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 - http://www.ag.state.mi.us)



STATE OF MICHIGAN

DANA NESSEL, ATTORNEY GENERAL

MCL 324.5901 et seq.

AIR POLLUTION CONTROL FACILITY;
TAX EXEMPTION:

Agency responsibilities
regarding applications for
tax exemption certificates.



The State Tax Commission, taking into consideration the Department of Environment, Great Lakes, and Energy’s findings whether machinery, equipment, or structures are a “facility” under Part 59 of the Natural Resources and Environmental Protection Act, 1994 PA 451, as amended (NREPA), MCL 324.5901 et seq., determines both the amount a tax exemption “shall be reduced to the extent of any commercial or productive value derived from any materials captured or recovered by any air pollution control facility” under MCL 324.5902(2), and “the total acquisition cost of the facility entitled to exemption” under MCL 324.5904(3).

Whether a cost is an “acquisition cost of the facility entitled to exemption” under MCL 324.5904(3) is a fact-specific inquiry that should be addressed through the administrative application and hearing process established in Part 59 of the Natural Resources and Environmental Protection Act, 1994 PA 451, as amended, MCL 324.5901 et seq., with the burden of proof on the claimant seeking the exemption, and because the Department of Environment, Great Lakes, and Energy’s guidance document is inconsistent with this principle and is otherwise inaccurate, it should be revised or withdrawn.

The Department of Environment, Great Lakes, and Energy’s responsibility to make a finding under MCL 324.5903 and its responsibility to respond to a request for approval from the State Tax Commission under MCL 324.5902(2), refer to different stages of the statutory process created by Part 59 of the Natural Resources and Environmental Protection Act, 1994 PA 451, as amended, MCL 324.5901 et seq., and the Department’s finding is a necessary precursor to its approval.

The State Tax Commission is responsible under Part 59 of the Natural Resources and Environmental Protection Act, 1994 PA 451, as amended, MCL 324.5901 et seq., for initially determining whether an application is complete and, based on its preliminary review, for communicating with the applicant if more information is needed. The Department of Environment, Great Lakes, and Energy is obligated to inform the Commission when an application the Commission preliminarily found complete is, in fact, incomplete because technical information needed by the Department is missing. The Commission is responsible for informing an applicant that they need to submit the additional information identified by the Department to submit a complete application. The Department may also communicate directly with the applicant.

Opinion No. 7315                                      July 22, 2021                                    

Director Liesl Eichler Clark

Department of Environment,

Great Lakes, and Energy

You have asked five questions concerning the respective responsibilities of the Department of Environment, Great Lakes, and Energy (Department) and the State Tax Commission (Commission) under Part 59, Air Pollution Control Facility; Tax Exemption, of the Natural Resources and Environmental Protection Act, 1994 PA 451, as amended (NREPA), MCL 324.5901 et seq. (Part 59).[1] 

A.   A review of the text of Part 59.

Answering your questions requires a general review of Part 59, which authorizes air pollution control facilities to be exempted from real and personal property taxes that would otherwise apply under the General Property Tax Act, 1893 PA 206, MCL 211.1 et seq. (Tax Act).  In addition, Part 59 provides that tangible personal property purchased and installed as a component part of an air pollution control facility is exempt from sales taxes under the General Sales Tax Act, PA 1933 PA 137, MCL 205.51 et seq., and use taxes under the Use Tax Act, 1937 PA 34, MCL 205.91 et seq.  MCL 324.5904. 

Section 5901 of Part 59, MCL 324.5901, defines an exempt “facility” as “machinery, equipment, structures, or any part or accessories of machinery, equipment, or structures, installed or acquired for the primary purpose of controlling or disposing of air pollution that if released would render the air harmful or inimical to the public health or to property within this state.”  That same section excludes air conditioners, dust collectors, fans, and other similar facilities that are “for the benefit of personnel or of a business.”  MCL 324.5901. 

