                          STATE OF MICHIGAN

                            COURT OF APPEALS



TOTAL FOUNDATIONS, LLC,                                              UNPUBLISHED
                                                                     March 22, 2016
               Plaintiff-Appellee,

v                                                                    No. 322983
                                                                     Court of Claims
DEPARTMENT OF TREASURY,                                              LC No. 13-000022-MT

               Defendant-Appellant.


Before: GLEICHER, P.J., and MURPHY and OWENS, JJ.

PER CURIAM.

       Defendant Department of Treasury (Department) appeals as of right the judgment of the
Court of Claims ordering the Department to refund use taxes paid by plaintiff Total Foundations,
LLC (TFL), in the amount of $74,950, plus statutory interest. The dispute concerns whether
TFL is entitled to the industrial-processing exemption in MCL 205.94o for purposes of the Use
Tax Act (UTA), MCL 205.91 et seq. The court found that TFL was entitled to the exemption
and ordered the Department to refund the full amount of its assessment. We affirm in part,
reverse in part, and remand for further proceedings.

                                 I. FACTUAL BACKGROUND

        TFL is in the business of installing foundations and earth retention systems. The
particular business that is the subject of dispute in this case is TFL’s installation of foundations
for International Transmission Company (ITC). ITC’s business consists of transmitting power
from power generation facilities to individual and business consumers of electricity. Expert
testimony established that power is generated at facilities owned by entities like DTE Energy at
approximately 20,000 volts before going through transformers that step up the voltage to
200,000 to 300,000 volts. The power is then transported from the generating facilities on high
transmission towers of up to 200 feet to electrical substations. At a substation, various
equipment, such as transformers that are mounted on steel poles, steps down the voltage to
approximately 115,000 volts. The electricity is then transmitted through transmission towers to
another substation that further reduces the voltage. The process continues until the voltage is
reduced to 120 to 240 volts, the level at which it is in a form usable for households and
businesses.



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        TFL’s work involves installing the foundations to which transmission towers and steel
poles at substations are attached. TFL begins the process by drilling a hole into the ground,
which can vary from 8 feet to 60 feet deep. A rebar cage is then placed into the hole and
backfilled with concrete. At some point, an anchor bolt cage is inserted into the hole before it is
finished being filled with concrete. Once the foundation is in place, ITC attaches its
transmission towers or steel poles used at substations. At the substations, the various
transformers and other equipment used to step down the voltage are then attached to the steel
poles that are attached to TFL’s foundations.

        During the period at issue, August 1, 2007, through July 31, 2011, TFL claimed that the
materials used to build and install the foundations were exempt from the use tax under the
industrial-processing exemption. The Department’s audit concluded that TFL was not entitled to
the exemption. An informal conference was conducted that upheld the Department’s
determination, and a final assessment was issued. TFL then initiated this action in the Court of
Claims. Following a bench trial, the court concluded that it was bound by this Court’s opinion in
Detroit Edison Co v Dep’t of Treasury, 303 Mich App 612, 614; 844 NW2d 198 (2014), aff’d in
part, rev’d in part 498 Mich 28 (2015), wherein the panel held that Detroit Edison Company
(DTE) was entitled to the UTA’s industrial-processing exemption for machinery and equipment
located outside of DTE’s generation plants. This Court determined that the exemption applied
because electricity leaves a generation plant at extremely high and unusable voltage levels and
the machinery and equipment outside of a plant are then used “in the activity of converting and
conditioning [the] electricity by changing . . . [its] quality, form, character, or composition . . .
for ultimate sale at retail up until the time the electricity reaches its customers’ meters, at which
point it becomes a finished good.” Id. at 627. The Court of Claims here ruled that the towers
and steel poles were necessary pieces of equipment in the industrial processing of electricity and
that these towers and poles could not stand without being affixed to the concrete foundations
TFL installed. The trial court held that TFL was, therefore, entitled to the industrial-processing
exemption and entered judgment in favor of TFL, requiring the Department to refund the use
taxes paid pursuant to its final assessment in the amount of $74,950, plus statutory interest. The
Department appeals as of right.

                                  II. STANDARD OF REVIEW

         This Court reviews for clear error a trial court’s factual findings in a bench trial, whereas
the trial court’s conclusions of law are reviewed de novo. Alan Custom Homes, Inc v Krol, 256
Mich App 505, 512; 667 NW2d 379 (2003). We review de novo issues concerning the
construction of the UTA. Guardian Indus Corp v Dep’t of Treasury, 243 Mich App 244, 248;
621 NW2d 450 (2000).

                                          III. ANALYSIS

       Under the UTA, a six-percent tax is imposed on a consumer’s use, storage, and
consumption of tangible personal property. Detroit Edison Co v Dep’t of Treasury, 498 Mich
28, 35; 869 NW2d 810 (2015). The UTA’s industrial-processing exemption provides, in
pertinent part, as follows:


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              (1) The tax levied under this act does not apply to property sold to the
       following after March 30, 1999, subject to subsection (2):

                                              * * *

              (b) A person, whether or not the person is an industrial processor, if the
       tangible personal property is intended for ultimate use in and is used in industrial
       processing by an industrial processor. [MCL 205.94o(1)(b).]

