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A Better Partnership
December 09, 2014

COA: Industrial processing sales tax exemption not available for telecommunications companies’ purchase of electricity

The Court of Appeals, in MidAmerican Energy Co. v. Dep't of Treasury, No. 316902, concluded that telecommunications companies’ purchase of electricity is not exempt from sales tax under the industrial processing exemption because telecommunications signals are not “tangible personal property.” The Court of Appeals therefore affirmed the Court of Claims which granted the Department of Treasury summary disposition in consolidated actions brought by a number of telecommunications companies. 

The Sales Tax Act (“the Act”), MCL 205.51 et seq., imposes a 6 percent tax on “all persons” who sell “tangible personal property” “at retail.”  MCL 205.52(1).  The Act defines “tangible personal property” as “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(q).  To qualify for the industrial processing exemption, MCL 205.54t(1)(a), the industrial processing taxpayer must sell consumers “tangible personal property,” not simply use “tangible personal property.”
The telecommunications companies first claimed that they convert and modify electricity, which is tangible personal property, into telecommunications signals, which they assert are another form of electricity that is thus also tangible personal property.  The Court of Appeals disagreed, concluding that the presence of both “water” and “steam” in the definition of “tangible personal property” demonstrates that, when the Legislature intends to include two different forms of the same matter, specifically lists out each form.  In contrast, because the Legislature only used the term “electricity,” it did not intend to include the term “telecommunications signals,” which are electricity at only some stages of the transmission process, within the term “electricity.”
Second, the plaintiffs claimed that the telecommunications signals “can be seen, weighed, measured, felt, or touched, or [are otherwise] perceptible to the senses,” making them “tangible personal property” in their own right.  The Court of Appeals rejected this argument as well.  The presence of the terms “signals” and “telecommunications service” in the Use Tax Act demonstrates that the Legislature is aware of telecommunications signals and would have chosen to specifically include them in the Sales Tax Act’s definition of “tangible personal property” if it had wanted to do so.  Further, the plaintiffs failed to present convincing evidence that telecommunications signals “can be seen, weighed, measured, felt, or touched, or [are otherwise] perceptible to the senses.”  The Court specified that the terms “weighed” and “measured” only apply to the weighing and measuring of an object that is directly “perceptible to the senses,” as almost any form of matter can be “weighed” or “measured” with special equipment.  Finally, in instances where the Legislature wished to classify as “tangible personal property” things that are difficult or impossible to sensually perceive, e.g., electricity, it made specific provision for them in MCL 205.51a(q).  Thus, the absence of “telecommunications signals” from the definition indicates that the Legislature had no intention of classifying telecommunications signals as tangible personal property.

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