For a uniform/linen rental-and-laundry business, which items can be bought for resale, and are monogramming and lost-item fees taxable?

Plain-English summary

The Petitioner rents uniforms, hospital gowns, mats, and linens to medical facilities and hospitals for a bundled fee, and it launders, maintains, picks up, and delivers those "full service items." Non-personalized items (sheets, towels) go back into general inventory; only personalized items are set aside for a customer. The laundry/pickup/delivery charge is included in the rental fee, not billed separately. It also rents hampers, lockers, and mats (separately priced) used to store/deliver the textiles -- these aren't cleaned, can be used for other purposes, and are always returned. Customers can pay extra for monogramming; there are lost-item fees and, on contract termination, customers must buy the customized items at replacement cost.

The Office of Counsel concluded:

• It's a laundry service; laundered items aren't bought for resale. Section 1105(c)(3)(ii) exempts laundry services, and under Matter of Atlas Linen Supply supplying linens incident to a laundry service is part of that exempt service, not a taxable rental. Property bought to perform an exempt service is not purchased for resale (20 NYCRR 526.6(c)(7)). Several facts confirm this is really a laundry service, not a rental: the laundry charge isn't separated, non-personalized items aren't set aside, and on termination the customer pays full replacement cost with no proration (so prior payments were really for laundry/delivery). The opinion contrasts EchoStar, where separately stated, lease-structured equipment rentals did qualify for resale. Result: the Petitioner pays sales tax when it buys the garments/linens. (Clothing under $110/item is exempt from State tax, but local tax may still apply.)
• Hampers/lockers/mats CAN be bought for resale. These are separately stated, not cleaned, and can be used for other purposes -- so they're not integral to the laundry service. The Petitioner may buy them for resale and must collect tax on those rentals.
• Monogramming incidental to the laundry service = not taxable. A monogram applied to garments provided only in conjunction with the laundry service isn't a separate sale (TSB-M-06(6)S).
• Lost-item fee = nontaxable penalty. A predetermined fee for a lost/unreturned item is a penalty to deter loss, not a sale (Tristate Industrial Laundries). But an actual sale of customized items -- e.g., on contract termination or a later purchase -- is taxable (clothing under $110 exempt from State tax; local may apply).

What this means for you

Linen / uniform / mat services

The items you actually launder are treated as used to perform an exempt laundry service, so you can't buy them for resale -- you pay sales tax when you purchase them (watch the under-$110 clothing State exemption, and remember local tax can still apply). You don't separately tax the "rental."

Separate, non-laundered gear is different

Hampers, lockers, mats you rent but don't clean -- separately priced and usable for other purposes -- are not part of the laundry service. Buy them for resale (ST-120) and collect tax on the rental charge.

Monogramming and lost-item fees

Incidental monogramming on laundered garments isn't a separate taxable sale. A predetermined lost/unreturned-item fee is a nontaxable penalty. But if you actually sell customized items (e.g., contract ends), charge tax on that sale.

Common questions

Q: Can I buy the uniforms and linens I rent tax-free for resale?
A: No -- because you launder them, they're used to perform an exempt laundry service, so you pay tax when you buy them. (Clothing under $110/item is exempt from State tax; local tax may apply.)

Q: What about hampers and lockers?
A: Those aren't integral to the laundry service, so you may buy them for resale and must collect tax on the rental.

Q: Do I charge tax on monogramming or on a lost-item fee?
A: No -- incidental monogramming isn't a separate sale, and a predetermined lost-item fee is a nontaxable penalty. But actually selling customized items (e.g., at contract end) is taxable.

Q: Can I rely on this opinion?
A: It binds the Department only as to the petitioner. Use it as guidance and confirm your own facts.

