Arizona Supreme Court Allows Commercial Laundry Service to Claim Processing Tax Exemption

The Arizona Supreme Court recently ruled that a commercial laundry service was entitled to the processing operation use tax exemption for equipment and chemicals used to sterilize reusable textiles rented to medical facilities.¹ For the taxpayer (a commercial laundry service doing business as Angelica Textile Services) to rent the used textiles/linens, the items underwent a complex sterilization process involving the use of different chemicals to remove all potential contaminants in the fibers. In so doing, the process changed the composition of the textiles.

The taxpayer argued that various property was exempt from the use tax pursuant to A.R.S. § 42-5159(B)(1), which exempts machinery or equipment used directly in…processing, fabricating…” These terms, the court explained, should be analyzed on their commonly understood and ordinary meaning.

A processing operation is a series of integrated actions or methods that prepares a product for the market or converts a product into marketable form. To qualify for the exemption as equipment used in the operation, the court set out a two-step inquiry under which an operation 1) prepares a product for the market or converts it into marketable form and 2) uses the machinery or equipment in a series of integrated actions or methods during the preparation of the product.

In this instance, the textile laundering process involved a series of integrated actions or methods that prepared a product for the market or converted it into a marketable form. The court noted that the textiles are not marketable before they undergo the laundering and disinfectant process. Thus, “the machinery or equipment that touches, manipulates, affects, or adds value to the healthcare textiles during Angelica’s cleaning process qualifies for the use tax exemption.”

Ryan’s Take and Action Steps

A laundry service may not come to mind when we think of the type of business that could potentially qualify for machinery and equipment exemption under § 42-5159(B)(1). Nevertheless, the facts here aligned with the requirements of the exemption: the process was a series of integrated actions, and the textiles had to be―and were―converted into a marketable use. Similarly situated taxpayers should examine purchase activity used in their operations to analyze whether the equipment qualifies.

Ryan’s team is available to consult on your fact pattern to determine the applicability of this exemption to your operations.

¹ 9W Halo Opco, LP v. Ariz. Dept. of Rev., AZ Supreme Court, Dkt. No. CV-24-0288-PR (March 3, 2026).

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