MCL 205.94o(7)(a) defines “industrial processing” as

       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 use or for use in the manufacturing of a product to be
       ultimately sold at retail or affixed to and made a structural part of real estate
       located in another state. 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.

       In Detroit Edison, 498 Mich at 40-42, our Supreme Court, in affirming that part of this
Court’s ruling that DTE was entitled to an industrial-processing exemption, held:

               We conclude that altering the voltage conditions the electricity for
       ultimate sale at retail. The industrial processing exemption inquires whether
       tangible personal property constitutes a finished good. The parties' various experts
       agree that the voltage levels at which the electricity is initially generated are not in
       their final form, such that they would be appropriate for ordinary use by the
       consumer. Thus, altering the voltage conditions the electricity for ultimate sale at
       retail because the electricity is not finished and, therefore, not suitable for
       consumption until that voltage has been lowered.

                Furthermore, altering the voltage transforms the quality and character of
       the electricity. The parties' experts agree that the tangible personal property
       generated by plaintiff—whether it is characterized as electricity or electric
       power—is composed of both voltage and current. Put simply, electricity is
       measured, at least in part, by voltage. Because electricity is measured in this way,
       voltage is an essential attribute, and an inherent feature, of electricity. Altering the
       voltage therefore alters the quality and character of the electricity. Accordingly,
       altering the voltage constitutes an industrial-processing activity by satisfying the
       initial sentence of MCL 205.94o(7)(a).

               The next inquiry required under MCL 205.94o(7)(a) is whether the
       industrial processing of the electricity outside the generation plant satisfies the
       second sentence, which provides that 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

                                                 -3-
       inventory storage. Defendant does not dispute that industrial processing begins
       before the electricity has been transmitted from the generation plant. And
       defendant has identified no point at which the electricity comes to rest in
       inventory storage. And nowhere does the record otherwise suggest that electricity
       ever comes to rest in inventory storage. Moreover, electricity is never a finished
       good until the voltage has been reduced to a level approximating 120/240 volts
       for the typical residential consumer and 480 volts for the typical industrial
       consumer. We conclude as a result that industrial processing of electricity does
       not become complete until final distribution to the consumer because there is
       simply no point within the electric system at which finished goods first come to
       rest in finished goods inventory storage before that point.

                For these reasons, the industrial processing of electricity under MCL
       205.94o(7)(a) occurs throughout the electric system from its initial generation
       until its final distribution to the consumer. [Citations, quotation marks, alteration
       brackets, and emphasis omitted.]

        The machinery and equipment, or tangible personal property, at issue in Detroit Edison
included transformers, fuses, circuit breakers, cables, and poles, all as employed to impact or
monitor the voltage levels in order to ensure consumer receipt of a usable product. Detroit
Edison, 498 Mich at 33. Here, the tangible personal property at issue is the raw materials used to
build the foundations to which the steel poles and towers are attached or mounted.

        Clearly, ITC qualified as an industrial processor under the UTA and the Supreme Court’s
construction of the UTA in Detroit Edison, and the Department does not appear to dispute that
matter. It is also clear, for the same reasons and apparently absent dispute, that ITC was
generally engaged in industrial processing. And in order for TFL, which itself was not an
industrial processor, to be entitled to the industrial-processing exemption, it was necessary to
show that the foundation materials or foundations constituted tangible personal property used in
industrial processing by industrial-processor ITC. MCL 205.94o(1)(b) (use tax does not apply to
“[a] person, whether or not the person is an industrial processor, if the tangible personal property
is intended for ultimate use in and is used in industrial processing by an industrial processor”).
Under the reasoning in Detroit Edison, TFL’s foundations that held in place electrical poles and
towers were intended for use and actually used in industrial processing conducted by ITC. The
dispute that arose concerns two subsections of MCL 205.94o that were not directly addressed in
Detroit Edison and that effectively reflect a distinction between exempt tangible personal
property and nonexempt real property.

        MCL 205.94o(4)(b) provides that “[p]roperty that is eligible for an industrial processing
exemption includes . . . [m]achinery, equipment, tools, dies, patterns, foundations for machinery
or equipment, or other processing equipment used in an industrial processing activity and in their
repair and maintenance.” (Emphasis added.) This language plainly encompasses TFL’s
foundations upon which ITC mounts its equipment. However, MCL 205.94o(5)(a) provides that
“[t]angible personal property permanently affixed and becoming a structural part of real estate in
this state” is not eligible for the industrial-processing exemption. This language suggests that
foundation materials and completed foundations are not exempt. The Court of Claims
determined that because MCL 205.94o(4)(b) more specifically describes TFL’s foundations, its

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inclusive language took precedence over the broader general language in MCL 205.94o(5)(a).
On appeal, the Department argues that the Supreme Court’s decision in Detroit Edison renders
the “general/specific” canon of statutory construction inapplicable. The Department contends
that this Court should instead interpret the apparent statutory conflict in its favor due to the
principle that tax exemptions are to be construed strictly against the taxpayer. See Sandy Pines
Wilderness Trails, Inc v Salem Twp, 232 Mich App 1, 13; 591 NW2d 658 (1998).