Section 5902 of Part 59, MCL 324.5902(1), establishes a process by which the owner of a facility may seek a tax exemption by filing an application with the Commission for a “pollution control tax exemption certificate.”  The application shall be filed in a manner and form prescribed by the Commission.  MCL 324.5902(1).  Applications must contain “plans and specifications” of the facility, including all materials making up the facility, a list of all equipment acquired or to be acquired for pollution control, and proposed operating procedures.  Id. 

Before the Commission issues a pollution control tax exemption certificate, it must seek the “approval” of the Department.  MCL 324.5902(2).  The Commission “shall issue a certificate” only if the Department “finds” that the subject facility “is designed and operated primarily for the control, capture, and removal of pollutants from the air, and is suitable, reasonably adequate, and meets the intent and purposes of” Michigan’s air pollution control laws.  MCL 324.5903.  Before issuing a certificate, the Commission must notify the Department of Treasury and the assessor of the taxing unit where the facility is or will be located and shall provide the applicant and the assessor an opportunity for a hearing.  MCL 324.5902(2). 

When issued, the tax exemption certificate “shall state the total acquisition cost of the facility entitled to exemption.”  MCL 324.5904(3).  Tax exemptions granted under Part 59 “shall be reduced to the extent of any commercial or productive value derived from any materials captured or recovered by” the subject facility.  MCL 324.5902(2).

B.   Questions 1 and 4: Who determines the total acquisition cost of the facility under § 5904(3), and who determines the amount a tax exemption shall be reduced under § 5902(2)?

You first ask which of the two agencies determines “the total acquisition cost of the facility entitled to exemption” under Section 5904 of Part 59, MCL 324.5904(3).  Your fourth question asks which of the two agencies determines the amount a tax exemption “shall be reduced to the extent of any commercial or productive value derived from any materials captured or recovered by any air pollution control facility” under Section 5902 of Part 59, MCL 324.5902(2).  These two questions are inextricably related and will therefore be addressed together. 

The Commission, under the Tax Act, has general supervision authority over assessing units in the state and is responsible for ensuring that all taxable property is properly assessed and valued.  MCL 211.150(1).  Towards that end, the Commission has broad authority to “examine the property, books, papers or accounts of any corporation, firm or individual owning property liable to assessment for taxes, general or specific under the laws of this state…to enable it to arrive at the true cash value of the property of such corporation, firm or individual subject to taxation under the laws of this state.”  MCL 211.148.  Moreover, the Commission may require the managing officer of any such entity to provide a sworn statement containing information sufficient for the Commission to determine the taxable value of its property.  Id.  The Commission also issues appraisal guidance for local assessing units.  MCL 211.10e.  See, e.g., State Tax Commission Guide to Basic Assessing (Nov. 2013). 

The Department, under Part 55, Air Pollution Control, of the NREPA, MCL 324.5501 et seq., is tasked with, among other things, issuing and enforcing permits to limit air pollution to protect public health and the environment.  MCL 324.5503(b) and (g).  It is also authorized to inspect facilities and to sample air pollutant emissions to determine compliance with permits.  MCL 324.5526(1).  And the Department has the power to conduct studies and research with respect to air pollution control, abatement, or prevention.  MCL 324.5503(p). 

To fully understand the interplay between these agencies’ roles, the Tax Act and Part 55 must be read in context.  “Contextual understanding of statutes is generally grounded in the doctrine of noscitur a sociis: ‘[i]t is known from its associates,’ see Black’s Law Dictionary (6th ed), p 1060.  This doctrine stands for the principle that a word or phrase is given meaning by its context or setting.”   Brown v Genesee Co Bd of Comm’rs (After Remand), 464 Mich 430, 437 (2001), quoting Tyler v Livonia Schs, 459 Mich 382, 390-391 (1999).  That context illustrates that the Commission has tax assessing and valuation responsibilities under the General Tax Act, while the Department is responsible for controlling air pollution under Part 55 of the NREPA.  Determining “the total acquisition cost of the facility entitled to exemption” from real and personal property taxes under Section 5904 of Part 59, MCL 324.5904(3), more closely aligns with the responsibilities of the Commission.

