail (or consumed in an industrial process). As stated above, eligibility for the exemption does not depend on the nature of the energy source driving the generation. It follows that solar-power equipment powering such charging stations are eligible for the exemption.

Example 1. A shopping center purchases solar panels and related equipment to power electric-vehicle charging stations, which are made available at no cost to shoppers. The electricity produced by the equipment is not consumed in an industrial process or sold at retail; therefore, neither the solar panels nor the related equipment is eligible for the industrial-processing exemption.

Example 2. A shopping center purchases solar panels and related equipment to power electric-vehicle charging stations. The fee to use a charging station is based on the amount of electricity dispensed. The electricity produced by the equipment is sold at retail; therefore, the equipment, including the solar panels, is eligible for the industrial-processing exemption.

Example 3. A shopping center purchases solar panels and related equipment to power electric-vehicle charging stations. The fee to use a charging station is based on how long a vehicle is connected to a charging station, without regard for how much electricity is dispensed. The electricity produced by the equipment is sold at retail; therefore, the equipment, including the solar panels, is eligible for the industrial-processing exemption.

Example 4. A shopping center purchases solar panels and related equipment to power both the shopping center and several electric-vehicle charging stations, which may be used for a fee. Some of the electricity produced by the equipment is sold at retail, but the rest is consumed by the shopping center; therefore, the equipment, including the solar panels, is eligible for the industrial-processing exemption, but the exemption must be apportioned between the exempt use (producing electricity sold at retail) and nonexempt uses (consumption).

The owner of an electric-vehicle charging station may resell the electricity it purchases from the utility. See generally MCL 460.10q(4).

Example 5. A shopping center purchases solar panels and related equipment to power electric-vehicle charging stations. To provide electricity when solar power is not available, the charging stations draw power from a public utility’s grid. The fee to use a charging station is based on the amount of electricity dispensed. The electricity produced by the equipment is sold at retail; therefore, the equipment, including the solar panels, is eligible for the industrial-processing exemption.

5. Can the industrial-processing exemption be claimed by a public utility’s customer who generates excess electricity and transfers it to the utility’s grid?

Yes, if the electricity transferred is ultimately sold at retail. State law requires each public electrical utility to administer a “distributed generation” program, under which certain customers of the utility can transfer unconsumed electricity derived from renewable sources to the utility’s grid. See generally MCL 460.1171 et seq. That transferred electricity will be ultimately sold at retail; therefore, the property used to derive that electricity is eligible for the industrial-processing exemption. But if any of the consumed electricity is used for a nonexempt purpose, the exemption must be apportioned.

Example 6. A manufacturer participates in its public utility’s distributed-generation program. The manufacturer purchases solar panels and related equipment to build a solar array on the roof of its factory. Of the electricity generated from the solar array, 85% is used to power an industrial process, 10% is used for nonexempt purposes, and 5% is transferred to the utility’s grid. The equipment, including the solar panels, is 90% exempt under the industrial-processing exemption.

Example 7. A shopping center participates in its public utility’s distributed-generation program. The shopping center purchases solar panels and related equipment to build a rooftop solar array. Of the electricity generated from the solar array, 90% is consumed by the shopping center and 10% is transferred to the utility’s grid. The equipment, including the solar panels, is 10% exempt under the industrial-processing exemption.

For residential participants in a distributed-generation program, property used to generate electricity from renewable sources may be apportioned as 5% exempt.

Example 8. A homeowning couple participates in their public utility’s distributed-generation program. They purchase solar panels and related equipment to build a solar array on the roof of their garage. The couple may claim a 5% exemption on the equipment, including the solar panels.