       Where a statute contains a specific provision as well as a related but more general
provision, the specific provision governs. Detroit Edison, 498 Mich at 43-44. The Supreme
Court in Detroit Edison determined that this principle of construction did not apply when
addressing the Department’s argument that DTE’s equipment was used to distribute electricity,
thereby falling under an exception to industrial processing for distribution activities, MCL
205.94o(6)(b), which is a more specific provision than the general industrial-processing
provision. Id. at 43-45. The Detroit Edison Court explained why it rejected application of the
“general/specific” rule of construction:

               [T]he rule only applies when there is some statutory tension or conflict
       between two possible treatments of a subject, e.g., when an agricultural statute
       sets different tax rates for “fruits” and “apples.” There is no such conflict or
       tension here. Rather, there are subjects or activities (“industrial processing”) that
       fall within the category of “industrial processing,” and there are other subjects or
       activities (“distribution” and “shipping”) that do not fall within the category of
       “industrial processing.” These categories are separate and distinct, and there is
       nothing to suggest that one category can be viewed as being more “general” or
       “specific” than the other. In short, the nonexempt activities in MCL
       205.94o(6)(b) are in no way within the scope of MCL 205.94o(7)(a), and the
       exempt activity in MCL 205.94o(7)(a) is in no way within the scope of MCL
       205.94o(6)(b). [Detroit Edison, 498 Mich at 44-45.]

        Although it is a bit difficult to distinguish Detroit Edison, we conclude that with respect
to a foundation for equipment there is indeed irreconcilable statutory tension or conflict between
MCL 205.94o(4)(b) and MCL 205.94o(5)(a) comparable to the “fruits” and “apples” example in
Detroit Edison. MCL 205.94o(5)(a) is plainly intended to preclude an industrial-processing
exemption for real property or tangible personal property that has come to obtain the
characteristics or features of real property, like fixtures. And a foundation has attributes typical
of real property and not tangible personal property, with foundation materials – at one time being
tangible personal property – effectively becoming part of the real estate on formation of a
foundation. That said, the Legislature expressly chose to allow for an exemption in regard to
foundations for equipment, MCL 205.94o(4)(b), essentially treating a foundation, when used in
connection with equipment, as tangible personal property. The more specific provision is MCL
205.94o(4)(b), given that it particularly covers “foundations for . . . equipment,” while MCL
205.94o(5)(a) concerns real estate and real estate fixtures in general. The Department’s
proffered interpretation would render entirely nugatory or meaningless the foundation language
in MCL 205.94o(4)(b). Accordingly, the industrial-processing exemption applies. However, the
distribution of electricity, which plainly is being accomplished through ITC’s operation along
with industrial processing, as assisted by TFL’s foundation work, dictates a remand under
Detroit Edison for an allocation as between the property’s use to distribute electricity
                                                -5-
(nonexempt use) and its use for industrial processing (exempt use), so as to determine the
percentage of exempt use to total use in setting the extent of the exemption/tax.

       MCL 205.94o(2) provides that property “is exempt only to the extent that the property is
used for the exempt purpose stated in this section[,] [with] [t]he exemption . . . [being] limited to
the percentage of exempt use to total use [as] determined by a reasonable formula or method
approved by the department.” The Detroit Edison Court observed:

                To determine the “percentage of exempt use to total use,” MCL
       205.94o(2), it is necessary to ascertain both the use of the property for exempt
       activity and the sum of the uses of the property for exempt and nonexempt
       activities. Then, the “percentage of exempt use to total use” must be determined
       on the basis of “a reasonable formula or method approved by the
       department.” MCL 205.94o(2). Once this percentage has been identified, the
       industrial-processing exemption “is limited to” this percentage.

              In the case at hand, the record shows that the “exempt use” of the electric
       system includes, at a minimum, alteration of the voltage under MCL
       205.94o(7)(a). And “total use” of the electric system is the sum of the uses for
       such exempt activity plus the nonexempt “distribution” and “shipping” activities
       under MCL 205.94o(6)(b). [Citation omitted.]

        Accordingly, we reverse the Court of Claims to the extent that it applied the industrial-
processing exemption absent the allocation required by MCL 205.94o(2) when it awarded TFL a
full refund of the use taxes paid. We remand for proceedings consistent with the directives set
forth by our Supreme Court in Detroit Edison.

        Affirmed in part, reversed in part, and remanded to the Court of Claims for further
proceedings consistent with this opinion. We do not retain jurisdiction. Neither party having
fully prevailed on appeal, we decline to award taxable costs under MCR 7.219.



                                                              /s/ Elizabeth L. Gleicher
                                                              /s/ William B. Murphy
                                                              /s/ Donald S. Owens




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