That conclusion is further supported by the decision of the Michigan Court of Appeals in City of River Rouge v EES Coke Battery, LLC, unpublished per curiam opinion of the Court of Appeals, issued December 9, 2014 (Docket No. 314789)[2].  In that case, the Court of Appeals ruled that the circuit court erred when it required the Department “to determine what amount, if any, of the tax exemption granted should be reduced for the commercial or productive value derived from materials captured or recovered by any pollution control facility.”  Id. at 7.  Instead, such calculations were to be made by the Commission after it received findings from the Department as to whether machinery, equipment, or structures are a “facility” under Part 59.  Id. at 8.  The Court noted that the Department “is only responsible for making [those]findings[.]” Id.

Although the Commission is ultimately responsible for issuing tax exemption certificates, the Department’s findings are crucial, as they establish which machinery, equipment, and structures qualify as a “facility” under Section 5901 of Part 59, MCL 324.5901, and therefore affect the Commission’s determination of the total acquisition costs of the facility entitled to exemption.  As a result, if the Department’s finding decreases the scope of a qualifying facility to less than what was proposed in an application, the finding will “lower the dollar amount of property covered by the tax exemption certificates” the Commission issues.  See City of River Rouge v DTE Elec Co, unpublished per curiam opinion of the Court of Appeals, issued May 16, 2019 (Docket No. 341331), p 6.

It is my opinion, therefore, that the State Tax Commission, taking into consideration the Department of Environment, Great Lakes, and Energy’s findings whether machinery, equipment, or structures are a “facility” under Part 59 of the Natural Resources and Environmental Protection Act, 1994 PA 451, as amended, MCL 324.5901 et seq., determines both the amount a tax exemption “shall be reduced to the extent of any commercial or productive value derived from any materials captured or recovered by any air pollution control facility” under MCL 324.5902(2), and “the total acquisition cost of the facility entitled to exemption” under MCL 324.5904(3).  

Before moving on to the remaining questions, a brief discussion of the tax exemption reduction is helpful.  Calculating the tax exemption reduction is a factual determination that can be challenging because valuing the commercial or productive value is different from valuing the air pollution control facility.  A hypothetical example illustrates this challenge.  If a gas plant installs an air pollution control device that controls air pollution in part by capturing flammable gas that can be used as fuel, that air pollution control device will qualify as a “facility” under MCL 324.5901, and the amount of productive value, i.e., avoided fuel costs, must be subtracted from the exemption amount, MCL 324.5904. 

While the value of the installed facility is calculated at one point in time and, thus, does not change, the productive value of avoided fuel costs constantly changes, in part due to the fluctuation of fuel cost and in part due to operational changes in fuel demand.  But Part 59 does not envision regular (or any) reassessment of the value of an exemption certificate.  This may be challenging for applicants and objecting municipalities that must present the Commission with sufficient evidence to determine the correct value of an exemption certificate.  In these situations, the Department’s limited role is to determine whether an air pollution control device in fact also creates commercial or productive value.  And the Commission’s different but equally limited role is to weigh the evidence presented to it, the hearing body.  MCL 324.5902(2).  Thus, the onus is ultimately on the applicants to carefully prepare applications with sufficient information to calculate all values, including the value of an exemption certificate.

C.   Question 2: What standard determines whether a cost is an acquisition cost entitled to exemption under § 5904(3)?

 

Your next question inquires as to the correct standard for deciding whether a cost is an “acquisition cost of the facility entitled to exemption” under MCL 324.5904(3).  Related to this inquiry, you provided a guidance document created by your agency, entitled “Tax Exemptions for Air Pollution Control,” and asked for clarification on which costs and equipment listed therein are acquisition costs of a facility so the Department may decide whether to revise the document.  Among the listed costs are miscellaneous costs that include administrative fees, contingency costs, engineering costs, feasibility costs, freight charges, installation costs, insurance fees, interest charges, start-up costs, legal fees, and taxes not including exempt taxes.

