Industrial Healthcare Textile Laundering Qualifies as “Processing Operation” for Use Tax Exemption: Arizona Supreme Court [Read Order]

In a recent ruling, the Arizona Supreme Court held that industrial healthcare textile laundering qualifies as a “processing operation” under Arizona’s use tax law, making machinery and equipment used in that process eligible for a use tax exemption.

9W Halo OPCO, LP, doing business as Angelica Textile Services, filed a claim seeking a refund of use taxes paid on machinery and chemicals purchased between 2014 and 2018. The company operates an industrial facility that rents reusable healthcare textiles such as bedsheets, patient gowns, and surgical scrubs to hospitals and other medical facilities in Arizona. The facility processes around 30 million pounds of healthcare textiles each year.

The textiles used in healthcare settings often contain bacteria and viruses and cannot be reused in patient care unless they undergo specialized laundering and disinfecting. Angelica’s process involves washing and drying equipment and a twelve-module cleaning cycle in which multiple chemicals are injected in controlled amounts depending on the type of textile. This process removes contaminants from the textile fibers and prepares them for safe use in healthcare facilities.

Angelica submitted refund claims arguing that the machinery used in its laundering process qualified for the use tax exemption for equipment used directly in “processing operations” under Arizona Revised Statute § 42-5159(B)(1). The Arizona Department of Revenue initially denied the claim and later revised its assessment but still rejected part of the requested refund.

Angelica appealed the decision before the Arizona Tax Court and argued that its laundering and disinfecting system converts contaminated textiles into sanitary products suitable for medical use. The company argued that this transformation satisfies the ordinary meaning of processing under the statute.

The Department argued that Angelica’s business is essentially a linen rental service and not a manufacturing or processing operation. It argued that the exemption should not apply because the company does not transform raw materials into new finished products.

Vice Chief Justice Lopez observed that the statute requires courts to interpret “processing operations” according to their ordinary meaning. The court observed that a processing operation refers to a series of integrated actions that prepare a product for the market or convert it into a marketable form.

The court explained that the analysis should focus on the specific operation in which machinery is used, not on the entire business model of the taxpayer. It also pointed out that downstream transactions such as whether a company sells or rents its product are not relevant to determining whether an operation qualifies as processing.

Applying this interpretation, the court observed that Angelica’s laundering and disinfecting process transforms contaminated healthcare textiles into sanitized products suitable for use in hospitals and medical facilities. Because the process prepares the textiles for their intended market, it qualifies as a processing operation under the statute.

The Arizona Supreme Court vacated the decision of the court of appeals, reversed the tax court’s summary judgment in favour of the Department, and remanded the matter to the tax court for further proceedings consistent with its interpretation of the statute.

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