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STATE OF MICHIGAN COURT OF APPEALS

GRANGER LAND DEVELOPMENT COMPANY and GRANGER WASTE MANAGEMENT COMPANY, Plaintiffs-Appellees, v DEPARTMENT OF TREASURY, Defendant-Appellant.

FOR PUBLICATION December 29, 2009 9:15 a.m.

No. 286355 Court of Claims LC No. 05-000083-MT Advance Sheets Version

Before: BECKERING, P.J., and CAVANAGH and M. J. KELLY, JJ. M. J. KELLY, J. In this suit for a tax refund, defendant Department of Treasury (the Department) appeals as of right the Court of Claims order compelling the Department to refund the full amount of taxes paid by plaintiffs Granger Land Development Company and Granger Waste Management Company (collectively Granger). On appeal, the primary question is whether the personal property at issue was exempt from Michigan's use tax. Because we conclude that the Court of Claims correctly determined that the property at issue was exempt, we affirm. I. BASIC FACTS AND PROCEDURAL HISTORY A. GRANGER'S LANDFILL AND GAS OPERATION Granger owns and operates landfills. The waste Granger deposits in its landfills generates methane gas as it decomposes. In addition, the landfills generate significant amounts of wastewater as rainfall and other naturally occurring sources of water seep through the waste deposited in the landfills. This wastewater is known as leachate. Under existing pollution control laws, Granger must monitor and control both the gas and leachate generated as part of its landfill operations. In a typical landfill operation, the landfill operator will monitor the gas levels and react to unsafe levels as needed, which may include burning the gas off. Likewise, in a typical operation, the operator will capture the leachate and send it to a wastewater plant for treatment. However, Granger does not operate the landfills at issue in a typical fashion. Rather, Granger takes steps to encourage the decomposition process in order to generate gas with a particular composition. Granger recovers the gas and then sells it to a related company, which burns the gas to generate -1-

electricity. The related company then sells the electricity to a local utility. Granger also captures the leachate generated in the landfill and circulates it back into the landfill, which further promotes gas production. In order to meet its pollution control and gas production needs, Granger establishes landfill cells for the waste. A cell consists of an impermeable barrier that is placed on an area of land that may span several acres. Granger establishes the barrier to ensure that liquids do not contaminate groundwater and to facilitate the capture and circulation of leachate. Granger will then place uniform layers of solid waste on the barrier. Before placing the waste in a cell, Granger uses heavy machinery to crush and compact the waste. This processing ensures that the solid waste is relatively uniform and anoxic, which encourages the anaerobic decomposition of the waste. Granger then uses loaders and bulldozers to distribute the waste uniformly in the cell. As the solid waste accumulates in the cell, Granger lays pipelines--referred to as horizontal wells--at various levels within the cell, including the bottom-most layer. The horizontal wells are protected from the weight of subsequent layers of solid waste and the compactor by spreading tire chips over the piping. The tire chips also serve to create a pathway for gas in the event that some piping is accidentally crushed. Granger uses the horizontal wells to capture the gas generated during decomposition and to capture and circulate leachate. Granger connects the horizontal wells to a system that both transports the recovered gas and monitors it for the composition necessary to burn it efficiently. As required by law, Granger also installs vertical wells within the cells in order to monitor gas levels. Granger uses bulldozers and other equipment to construct the cells. Granger also sprays an organic cover over the cells to prevent the solid waste from blowing away between deposits and to inhibit the escape of gas from the cell or the infiltration of oxygen, which would inhibit the generation of methane gas. Granger also uses the bulldozers to lay gravel for access roads. When a cell reaches its maximum capacity, Granger caps the cell with nonorganic material to reduce outside air infiltration and improve collection efficiency. Granger then places another impermeable barrier over the cell to prevent the escape of gas and the entry of water. Finally, Granger covers the barrier with two feet of soil and plants vegetation to prevent erosion. Even after Granger caps a cell, it will continue to monitor and recover gas from the cell. A typical cell has a lifespan of 60 to 75 years before being closed and will continue to generate gas for another 30 years after being closed. Although Granger has excavated the waste left after a cell ceases to generate commercial levels of gas in order to recover the horizontal wells and reuse the cell, it does not routinely do so. B. PROCEDURAL HISTORY In January 2005, the Department audited Granger's landfill operations. The Department determined that Granger's operation of the landfills constituted the design, construction, or maintenance of real property and did not involve the use of processing equipment. For that reason, it determined that Granger must pay sales or use tax on the materials and equipment-- such as the tire shreds, gravel, liners, piping, and bulldozers--that it used or consumed during the operation of its landfills from May 2000 to January 2004. The Department determined that Granger Land Development Company owed $194,296.02 in taxes and that Granger Waste Management Company owed $84,069.32 in taxes. After making adjustments for various -2-