Neither Part 59 nor the Tax Act defines the term “acquisition cost.”  But because the acquisition cost of an exemption on a pollution control tax certificate is subtracted from the otherwise taxable “true cash value” of assessed property, it is appropriate to look to the term “true cash value” to determine the standard for determining whether a particular expense is an “acquisition cost of the facility entitled to exemption” under MCL 324.5904(3).  Although case law interpreting “true cash value” does not provide conclusive guidance for interpreting the term “acquisition cost,” because the two related terms are used and interpreted within the same valuation context, a brief discussion of “true cash value” demonstrates appropriate principles to use when interpreting “acquisition cost” as well.

The Tax Act uses the term “true cash value” to refer to the assessed value of property, consistent with the term’s usage under Michigan’s constitution.  Const 1963, art 9, § 3; MCL 211.24(b).  The Michigan Supreme Court has explained that the “general meaning” of the term, with its “long history of interpretation and settled meaning,” is “not only what may be put to valuable uses, but what has a recognizable pecuniary value inherent in itself, and not enhanced or diminished according to the person who owns or uses it.”  Washtenaw Co v State Tax Comm’n, 422 Mich 346, 370 n4 (1985). 

Towards that end, the Michigan Supreme Court has explained that there are three general approaches to valuation, namely cost less depreciation, capitalization of income, and market approach.  Antisdale v City of Galesburg, 420 Mich 265, 276, n1 (1984), citing 1 State Tax Comm Assessor’s Manual, Ch VI, pp 1–2, 4, Ch X, p 1.  However, the Court of Appeals has observed that “the determination of true cash value is not an exact science and that it often involves a reconciliation of various approaches.”  Great Lakes Div of Nat Steel Corp v City of Ecorse, 227 Mich App 379, 398 (1998).  As a result, some of the listed miscellaneous costs may be included in the valuation of a facility, depending on the factual circumstances and which approach to valuation is used. 

For example, the Court of Appeals held that whether freight, sales tax, and installation costs are included in the total cash value of a property, based on the market approach, requires specific evidence demonstrating that such costs are in fact included in market costs.  Lionel Trains, Inc v Chesterfield Twp, 224 Mich App 350, 354–55, (1997).  Relevant to the capitalization approach, the United States Supreme Court has held that legal costs may be capitalized as acquisition costs where “the origin of the claim litigated is in the process of acquisition itself.”  Woodward v Comm’r, 397 US 572, 577 (1970).  Moreover, the Michigan Court of Appeals has upheld different valuation approaches for the same type of steam and electricity generation facilities.  Compare Midland Cogeneration Venture v City of Midland, unpublished per curiam opinion of the Court of Appeals, issued February 21, 2006 (Docket Nos. 254636, 254745, 255066), p 2, with TES Filer City Station v Twp of Filer, unpublished per curiam opinion of the Court of Appeals, issued March 21, 2006 (Docket No. 258806), p 4.

In fact, the Michigan Court of Appeals has already rejected lists that predetermine what costs or items qualify for this tax exemption without regard to the facts or circumstances of each application.  See Sterling Heights v Chrysler Group, LLC, 309 Mich App 676, 687–688 (2015).  See also id., Boonstra, J., concurring.  Such presumptions run contrary to Michigan’s body of law regarding tax exemptions, which are special tax benefits that “are never presumed.”  Ladies Literary Club v City of Grand Rapids, 409 Mich 748, 754 (1980).  

As a result, the use of a generic list of items or miscellaneous expenses predetermined as “exempt” is inappropriate.  Instead, when reviewing tax exemption claims, “the burden is on a claimant to establish clearly his right to exemption” because they are “strictly construe[d]” and “cannot be made out by inference or implication but must be beyond reasonable doubt.”  Id., quoting 2 Cooley on Taxation (4th ed), s 672, pp 1403–1404.  Accordingly, under this statutory scheme, exemption applicants must prove that each included expense is properly included as part of the acquisition cost of a “facility” under MCL 324.5901.  Thus, the question of which, if any, of the miscellaneous costs may be included in the acquisition cost of a particular facility is a fact-specific inquiry that should be addressed through the administrative application and hearing process established in Part 59. 

