Savvy businesses often look for loopholes they can exploit to (legally) avoid paying sales taxes. But state revenue departments and courts tend to frown on creative interpretations of the law. A group of telecommunications companies in Michigan recently learned this lesson.
Like many states, Michigan tries to avoid double taxation by clearly distinguishing wholesale and manufacturing operations from retail sales. Michigan exempts from sales tax any purchase of tangible goods used in the manufacturing of other tangible goods intended for sale. This industrial processing exemption means, for example, a company that produces the proverbial widget does not have to pay sales tax on the machinery necessary to produce the widget.
In this case, a group of telecommunications companies claimed the industrial processing exemption applied to their purchases of electricity. Normally, Michigan imposes a sales tax on electricity. The companies argued since they converted that electricity into telecommunications signals – which is really just another form of electricity – they were engaged in manufacturing.
Not surprisingly, the Michigan Department of Treasury did not see it that way. And in a decision issued on Dec. 4, neither did the Michigan Court of Appeals. Judge Henry William Saad, writing for the court, agreed with the Department and a lower court that the industrial process exemption did not apply here, therefore it is not sales tax exempt.
The basic flaw in the telecommunications companies’ arguments, Saad said, was that while electricity is a form of “tangible personal property” under Michigan sales tax law, telecommunications signals are not legally considered a form of electricity. Indeed, Saad concluded telecommunications signals are not even “tangible personal property,” a basic requirement for invoking the industrial process exemption in the first place.
As written, Michigan law defines tangible personal property to include “electricity, water, gas, [and] steam.” Saad pointed to the Michigan legislature’s specific enumeration of water and steam, which are both forms of water. In contrast, the legislature did not specifically enumerate “telecommunications signals,” and it would therefore be improper for the courts to construe the term “electricity” to include such signals.
Furthermore, Saad noted, telecommunications signals do not fall within the broader definition of tangible personal property, which includes anything that “can be seen, weighed, measured, felt, or touched, or that is in any other manner perceptible to the senses.” Obviously, a wireless telephone or Internet signal cannot be seen or perceived by human senses. Nor can they be weighed or measured in any conventional sense.
S.M. Oliva is a writer living in Charlottesville, Virginia. He edits the international legal blog Bonham’s Cases.
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