Arizona Supreme Court Issues Ruling on Industry Tax Exemption

The Arizona Supreme Court issued a ruling on March 3 that provided guidance for how a business can qualify as a “processing operation” under the state’s tax law. The ruling is a positive development for linen, uniform and facility services operations in the state.

TRSA submitted an amicus brief during both the appeals court process as well as the Supreme Court case, titled 9W Halo Opco LP dba Angelica Textile Services LP v. Arizona Department of Revenue. TRSA’s amicus brief included relevant context and case law to provide technical assistance and industry expertise to the case, clarifying that the linen, uniform and facility services industry performs processing and therefore should qualify for the exemption.

Arizona offers an exemption for the tax on machinery or equipment “used directly in manufacturing, processing, fabricating, job printing, refining or metallurgical operations.”

In 2018, Angelica Textile Services submitted claims for the use of tax refunds on purchases made for equipment and chemicals used during its laundering and disinfecting process. The Arizona Department of Revenue denied about half of the requested refund and the business appealed to the Arizona Tax Court.

Both the tax court and appellate court ruled in favor of the revenue department, concluding that Angelica’s business model of renting, laundering and re-renting textiles did not qualify for the tax exemption because the business was not converting “raw materials” to a marketable form.

In its March 3 ruling, the Arizona Supreme Court reversed the prior ruling and determined that Angelica’s operation qualified for the use-tax exemption because the business’s operation “involves a series of integrated actions or methods that prepares a product for the market or converts a product into marketable form.”

Thus, the justices concluded that the business qualifies for the use-tax exemption and remanded the case back to the tax court for further proceedings. Click here to read the opinion from the Arizona Supreme Court.

TRSA thanks the TRSA Tax Advisory Council for their efforts and support in making this ruling beneficial for the industry.