As for the guidance document itself, it also mistakenly lists some equipment that do not qualify as a “facility” under Part 59.  Under the statute, an exempt facility must be “installed or acquired for the primary purpose of controlling or disposing of air pollution.”  MCL 324.5901.  Page 9 of the guidance document includes “equipment for safer or quieter operation of exempt equipment.”  But such equipment, no matter how beneficial, is not for the primary purpose of controlling or disposing of air pollution and therefore does not qualify as a “facility” under Section 5901 of Part 59, MCL 324.5901. 

Similarly, “ancillary equipment installed primarily for the purpose of testing other equipment” is not a “facility” under Part 59 because operating such equipment does not reduce air pollution.  DaimlerChrysler Corp v State Tax Comm’n, 482 Mich 220, 235 (2008).  In DaimlerChrysler, the Michigan Supreme Court concluded that the primary purpose of test cells used by automobile companies was to determine whether automobile engines meet federal regulations and that those test cells do not qualify as “facilities” under Part 59 because they do not themselves operate to remove air pollution from the air.  In so doing, the Court interpreted Sections 5901 and 5903 of Part 59 as requiring that a “facility” actually “curb, control, and eliminate” air pollution.  Id. at 227–228.  Contrary to that holding, the guidance document lists ancillary equipment such as in-stack monitors and ambient monitoring equipment measure emissions but do not remove air pollution from the air.

The guidance document also erroneously establishes presumptively exempt percentages for equipment that typically both controls air pollution and provides benefit to personnel such as fans and motors and ductworks and hoods.  Part 59 excludes from the definition of an exempt facility any “air conditioner, dust collector, fan, or other similar facility for the benefit of personnel or of a business.”  MCL 324.5901.  Under that provision, the Department is required to determine on a case-by-case basis whether equipment meets the definition of “facility” and may not rely on presumptive percentages in lieu of performing this analysis.  The Court of Appeals previously explained that “generic and broad” categories are unacceptable substitutions for case-specific determination.  Sterling Heights, 309 Mich App at 687. 

Because the Department’s guidance document includes equipment that does not actually curb, control or eliminate air pollution and thus does not qualify as a “facility” under Part 59, it is legally inaccurate.  This inaccuracy, along with the guidance document’s overbroad listed miscellaneous costs, is inconsistent with Part 59.  As a result, the guidance document should be revised, if not withdrawn, so that members of the public do not rely on these erroneous discussions of the law.

It is my opinion, therefore, that whether a cost is an “acquisition cost of the facility entitled to exemption” under MCL 324.5904(3) is a fact-specific inquiry that should be addressed through the administrative application and hearing process established in Part 59 of the Natural Resources and Environmental Protection Act, 1994 PA 451, as amended, MCL 324.5901 et seq., with the burden of proof on the claimant seeking the exemption, and that because the Department of Environment, Great Lakes, and Energy’s guidance document is inconsistent with this principle and is otherwise inaccurate, it should be revised or withdrawn. 

D.  Question 3: How do the Department’s responsibilities under § 5903 and § 5902(2) compare?

In your third question, you ask: How is the Department’s responsibility to make a finding under Section 5903, MCL 324.5903 different from that agency’s responsibility to respond to a request for “approval” from the Commission under Section 5902(2), MCL 324.5902(2)? 

Neither “find” nor “approval” is defined in Part 59 so answering this question requires referring to the “plain and ordinary meaning” of each.  Winiecki v Wolf, 147 Mich App 742, 744–45 (1985).  To determine the plain and ordinary meaning, a dictionary may be consulted, Corley v Detroit Bd of Ed, 470 Mich 274, 279 (2004), and preferably a dictionary from the time the statute was enacted, see e.g., Cain v Waste Management Inc, 472 Mich 236, 237 (2005).  The NREPA was formerly 1965 PA 250.  Referring to a dictionary contemporaneous to that enactment reveals that “find” means to “determine & declare,”[3] whereas something is “approved” if it has been “pronounced satisfactory, accepted.”[4]  

