The problem with declaring the police as terrorist is that they also have legitimate use and the aren't necessarily directly politically motivated. That said, I could see how someone could claim that the crackdown of the civil rights movement in the US in the 60s could be considered a form of state terrorism. A more obvious example would be something like South Africa under apartheid.
This is of course a slightly academic use of the word. Many people have a hard time seeing even traditional domestic terrorism (like the unabomber) as terrorism.