The opinion is designated "FOR PUBLICATION" and is subject to revision until final publication. This case involves TOMRA of North America, Inc. as the plaintiff-appellant against the Department of Treasury as the defendant-appellee in consolidated appeals concerning three orders from the Court of Claims that granted summary disposition in favor of the Department. The core of the plaintiff's argument is that the Court of Claims incorrectly determined that TOMRA's recycling machines and their repair parts do not qualify for the industrial-processing tax exemption outlined in MCL 205.54t of the General Sales Tax Act and MCL 205.94o of the Use Tax Act. Additionally, TOMRA contests the imposition of a negligence penalty under MCL 205.23(3). The Court affirms the decisions of the Court of Claims.
The background details indicate that TOMRA sells and leases container-recycling machines that process aluminum cans, glass bottles, and plastic bottles. The machines read UPC codes, sort containers, and prepare them for transport to recycling facilities. The procedural history includes multiple appeals regarding TOMRA's requests for refunds of sales tax and penalties imposed by the Department of Treasury. The trial court dismissed initial cases, but upon appeal, the dismissals were reversed, leading to further proceedings. Ultimately, the trial court ruled that TOMRA was not eligible for the industrial-processing exemption because the machines' activities occur before the "industrial process" begins, as defined by the relevant statutes.
Plaintiff's appeal resulted in a reversal and remand by the Court to the trial court for further proceedings regarding the definition of "industrial processing" as per MCL 205.54t and MCL 205.94o. The Court clarified that activities categorized as "industrial processing" can occur outside the usual timeframe defined in Subsection (7)(a) and highlighted that planning and scheduling are considered part of these activities. Following the appeal to the Supreme Court, the ruling was affirmed, indicating that the tasks performed by TOMRA's machines occur prior to the industrial process commencement, but the temporal limitation in Subsection (7)(a) does not restrict the activities described in Subsection (3).
The trial court subsequently granted summary disposition in favor of the Department of Treasury, explaining that TOMRA was ineligible for the industrial-processing exemption for three reasons: neither TOMRA nor its customers qualified as "an industrial processor," the machines did not conduct an "industrial processing" activity under Subsection (3), and TOMRA was not entitled to a refund as claimed under MCL 205.73(4). Additionally, the court upheld a negligence penalty imposed on TOMRA under MCL 205.23(3).
Plaintiff appealed three separate trial court orders, asserting that its machines and parts qualify for the industrial-processing exemption and challenging the negligence penalty. The appeals were consolidated, and the Court concluded that TOMRA's machines do not satisfy the criteria for "industrial processing" under Subsection (3) and that the imposition of the negligence penalty was appropriate. The standard of review for the decisions involved de novo evaluations on summary disposition and statutory interpretation. The GSTA imposes a 6% tax on retail sales, and the UTA imposes a similar tax on the use, storage, or consumption of tangible personal property, both allowing for various exemptions.
The industrial-processing exemption aims to prevent double taxation on retail products by clarifying the conditions under which tangible personal property is exempt from sales tax. Under MCL 205.54t of the GSTA, the exemption applies to sales of tangible property used in industrial processing, which includes activities such as inspection, quality control, remanufacturing, recycling, material handling, and storage of in-process materials. "Industrial processing" involves transforming tangible property for retail sale or manufacturing products for retail.
On appeal, plaintiff TOMRA contends that its machines engage in industrial processing as defined in various subsections of MCL 205.54t and MCL 205.94o. However, the trial court found that TOMRA’s machines do not perform inspection, quality control, or testing as outlined in Subsection (3)(d). This subsection specifies that such activities must be conducted on materials or products that are destined for finished goods inventory, meaning that the inspection must occur on items that will ultimately be sold to consumers. The court illustrated this point by contrasting TOMRA’s operations with a lawnmower manufacturer’s quality control measures. Although TOMRA's machines assess attributes of returned containers, they do not meet the criteria for industrial processing as defined in the statute.
The activity in question is categorized as "testing," but it does not qualify as "testing of materials or products" under Subsection (3)(d). The returned containers are compacted and sent to recycling centers for use as raw materials, not tested products. Consequently, the operations of the machines do not meet the criteria of Subsection (3)(d). Regarding Subsection (3)(g), the trial court correctly determined that the machines do not engage in "remanufacturing," which involves overhauling or repairing products for retail sale. The Supreme Court's ruling in TOMRA III clarified that the machines simply collect raw materials, lacking the affirmative actions necessary for remanufacturing.
Additionally, while the act of returning containers could be seen as "recycling" in a general sense, it does not fit Subsection (3)(i) because the recycled materials are not sold at retail or reused; they are destroyed and transformed into raw materials for different products. Therefore, the machines' activities do not satisfy Subsection (3)(i).
Furthermore, the operations do not align with Subsection (3)(j) concerning "production material handling" or Subsection (3)(k) regarding "storage of in-process materials," as the law distinguishes between raw materials and those used in production. The Supreme Court reiterated that the machines merely collect raw materials, and do not perform downstream production activities.
The plaintiff argues that the machines meet the broader definition of "industrial processing" outlined in Subsection (7)(a), asserting Subsection (3) is non-exhaustive. While this argument holds some merit, it is unnecessary to resolve because the Supreme Court has already established that the machines' function occurs prior to the industrial process, disqualifying them from Subsection (7)(a). Thus, the plaintiff cannot demonstrate that the machines perform any enumerated "industrial processing" activities under Subsection (3), leading to the conclusion that TOMRA does not qualify for the exemption.
TOMRA container-recycling machines do not qualify as performing "industrial processing" under Subsection (3) or meet the general definition in Subsection (7)(a). Consequently, the machines and their repair parts are not exempt from tax under MCL 205.54t or MCL 205.94o. Regarding negligence penalties, MCL 205.23(3) imposes a penalty for deficiencies due to negligence, which can be waived if the taxpayer demonstrates reasonable cause. The Department of Treasury must prove negligence, while the taxpayer must demonstrate facts to negate this finding. TOMRA argued against the negligence penalty, stating it had a reasonable disagreement with the Department about tax obligations. However, the trial court upheld the penalty based on TOMRA's inadequate record-keeping, which showed discrepancies between gross sales and tax returns, lack of evidence for exempt sales, and failure to maintain proper records of exempt transactions as required by MCL 205.62(4). The trial court's conclusions on these points were upheld, affirming both the rejection of the industrial-processing exemption and the imposition of the negligence penalty against TOMRA.