In the context of Part 59, it is apparent that the plain meaning of the words “approval” and “find” refer to different stages of the statutory process.  Under Section 5902 of Part 59, MCL 324.5902, the Commission “shall seek approval of the [D]epartment,” meaning it is to ask the Department to determine that the application for an exemption certificate describes a “facility” as defined in Section 5901 of Part 59, MCL 324.5901, that is “designed and operated” in accordance with Section 5903 of Part 59, MCL 324.5903.  As part of its approval process, the Department determines whether an application describes a facility that is “designed and operated primarily” for air pollution control in accordance with Section 5903 of Part 59, MCL 324.5903.  In other words, when the Commission asks the Department to “approve” an application, it is asking the Department whether it accepts the application as satisfactory.  In order to do so, the Department must “find” (that is, determine and make a statement about) whether the application describes a “facility” under Section 5901 of Part 59, MCL 324.5901, that is designed and operated in accordance with Section 5903 of Part 59, MCL 324.5903. 

 

It is my opinion, therefore, that the Department’s responsibility to make a finding under MCL 324.5903, and its responsibility to respond to a request for approval from the Commission under MCL 324.5902(2), refer to different stages of the statutory process created by Part 59 of the Natural Resources and Environmental Protection Act, 1994 PA 451, as amended, MCL 324.5901 et seq., and that the Department’s finding is a necessary precursor to its approval.

E.   Question 5: Which agency must communicate with an applicant for air control pollution tax exemptions?

 

            Finally, in your fifth question you ask which agency is responsible for deciding whether an application is complete and for communicating with the applicant if more information is needed.  The Commission has promulgated an administrative rule for air pollution control exemption certificates.  Mich Admin Code, R 209.81.  That rule states that an applicant shall file “a complete application and required documents” with the Commission.  R 209.81(1).  A “preliminary review will be performed” by Commission staff, and a “complete air pollution application shall be forwarded” to the Department “and they will make a recommendation of approval, partial approval, or denial.”  Id.

Based on the plain language of the rule, the Commission reviews an application to determine whether it is complete and determines whether additional information from the applicant is needed based on its preliminary review.  The Commission then forwards an application to the Department after it determines the application is complete. 

However, because an application necessarily contains technical specifications that fall within the Department’s subject matter expertise, it is possible that the Commission could receive an apparently complete application that the Department determines is incomplete.  If that occurs, then the Department needs to inform the Commission that the application is not complete.  The Department also needs to inform the Commission when the applicant has finally submitted a complete application so that the Commission correctly applies its regulatory timelines for considering complete applications.  See Mich Admin Code, R 209.81(2).  Part 59 does not indicate whether the Commission or the Department should communicate with the applicant in that instance.  It may be more efficient for the Department to directly communicate with the applicant, but the Commission must know when a complete application is submitted.  In this instance, the Department and Commission may communicate with the applicant in a manner both agencies deem efficient, so long as the Department is able to obtain the required technical information and the Commission knows when a complete application is actually submitted.

It is my opinion, therefore, that the State Tax Commission is responsible under Part 59 of the Natural Resources and Environmental Protection Act, 1994 PA 451, as amended, MCL 324.5901 et seq. for initially determining whether an application is complete and, based on its preliminary review, for communicating with the applicant if more information is needed.  The Department of Environment, Great Lakes, and Energy is obligated to inform the Commission when an application the Commission preliminarily found complete is, in fact, incomplete because technical information needed by the Department is missing.  The Commission is responsible for informing an applicant that they need to submit the additional information identified by the Department to submit a complete application.  The Department may also communicate directly with the applicant.

Sincerely,

 

DANA NESSEL
Attorney General



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[1] Although your request is specific to tax exemptions for air pollution control facilities under Part 59 of the NREPA, similar requirements exist for tax exemptions for water pollution control facilities in Part 37 of the NRPA, Water Pollution Control Facilities; Tax Exemption, MCL 324.3701 et seq.  This opinion addresses only Part 59, but the analysis also applies to the tax exemption process under Part 37.

[2] While not binding precedent, unpublished opinions of the Michigan Court of Appeals may be considered instructive or persuasive.  Paris Meadows, LLC v City of Kentwood, 287 Mich App 136 n 3 (2010).

[3] The Concise Oxford Dictionary of Current English (5th ed 1964), p 452.

[4] Id. at p 56.