Is a hospital linen-supply company's service an exempt laundering service, so that it owes sales tax on the linens it buys to furnish that service?

Plain-English summary

Linen Systems for Hospitals, Inc. supplies hospitals with bed and patient linens, operating-room and obstetrics linens, infant and pediatric linens, uniforms and kitchen linens — adding bacteriostats, testing with bacteriologists and pathologists, inspecting for pin-holes and lint, keeping clean and soiled linens separate, and handling inventory management. Under the arrangement, it furnishes the linens (which it owns) and periodically launders them, swapping soiled items for clean. It asked whether this is an exempt laundering service, which would mean it owes sales tax on the linens it buys.

The Department held: yes — the service is exempt laundering, and the purchases are taxable.

• Laundering and dry cleaning are carved out of the taxable service. Section 1105(c)(3) taxes servicing and repairing tangible personal property "except receipts from laundering, dry cleaning."
• A linen-supply arrangement is a laundering service. A July 12, 1965 Opinion of Counsel held that a company furnishing linens, towels, uniforms and similar articles under an agreement to return them periodically for laundering is rendering an exempt laundering or dry-cleaning service — as long as the value of the article furnished has no substantial relationship to the charge, so that the major portion of the charge is for the laundering.
• But the supplier pays tax on its own purchases. That same authority says the company "must pay a sales tax on all their purchases of uniforms, linens and other tangible personal property used in rendering such service." A July 13, 1981 Opinion of Counsel issued to Linen Systems confirmed the 1965 interpretation is still Department policy.
• Result: Linen Systems does not collect tax from hospitals, but is subject to sales tax on its purchases of linens.

What this means for you

When your service is exempt, you're usually the taxpayer on the inputs. Because the laundering service isn't taxed, the linen-supply company can't buy its linens tax-free for "resale" — it's treated as the end consumer of the linens and pays sales tax when it buys them.

The "substantial relationship" test decides which side you're on. If the value of the goods furnished is minor next to the service charge — so customers are really paying for laundering — the whole arrangement is an exempt laundering service. If the goods dominate the charge, the analysis (and the tax result) can differ.

Extra quality steps don't change the classification. Bacteriostats, lab testing, defect inspection and inventory management are part of delivering the laundering service; they don't turn it into a taxable sale of goods.

Common questions

Q: We furnish the linens and launder them — are we selling linens or providing a service?
A: A service. Furnishing and periodically laundering linens is an exempt laundering service under § 1105(c)(3), so you don't charge your customers sales tax on it.

Q: If the service is exempt, can we buy the linens tax-free for resale?
A: No. Because you're providing an exempt service rather than selling the linens, you're the consumer of the linens and owe sales tax on your purchases of them.

Q: What if the linens were worth a lot relative to the charge?
A: The exempt-laundering treatment depends on the value of the article having no substantial relationship to the charge, so that the major portion of the charge is for laundering. If goods dominated the charge, the arrangement might not qualify as an exempt laundering service.

Citations and references

Statutes and authority:

• Tax Law § 1105(c)(3) — taxes servicing/repairing tangible personal property, but excludes receipts from laundering and dry cleaning
• Opinion of Counsel, July 12, 1965 — a linen-supply company furnishing and periodically laundering articles renders an exempt laundering service (where the article's value has no substantial relationship to the charge), but must pay sales tax on its purchases of the linens, uniforms and other property used in the service
• Opinion of Counsel, July 13, 1981 — confirms the 1965 interpretation remains Department policy

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1981.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a81_14s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-81 (14) S
Sales Tax
September 25, 1981

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S810317B

On March 17, 1981, a Petition for Advisory Opinion was received from Linen Systems for
Hospitals, Inc., 311 Turner Street, Utica, New York 13502.
The issue raised is whether the linen services furnished by Petitioner to its customers are
exempt laundering and dry cleaning services so that the purchase of linens by Petitioner for use in
furnishing such services will be subject to sales tax.
Petitioner is engaged in the business of furnishing bed and patient linens, operating room and
obstetrics linens, infant and pediatric linens, personal apparel (uniforms) and kitchen linens to
hospitals. To meet the special requirements of hospitals, Petitioner adds special bacteriostats during
the washing of its hospital linens and employs bacteriologists and pathologists to test the linens.
Operating room and obstetrics linens are continually inspected for pin-holes and lint. Special pick
up and delivery procedures are employed so that clean and soiled linens are not commingled.
Additionally, Petitioner assists the hospitals with inventory management and provides an ongoing
comprehensive linen cost and distribution management program, the costs of which are included in
its charges for linen supply.
Section 1105(c)(3) of the Tax Law imposes a tax on the receipts from "Installing tangible
personal property, or maintaining, servicing or repairing tangible personal property . . . except
receipts from laundering, dry cleaning . . . . "
An Opinion of Counsel dated July 12, 1965 provided in pertinent part:
"This letter will serve as a reply to your request for a ruling as to
whether the receipts of a linen supply company are within the
statutory exemption made for 'receipts from laundering', although the
linens so furnished are owned by the company rather than the
customer.
Persons engaged in the business of furnishing coats, trousers, caps,
aprons, dresses, towels, linens, napkins, diapers, tablecloths and
articles of a similar nature to barber shops, beauty parlors, restaurants,
industrial plants, offices and households and other establishments
under an agreement which provides for having such articles returned

JAMES H. TULLY., COMMISSIONER
TP-8 (4/80)

LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

-2­
TSB-A-81 (14) S
Sales Tax
September 25, 1981

periodically for laundering or dry cleaning and replacing them with
clean articles should not collect a tax on the receipts from such
service since they are rendering a laundering or dry cleaning service.
The service of laundering or dry cleaning is exempt from the sales tax
under section 1105(c)(3) of the Tax Law. However, this rule only
applies to those agreements where the value of the article of personal
property furnished has no substantial relationship to the charge for the
service rendered so that the major portion of the charge made is for
laundering or dry cleaning service.
However, the persons so engaged in supplying uniforms, linens and
items of a similar nature are required to pay a sales tax on all their
purchases of uniforms, linens and other tangible personal property
used in rendering such service.
An Opinion of Counsel dated July 13, 1981 and issued in response to an inquiry from
Petitioner has confirmed that the interpretation of law made in the July 12, 1965 Opinion of Counsel
is a correct interpretation and remains the policy of this Department.
Accordingly, Petitioner is advised that it is subject to sales tax on its purchases of linens,
inasmuch as the furnishing of linens by Petitioner to its customers is deemed to be an exempt
laundering or dry cleaning service.

DATED: August 14, 1981

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau