The opinion, designated "FOR PUBLICATION," is subject to revision before final publication in the Michigan Appeals Reports. In the consolidated appeals involving TOMRA of North America, Inc. as the plaintiff-appellant against the Department of Treasury as the defendant-appellee, the Court of Appeals affirms the Court of Claims' summary disposition favoring the Department. The plaintiff argues that its container-recycling machines and associated repair parts qualify for an industrial-processing tax exemption under MCL 205.54t of the General Sales Tax Act and MCL 205.94o of the Use Tax Act. Additionally, the plaintiff contests a negligence penalty imposed under MCL 205.23(3).
The background reveals a lengthy procedural history, beginning with TOMRA's request for significant tax refunds related to sales taxes paid between 2003 and 2008, and a later request for refunds for the 2011 tax period. The trial court dismissed the initial cases, but this dismissal was reversed on appeal, leading to further proceedings. Ultimately, the trial court ruled that TOMRA's machines do not qualify for the industrial-processing exemption because they engage in activities before the commencement of the industrial process as defined in the relevant statutes.
Plaintiff TOMRA appealed a trial court decision concerning tax exemptions for industrial processing activities, resulting in a reversal and remand for further proceedings by the Court of Appeals. The court clarified that certain "industrial processing" activities, as defined in MCL 205.54t(3) and MCL 205.94o(3), can occur outside the standard timeframe outlined in Subsection (7)(a) of those statutes. Specifically, activities like planning and scheduling may precede the physical movement of raw materials for processing. The Supreme Court affirmed the appellate ruling, confirming that the tasks performed by TOMRA's machines occur before industrial processing begins but determined that the timing restrictions in Subsection (7)(a) do not apply to activities in Subsection (3).
Following the remand, the trial court ruled against TOMRA, stating three reasons: neither TOMRA nor its customers qualified as "industrial processors," the machines did not perform qualifying industrial processing activities, and TOMRA was not entitled to a refund as requested under MCL 205.73(4). The trial court also upheld a negligence penalty against TOMRA under MCL 205.23(3). TOMRA appealed multiple trial court orders, arguing that its machines and repair parts should qualify for the industrial-processing exemption and contesting the negligence penalty.
The consolidated appeals concluded that TOMRA’s machines did not engage in "industrial processing" activities under Subsection (3) of the relevant statutes and that the Department of Treasury acted correctly in imposing the negligence penalty. The court's review of the case, including statutory interpretation and summary disposition, was conducted de novo. The general sales tax (GSTA) and use tax act (UTA) impose a 6% tax on retail sales and the use, storage, or consumption of tangible personal property but provide for various exemptions.
The industrial-processing exemption aims to prevent double taxation of retail products by clarifying the use of sales tax in industrial processing contexts. To determine applicability, focus is placed on the activity carried out by the equipment rather than the owner's business type. Under MCL 205.54t, the exemption applies to sales of tangible personal property used in industrial processing, including activities such as inspection, quality control, remanufacturing, recycling, production material handling, and storage of in-process materials. "Industrial processing" is defined as transforming tangible property for retail sale, commencing when raw materials are moved for processing and ending when finished goods are stored.
TOMRA contends that its machines engage in industrial processing activities under specific subsections of MCL 205.54t and MCL 205.94o, but the trial court found otherwise. Specifically, for Subsection (3)(d), which pertains to inspection and quality control, the court ruled that TOMRA's machines do not perform these activities as defined. The term "materials or products" refers to the finished goods sold to consumers, and inspection must occur on items destined for finished goods inventory storage. Although TOMRA's machines evaluate the quality of returned containers, this does not qualify as testing "materials or products" under the relevant legal definition.
Returned containers are compacted by machines and sent to recycling centers for use in different products, thus classifying them as tested "raw materials" rather than "materials or products." This distinction means the activities of these machines do not fall under Subsection (3)(d) or Subsection (3)(g), as remanufacturing requires overhauling or repairing for retail sale, which TOMRA’s machines do not perform. The Supreme Court's ruling in TOMRA III emphasizes that these machines merely collect raw materials, not engage in activities that qualify as remanufacturing or recycling under Subsection (3)(i), which mandates that recycled materials be sold at retail or reused. Instead, the returned containers are destroyed and used as raw materials, failing to meet the criteria for retail sale or reuse. Furthermore, the machines do not conduct activities related to production material handling (Subsection (3)(j)) or storage of in-process materials (Subsection (3)(k)). Although the plaintiff contends that the machines meet the general definition of "industrial processing" in Subsection (7)(a), the Supreme Court has previously determined that the machines operate before the industrial process begins, disqualifying them from this exemption. Ultimately, the plaintiff cannot demonstrate that the machines engage in the specific industrial processing activities listed in Subsection (3), which is a necessary requirement for exemption.
TOMRA container-recycling machines do not qualify as performing "industrial processing" under relevant legal definitions, specifically not falling under Subsection (3) or the general definition in Subsection (7)(a). Consequently, the machines and their repair parts are not eligible for the industrial-processing exemption outlined in MCL 205.54t or MCL 205.94o. Regarding negligence penalties, MCL 205.23(3) stipulates that if a tax deficiency arises from negligence (without intent to defraud), a penalty of $10.00 or 10% of the deficiency, whichever is greater, may be applied. The taxpayer can request a waiver if they demonstrate reasonable cause for the deficiency. The Michigan Administrative Code defines negligence as the failure to act with the care a reasonable person would exercise.
TOMRA contends that its tax obligation misunderstandings stem from a reasonable disagreement with the Department of Treasury. However, the trial court upheld the negligence penalty based on TOMRA's inadequate record-keeping, which led to discrepancies between gross sales reported in accounting records and tax returns, insufficient evidence of exempt sales, and non-compliance with record-keeping requirements for exempt transactions. The trial court found TOMRA's negligence complicated the audit process, indicating a lack of due care, thus affirming the penalty. The trial court's conclusions regarding the machines and the negligence penalty were deemed correct and are upheld.
