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Taxation – County Business Tax – ‘Processing Business’

A linen rental company that cleans its own linens is not a “processing business” under Va. Code § 58.1-3507(A), and a local tax commissioner correctly assessed the business under the standard business tangible personal property tax, not under the reduced tax rate on tools and machinery used in a processing business, according to the Virginia Supreme Court.

The taxpayer, Palace Laundry, appealed the county tax assessment to the state tax commissioner, who concluded that Palace Laundry was a processing business entitled to the lower tax rate, but the Chesterfield County Circuit Court reversed that decision.

Palace Laundry owns an inventory of linens that it rents to customers. During each periodic delivery to a customer, the Laundry picks up soiled rented linens and replaces those linens with rented linens that have been laundered and finished according to generally accepted standards of textile rental companies. In order to clean its linens, the Laundry uses two large washing machines and pays personal property taxes assessed on that equipment. The Laundry does not clean linens or other textiles that are owned by any person or entity other than itself.

While recognizing that the county had the burden of proving that the commissioner erred by finding that Palace Laundry was a processing business, the circuit court nonetheless reversed the commissioner’s ruling and held that Palace Laundry was not a processing business. The circuit court reasoned that Palace Laundry “does not render the linens more marketable or useful than when originally acquired by them, rather they are attempting to maintain linens for continued use by their customers.”

Palace Laundry contends it is a processing business under this court’s case law because it “treats linens by heat (as in pasteurization) when it washes, dries and presses the linens; it treats linens by agitation and the addition of chemical detergents and mildew prohibitors during the washing cycles (as in making fertilizer); and it treats linens by finishing the linens to customer specifications and delivery (as in blending or sorting).” We disagree with Palace Laundry’s analysis.

Although “processing” has not been defined in the context of a tax classification, this court has defined “processing” for purposes of the sales and use tax in State Tax Comm’r v. Flow Research Analysis Inc., 221 Va. 817 (1981). In Dep’t of Taxation v. Orange-Madison Coop. Farm Serv., 220 Va. 655 (1980), it was stated that processing requires that the product undergo a treatment rendering the product more marketable or useful. Other decisions by this court dictate that to constitute a processing business for purposes of personal property taxation under Code § 58.1-3507(A), a company’s product must undergo a treatment rendering it more marketable or useful. Here, however, Palace Laundry does not apply any treatments that make the linens more marketable or useful than when the linens were originally purchased. The Laundry’s acts of cleaning and maintaining its linens do not constitute processing and the Laundry therefore is not a processing business within the meaning of Code § 58.1-3507(A).

Cleaning and maintaining its rental property does not transform a rental business into a processing business. The circuit court did not err in finding that the Laundry is not a processing business.

Judgment for the county affirmed.

Palace Laundry Inc. v. Chesterfield County (Goodwyn, J.) No. 071920, Sept. 12, 2008; Chesterfield County Cir.Ct. (Rockwell) Craig D. Bell, Brian C. Bernhardt, J. Christina Tennant for appellant; Michael S.J. Chernau, Steven L. Micas, Office of County Att’y, for appellee. VLW 008-6-087, 8 pp.

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