exemptions, the Department revised the assessments to $141,549 for Granger Land Development Company and to $5,858 for Granger Waste Management Company. Granger paid these assessments under protest. In April 2005, Granger sued the Department for a refund of the assessments that it paid for the period at issue. In its complaint, Granger alleged, in part, that the materials and equipment that it used or consumed were used or consumed as part of an industrial process; namely, the processing of solid waste to generate gas. Because it used or consumed the materials and equipment as part of an industrial process, Granger argued that it was entitled to the exemption from sales and use taxation applicable to materials and equipment used in industrial processing. In response, the Department argued that the materials and equipment were not used in an industrial process or, in the alternative, that they were nevertheless not entitled to the exemption because the materials were incorporated into real property and the equipment was used to groom real property. After a bench trial, the Court of Claims determined that the creation and maintenance of the landfill cells constituted an industrial process. It further determined that Granger did not affix the cells, including all the components of the cells, to its real property and did not intend that the cells become part of its real property. Accordingly, the Court of Claims concluded that the materials used or consumed in the creation of the cells qualified for the industrial process exemption. It also concluded that Granger did not use its heavy equipment, such as the bulldozers at issue, to design, construct, or maintain real property, but rather used the equipment as part of an industrial process. For these reasons, the Court of Claims determined that Granger was entitled to the industrial processing exemption for all the property at issue and ordered the Department to refund Granger's tax payments. This appeal followed. II. THE INDUSTRIAL PROCESS EXEMPTION A. STANDARD OF REVIEW On appeal, the Department argues that the Court of Claims erred when it determined that the personal property at issue was exempt from taxation under the Use Tax Act, MCL 205.91 et seq. Specifically, the Department argues that the property used or consumed in the construction of Granger's landfill cells is not exempt because Granger affixes the personal property to its real property. Similarly, the Department argues that Granger uses the bulldozers and other heavy equipment to design or maintain the landfills and, for that reason, the equipment is also not exempt. This Court reviews de novo the proper interpretation of statutes such as the Use Tax Act. AutoAlliance Int'l, Inc v Dep't of Treasury, 282 Mich App 492, 499; 766 NW2d 1 (2009).

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B. MICHIGAN'S USE TAX The Michigan Legislature has imposed a use tax on consumers for the "privilege of using, storing, or consuming tangible personal property in this state . . . ." MCL 205.93(1); see World Book, Inc v Dep't of Treasury, 459 Mich 403, 408; 590 NW2d 293 (1999). The provisions of the Use Tax Act complement those of the General Sales Tax Act, MCL 205.51 et seq., and were generally designed to avoid the imposition of both use and sales tax on the same property. Elias Bros Restaurants, Inc v Treasury Dep't, 452 Mich 144, 153 n 19, 153-154; 549 NW2d 837 (1996). The Legislature also sought to avoid multiple layers of taxation--referred to as pyramiding--by exempting property used or consumed in the production of goods that will ultimately be subject to a use or sales tax when purchased by consumers. Id. at 152.1 Accordingly, the use tax does not apply to property sold to an "industrial processor for use or consumption in industrial processing." MCL 205.94o(1)(a). On appeal, the Department does not challenge whether Granger engaged in industrial processing during the relevant taxing period.2 For that reason, we shall assume that the erection and maintenance of landfill cells--including the modification of the waste stored in the cells-- for the production and capture of methane gas constitutes industrial processing.3 See MCL 205.94o(3); MCL 205.94o(7)(a). The Department does, however, challenge whether Granger's use of various materials and machinery during any industrial processing should be excluded from the use tax under the industrial processing exemption. Specifically, the Department argues that Granger affixes the personal property that it uses in the erection and maintenance of its landfill cells to real property and, for that reason the property so used is excluded from exemption under the industrial processing exemption. See MCL 205.94o(4)(d); MCL 205.94o(5)(a). Similarly, the Department argues that Granger uses the bulldozers and other heavy machinery to design, engineer, construct, or maintain real property, which are activities that are specifically excluded from the definition of industrial processing. See MCL 205.94o(6)(d). C. PERSONAL PROPERTY AFFIXED AND BECOMING PART OF REAL ESTATE Beginning with the enactment of 1939 PA 313, the exemption for personal property used or consumed during industrial processing has been defined to exclude personal property that is permanently affixed to, and becomes a structural part of, real estate. See R C Mahon Co v Dep't of Revenue, 306 Mich 660, 663; 11 NW2d 280 (1943). Under the modern Use Tax Act, this exclusion from exemption is codified at both MCL 205.94o(4)(d) and MCL 205.94o(5)(a). MCL

The industrial processing exemption has existed since at least 1939 in both the General Sales Tax Act and the Use Tax Act. See 1939 PA 313,

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