PHOENIX — The Arizona Supreme Court has ruled that Angelica Textile Services qualifies for a use tax exemption as a “processing operation” under Arizona law.
Angelica rents reusable healthcare textiles — such as bedsheets, patient gowns and surgical scrubs — to hospitals, outpatient facilities and long-term care centers in the state.
Arizona law provides a use tax exemption for machinery or equipment used directly in processing operations.
From 2014 to 2018, Angelica purchased equipment and chemicals to use in its textile laundering and disinfecting process and paid state and City of Phoenix use taxes for these purchases. In 2018, Angelica submitted claims for use tax refunds based, in part, on the use tax exemption for processing operations.
The Arizona Department of Revenue denied roughly half of the requested refund.
Angelica appealed the Department’s decision to the Arizona tax court, which ruled in favor of the Department. The court of appeals also ruled in favor of the Department, reasoning that Angelica’s business model of renting, laundering and disinfecting, and re-renting healthcare textiles did not qualify for the use tax as a processing operation. The court of appeals also concluded that the exemption did not apply because Angelica did not convert “raw materials” into marketable form.
The state Supreme Court reversed the court of appeals and the tax court, reasoning that Angelica did not have to convert raw materials into marketable form because the statute only required that a processing operation “prepare a product for the market or convert a product into marketable form.”
Angelica qualified for the use tax exemption because its processing operation’s complex laundering and chemical disinfecting process changed the nature of the textiles by sterilizing them and rendering them usable for the unique, government-regulated healthcare textile market.
The state Supreme Court also clarified that Angelica’s business model of renting rather than selling the healthcare textiles was irrelevant under the use tax exemption statute.
Vice Chief Justice John R. Lopez IV, writing for a unanimous court, authored the opinion reversing the tax court’s denial of Angelica’s use tax exemption request, vacating the court of appeals decision, and remanding the case to the tax court for further proceedings.
The decision provides guidance on the standard required for the use tax exemption as a processing operation under A.R.S. § 42-5159(B)(1).
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