Extras on Excise: Michigan Considers Groundwater Extraction Tax on Bottled Water Producers, but Not Other High-Volume Extractors

Michigan may soon tax bottled water producers if H.B. 5133, introduced by Rep. Peter Lucido (R), becomes law. The bill proposes an excise tax on the production of bottled drinking water and has been referred to the Committee on Natural Resources for debate. The tax would be levied on every bottled water operator engaged in the business of producing bottled drinking water in Michigan at the rate of $0.05 per gallon produced.

The tax would only apply to extracted water used by bottling companies for drinking water, and “the funds would go directly to upgrading aging infrastructure, like the municipal sewer systems that overflow and dump sewage into Lake St. Clair,” Lucido said on Oct. 18. “We need to preserve, protect and repair our sewer and water systems, and this will provide a fitting funding source.”

Nestlé Waters North America Inc. could face a $20 million tax bill if this proposed legislation becomes law, according to an article by Alex Ebert in the Daily Tax Report: State. The company extracts about 1.1 million gallons of water per day from four locations in Michigan, according to Lucido, but only pays the state a nominal annual fee of $200 per facility for the processing of paperwork. This is permissible, as MLive.com explains, because Michigan adheres to the reasonable use doctrine, allowing landowners to use water on or under both their property and adjacent property, if such use doesn’t have an adverse impact on “neighboring ground or surface waters.”

In 2016, Nestlé sought a permit to increase its extraction rate from 250 gallons per minute to 400 gallons per minute at one of its wells. The Michigan Department of Environmental Quality (DEQ) has not yet ruled on that application, but if approved, Nestlé could extract an additional 78.84 million gallons of groundwater from that well per year. That increased production alone could yield up to $3.942 million in tax revenue if the bottled water excise tax is enacted.

While Nestlé’s rate of groundwater extraction is significant, it pales in comparison to the estimated 6.9 billion gallons of water extracted from Michigan in 2015 by pharmaceutical giant, Pfizer, according to data from the Michigan DEQ. In fact, numerous companies, including industrial plants, paper companies, and utilities, extract significantly more groundwater than Nestlé in Michigan. They would not be subject to the proposed tax, however, because its application would be limited to bottled drinking water producers.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: If enacted, could this tax bring constitutional challenges because of its applicability to only those groundwater extractors in the bottled water business?

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