Equipment used to produce aggregate construction materials used in the construction, maintenance, or repair of real property in Michigan are now exempt under the state’s industrial processing exemption. This change became effective on May 8, 2023.
S.B. 97 and H.B. 4054 are the joint bills that implemented this expansion of Michigan’s industrial processing exemption. The bills also require the Michigan Department of Treasury to cancel assessments and any other outstanding tax balances incurred prior to May 8, 2023 that are related to a taxpayer’s sales and use tax liability for purchases of equipment now exempted by the expanded industrial processing exemption. Any potential new assessments must also be cancelled by the Department. If a taxpayer is eligible for this relief, then they should contact the Michigan Department of Treasury to inquire further. The bills, however, do not allow taxpayers who were previously assessed and paid sales and use tax on these kinds of purchases to seek a refund.
The bills define “aggregate” as “common variety building materials like sand, gravel, crushed stone, slag, recycled concrete, recycled asphalt, and geosynthetic aggregates.” The language in the bills clarify that the exemption only applies to equipment used to produce aggregate products or materials in an industrial processing activity if the aggregate is subject to the Michigan use tax.
This clarification makes some sense, as Michigan is likely looking to expand construction activities in their state and thus, provide manufacturers of certain construction materials with an incentive to produce in Michigan. However, it does seem to create some potential confusion and complexity as well. As the laws point out, the exemption is limited to equipment used to produce aggregate construction materials used in the construction, maintenance, or repair of real property within the State of Michigan. How is the producer to know when buying the equipment whether the aggregate materials will be used within or without Michigan? Furthermore, since the exemption is limited to equipment used to produce aggregate products or materials in an industrial processing activity if the aggregate is subject to the Michigan use tax, when would aggregate manufactured in Michigan, sold to contractors in Michigan, and to be used in real property projects in Michigan be subject to the use tax instead of the sales tax? How will the Department of Treasury review the taxability of aggregate materials-producing equipment purchased by manufacturers and enforce the sales and use tax laws should those manufacturers come under audit?
It will be interesting to see how this newly expanded exemption pans out in a Michigan audit scenario. The Michigan Department of Treasury announced that they will issue a new Revenue Administrative Bulletin to replace the old Michigan Revenue Administrative Bulletin No. 2000-4, 06/13/2000 to address changes made to the industrial processing exemption by these bills. So, perhaps we may get some answers to the questions posed above.
If you have questions about how the Michigan sales and use tax laws apply to the purchase(s) of your industrial processing equipment, the advisors here at Clarus Partners will be happy to help you determine the most accurate tax treatment in accordance with Michigan’s laws and regulations.