September 10, 2015 | By Keith Martin in Washington, DC

Michigan electric and gas utilities will have to pay sales and use taxes on some of their new equipment, the state Supreme Court said.

The sales and use tax rate in Michigan is 6%.

At issue was the scope of an “industrial processing exemption.” Sales taxes are collected on sales of equipment in the state. Use taxes are collected on equipment bought out of state and brought into the state for use in Michigan.

Equipment that is used in “industrial processing” is exempted from taxes. It is industrial processing to convert or condition “tangible personal property by changing the form, composition, quality, combination, or character of the property for ultimate sale at retail.” Electricity and gas are considered tangible products. The utilities sell them to retail customers. Lower courts in Michigan held in cases involving Detroit Edison and Consumers Energy that the exemption extends to equipment that the utilities use to transmit and distribute electricity and gas to their customers because the utilities alter the character of the electricity or gas while moving it through power lines and gas mains.

The state Supreme Court disagreed after hearing an appeal of the case involving Detroit Edison.

The state tax department assessed Detroit Edison for back taxes of $13.1 million plus interest for the period January 1, 2003 through September 30, 2006. The Supreme Court said the exemption only applies to the extent equipment is used in an exempt activity, and “[s]ales, distribution, warehousing, shipping, or advertising” of the product after processing are not exempt activities. It sent the case back to the trial court to figure out the percentage of use of the transmission and distribution equipment in these downstream functions.

The case is Detroit Edison Co. v. Michigan Department of Treasury. The Supreme Court released its decision in late July.