Taxpayer Changed the Form, Composition, or Character of the Circuit Boards
In K & S Industrial Services, Inc. v. Department of Treasury, Michigan Court of Appeals, No. 305516, September 27, 2012, a taxpayer that operated a circuit board repair business was not liable for Michigan use tax on test beds and stands used to diagnose and repair the boards and on utilities consumed during the diagnostic process because it qualified for the industrial processing exemption.
The Use Tax Act, applicable during the audit period, advised that a taxpayer qualifies as an industrial processor "if (1) it alters the form, composition, or character of tangible personal property; and (2) the property is ultimately sold at retail or sold to another industrial processor for processing for ultimate sale at retail."
The taxpayer's customers transferred title to the defective circuit boards, and the taxpayer sold the reconditioned boards at a set price back to its customers. The Court of Appeals held that a strict reading of the statutes applicable to the relevant period resulted in the conclusion that the taxpayer changed the form, composition, or character of the circuit boards. Furthermore, Rule 205.90, Mich. Admin. Code, expressly specifies that the "design, construction and maintenance of factory, machinery, equipment, and tooling" qualifies as an exempt industrial processing activity.