Michigan Court of Appeals: Recycling machines do not qualify for Industrial Processing Exemption

A Michigan Court of Appeals on July 21, 2022 upheld a ruling that the seller of recycling machines did not qualify for the state’s industrial processing exemption.

Judges Jane Markey, Mark Boonstra and Michael Riordan agreed with the trial-court ruling that “the machines at issue did not perform a specifically enumerated ‘industrial processing’ activity…As a result, the machines and attendant repair parts were not subject to the industrial processing exemption.”

The court also reaffirmed the Michigan Department of Treasury’s imposition of a negligence penalty, noting the plaintiff’s “negligent” record-keeping, which “complicated the Department of Treasury audit and otherwise hindered the (Department’s) performance of its duties in association with this tax matter… The failure to maintain consistent documents in this regard, when a relatively high amount of sales tax was at stake, indicated a ‘lack of due care’ by plaintiff.”

Industrial processing machines, as defined in Michigan, should perform any of the following functions: inspection, quality control, testing, manufacturing, remanufacturing, production material handling, recycling of used materials for ultimate retail sale.

Failure to meet the definitions of these actions results in not qualifying the sales tax exemption and paying the 6% tax on those purchases of equipment. Additionally, in this case, the court ruled to uphold a negligence penalty based on the record-keeping of the taxpayer, which is not a common occurrence.

To determine if equipment qualifies for the exemption, taxpayers should consider the activity in which the equipment is engaged instead of looking at the type of business the equipment owner operates. Taxpayers should maintain and produce adequate records to substantiate claims for sales tax exemptions when defending those claims with the state.

(TOMRA of North America, Inc v Dep’t of Treasury, 325 Mich App 289, 292; 926 NW2d 259 (2018)

Posted on August 11, 2022