The Michigan Business Tax Act (MBTA) in Section 113(6)(c) provides a subtraction for "materials and supplies, including repair parts and fuel".  [MCL 208.1113(6)(c)]  The language of the law seems quite simple.  A taxpayer should be able to subtract all purchases of tangible personal property that constitute materials and supplies, including repair parts and fuel, but only to the extent not included in inventory or depreciable property. 

However, Treasury stated their position on the subtraction for "materials and supplies" in their FAQ M-4 as follows:

Under MCL 208.1113(6), "purchases from other firms" means:

1. Inventory acquired during the tax year, including freight, shipping, delivery, or engineering charges included in the original contract price  for that inventory.
2. Assets, including the costs of fabrication and installation, acquired during the tax year of a type that are, or under the internal revenue code will become, eligible for depreciation, amortization, or accelerated capital cost recovery for federal income tax purposes.
3. To the extent not included in inventory or depreciable property, materials and supplies, including repair parts and fuel.

As used in MCL 208.1113(6)(c), "materials and supplies" means tangible personal property acquired during the tax year to be used or consumed in and directly connected to - the production or management of inventory under MCL 208.1113(6)(a) or the operation or maintenance of assets under MCL 208.1113(6)(b).

In FAQ M-17, Treasury said the deduction for materials and supplies does apply to a service provider, but only if the service provider maintains an inventory of goods for sale or has depreciable assets:

A taxpayer whose business activity is the provision of services may calculate its MGR by deducting from its gross receipts the amount attributed to "materials and supplies" under MCL 208.1113(6)(c), to the extent used or consumed in and directly connected to the production or management of inventory or the operation or maintenance of the depreciable assets described above.

To the extent that a taxpayer who is a service provider maintains an inventory of goods for sale or has depreciable assets, any tangible personal property acquired by the taxpayer during the tax year that is used or consumed in, and directly connected to, the management of taxpayer's inventory or the operation or maintenance of depreciable assets is a "purchase from other firms" for purposes of calculating MGR.

For example, a physician's or dentist's purchase of sterilizing solution during the tax year that is used to sterilize examination equipment, such as an X-ray machine, may be considered materials and supplies under MCL 208.1113(6)(c).

Treasury has made all of the above very confusing by reading into the law something that is not there.  The law in Subsection 113(6)(c) does not say anything about "inventory of goods for sale or depreciable assets".  It simply says:  "materials and supplies, including repair parts and fuel."  Therefore, the taxpayer should be allowed a subtraction for all purchases of materials and supplies, including repair parts and fuel unless included in inventory or depreciable property.  The latter phrase being included to avoid a double deduction.