The following opinion is presented on-line for informational use only and does not replace the official version. (Mich Dept of Attorney General Web Site - www.ag.state.mi.us) STATE OF MICHIGAN
JENNIFER M. GRANHOLM, ATTORNEY GENERAL
PLANT REHABILITATION
AND INDUSTRIAL DEVELOPMENT
DISTRICTS:
TAX EXEMPTION:
WORDS AND PHRASES:
Eligibility of merchant electric generating plant for tax exemption
Industrial property
A merchant electric generating plant is not an "industrial property" eligible for an industrial facility tax exemption under the plant rehabilitation and industrial development districts act.
Opinion No. 7027
August 5, 1999
Honorable Mary Ann Middaugh
State Representative
The Capitol
Lansing, Michigan 48913
Honorable Mark Schauer
State Representative
The Capitol
Lansing, Michigan 48913
You have asked whether a merchant electric generating plant is an "industrial property" eligible for an industrial facility tax exemption under the plant rehabilitation and industrial development districts act.
Information supplied with your request describes the plant which generates electrical power for sale on the open market. The plant is owned and operated by a commercial enterprise which engages in the production of electricity as its primary business purpose. The commercial enterprise is not a regulated public utility.
The plant rehabilitation and industrial development districts act (Act), 1974 PA 198, MCL 207.551 et seq; MSA 7.800(1) et seq, provides for the establishment of industrial development districts and the exemption from certain taxes. Local governmental units may establish industrial development districts "upon a written request filed by the owner or owners of 75% of state equalized value of the industrial property located within a proposed . . . district." Section 4(2). (Emphasis added.) Upon the establishment of an industrial development district, the owner of an industrial property within the district may apply for an industrial facilities exemption (section 5) which, if granted, exempts the facility1 from ad valorem real and personal property taxes. Section 8.
Section 2(6) defines the term "industrial property" as used in the Act:
(6) "Industrial property" means land improvements, buildings, structures, and other real property, and machinery, equipment, furniture, and fixtures or any part or accessory thereof whether completed or in the process of construction comprising an integrated whole, the primary purpose and use of which is the manufacture of goods or materials or the processing of goods and materials by physical or chemical change; the operation of a theme and recreation park located in an industrial park district; property acquired, constructed, altered, or installed due to the passage of proposal A in 1976; the operation of a hydroelectric dam by a private company other than a public utility; or agricultural processing facilities. For certificates granted between April 1, 1986 and September 30, 1986, industrial property shall include the real and personal property of a nonprofit cooperative power corporation that is used as an office, warehouse, or similar facility, and that is located on land owned by the nonprofit cooperative corporation.
(Emphasis added.)
Section 2(10) defines the term "manufacture of goods or materials" as used in the Act:
(10) "Manufacture of goods or materials" or "processing of goods or materials" means any type of operation that would be conducted by an entity included in the classifications provided by division D, manufacturing, of the standard classification manual of 1972, published by the United States office of management and budget, regardless of whether the entity conducting such an operation is included therein.
(Emphasis added.)
The federal classification "division D, manufacturing," does not include enterprises engaged in the production of steam or electricity. Standard Industrial Classification Manual of 1972 (Washington, DC: United States Government Printing Office 1972), pp 57-218. Rather, the manual lists "electricity" and "steam" establishments under division E, Transportation, Electric, Gas and Sanitary Services.
Statutes affording tax exemptions must be strictly construed. Kendall Memorial School v Grand Rapids, 11 Mich App 231, 240-241; 160 NW2d 778 (1968). A prior opinion of this office concluded that a cogeneration facility, i.e. a facility that produces both steam and electricity, is not an industrial property eligible for a tax exemption under the Act because it does not have, as its required primary purpose, the "manufacture of goods or materials or the processing of goods and materials" as those terms are defined in section 2(10). OAG, 1987-1988, No 6473, p 214 (October 7, 1987). The same analysis must be applied to the merchant electric generating plant described in your question.
I am mindful that section 2(6) of the Act provides for the property of certain power producers to be included within the definition of "industrial property," thereby qualifying for the tax exemption afforded by section 5. The language which includes these types of facilities, however, is expressly limited to the following:
[T]he operation of a hydroelectric dam by a private company other than a public utility. . . . For certificates granted between April 1, 1986 and September 30, 1986, industrial property shall include the real and personal property of a nonprofit cooperative power corporation that is used as an office, warehouse, or similar facility, and that is located on land owned by the nonprofit cooperative corporation.
The merchant electric generating plant described in your question meets neither of these two descriptions. It is not a hydroelectric dam, and it is not a nonprofit cooperative power corporation seeking an exemption for the 1986 window period. The Legislature's clear mandate in section 2(10) of the Act -- that only those entities whose activities are included within the federal classification "division D, manufacturing," are to be considered as engaging in "manufacture of goods or materials or processing of goods and materials" -- compels the conclusion that other non-included types of power producers do not qualify for the tax exemption afforded by the Act.
The opinion noted above, OAG, 1987-1988, No 6473, was issued prior to the decision in Great Lakes Sales, Inc v State Tax Comm, 194 Mich App 271, 283; 486 NW2d 367 (1992). In that case, the court held that an activity qualified for the tax exemption afforded by the Act even though its operations were not classified under "division D, manufacturing." The court found that despite the fact that the entity seeking the tax exemption was a wholesaler of floor coverings, and thus not within division D, the activity for which the exemption was sought (the cutting and storing of floor coverings) was the same type of activity undertaken by the actual manufacturer of such floor coverings in the manufacturing process, which is within division D. Since the "activity" for which the tax exemption was sought was the same type of activity in which the original manufacturer was engaged during the manufacturing process, the activity of cutting and storing floor coverings qualified for the exemption afforded by the Act. The court stressed that the primary purpose of the applicant's operation, rather than the primary purpose of its overall business, was determinative of eligibility for an industrial facility tax exemption.
The situation presented in your question is distinguishable from that in Great Lakes Sales. In this situation, the primary activity for which the tax exemption is sought is the production of electrical power. No entities contained within the federal classification "division D, manufacturing" have, as their primary activity, the production of power. Manufacturers within division D may, for various business reasons, produce their own power, but such power production is not the primary purpose of the manufacturing operation. Entities which engage in the production of power as a business are contained in division E, not division D, and are therefore not entitled to an industrial facility tax exemption under the Act. Thus, the decision in Great Lakes Sales, Inc, does not compel a conclusion different from that reached in this office's earlier opinion, OAG, 1987-1988, No 6473.
It is my opinion, therefore, that a merchant electric generating plant is not an "industrial property" eligible for an industrial facility tax exemption under the plant rehabilitation and industrial development districts act
The Legislature is, of course, free to amend the Act if it determines that this activity should be eligible for an industrial facility tax exemption.
JENNIFER M. GRANHOLM
Attorney General
1 The exemption, if granted, exempts the industrial facility but not the land on which it is located.