Citations and references

• Tax Law section 1105(c)(3)(ii) (laundry services exemption)
• Tax Law section 1101(b)(4) (purchase for resale)
• Tax Law section 1105(a) (sales tax on retail sales, including rentals, of tangible personal property)
• 20 NYCRR section 526.6(c)(7) (property used to perform an exempt service is not purchased for resale)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2015.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a15_19s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-15(19)S
Sales Tax
May 12, 2015

Office of Counsel
Advisory Opinion Unit

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S131115A

The Department of Taxation and Finance received a Petition for an Advisory Opinion
from REDACTED REDACTED REDACTED REDACTED REDACTED “Petitioner”.
Petitioner asks whether it is engaged in a laundry service and whether the garments it rents to
outpatient medical facilities and hospitals (“Customers”) and certain other tangible personal
property may be purchased for resale. Petitioner also asks whether its charges for
monogramming uniforms and fees for lost or unreturned items are subject to sales and use tax.
We conclude that Petitioner is a laundry service and may not purchase for resale the
items that it launders, such as garments and linens. Purchases of other tangible items that are not
laundered, such as hampers and lockers, may be purchased for resale. We further conclude that
charges for monogramming that is incidental to the laundry service are not taxable. Finally, the
fees charged for items lost by the Customers are not subject to sales tax.
Facts
Petitioner rents “full service items”, such as uniforms, hospital gowns, mats, linens
(sheets, towels etc.) and other textiles to its Customers for a predetermined rental fee based on
the number of items those Customers agree to have available on site. Full service items are those
items that are laundered, maintained, picked up and delivered by Petitioner. Full service items
that are not personalized, such as sheets and towels, are laundered at the processing facility and
returned to the general operating inventory for redistribution. These items are not segregated for
a specific Customer. Only personalized items are segregated for exclusive use by a particular
Customer. The charges for laundry, pick-up and delivery services for these items are included in
the rental charge; they are not billed separately. The rental fee remains the same regardless of the
actual usage of those items.
Petitioner also rents hampers, lockers, and other items of tangible personal property that
are used for the storage and delivery of the textiles. Petitioner states that the rental price for
these items incorporates “all costs for the service program.” The services provided relative to the
hampers and lockers only include maintenance and replacement of items as necessary, at no
additional cost. Petitioner does not clean or sanitize these items. At the end of the agreement or
upon termination of the agreement, the Customer always returns these items; they are never
purchased. The Customers do not rent lockers or hampers without renting textiles, because the
option to rent those items is part of Petitioner’s program to store and maintain the textiles being
rented. The Customers determine the number of those items that they choose to rent, but are not
obligated to rent any of these items. Further, the use of those items is not restricted to the storage

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of the rented textiles. These items are not available for purchase by the Customers. The rental
charges for the selected items are priced per item in the Customer Service Agreement.
The Customers also have the option of having logos or names embroidered on uniforms
for an additional monogramming fee. This monogramming generally is done by Petitioner.
Large orders occasionally may be outsourced, but this is not standard practice.
The Customers are required to enter into a five year customer service agreement.
Delivery and pick-up of the rental items for the purpose of laundering can be on a weekly, biweekly or monthly basis. The rental agreement provides that all textiles and other rented items
remain the property of the Petitioner, and that all “full-service items” will be provided,
laundered, maintained, picked-up, and delivered by the Petitioner. Items requiring replacement
based on normal wear are replaced without charge. However, items otherwise damaged or lost
incur a predetermined lost item fee based on the replacement cost of the item. In addition, upon
discontinuation of the service prior to the expiration of the agreement or upon termination of the
agreement for any reason, the Customer is obligated to purchase all customized items, at the
replacement cost specified in the agreement. The non-personalized items are returned to the
general operating inventory of Petitioner and made available for use by other Customers.
Analysis
Tax Law § 1105 (a) imposes a tax on the retail sale of every item of tangible personal
property sold within this State, unless the Tax Law specifically provides an exclusion or
exemption from sales and use tax applicable to such item. The rental or lease of tangible personal
property is included within the definition of “retail sale.” See Tax Law § 1101(b)(5).
Tangible personal property purchased exclusively for resale (including rentals) is not
subject to sales tax at the time of purchase. See Tax Law § 1101(b)(4); Matter of EchoStar
Satellite Corp. v. Tax Appeals Trib., 20 NY3d 286 (2012). However, the fees charged for the
subsequent sale or rental of that property generally is subject to sales tax, unless an exemption
applies. Id.
Tax Law § 1105(c)(3)(ii) provides a specific exemption for laundry services. In addition
to the actual charge for laundering, the Court in Matter of Atlas Linen Supply Co. v. State Tax
Commn. (149 AD2d 824, 825, (3rd Dept.1989) found that receipts from supplying linens incident
to a laundry service are not subject to tax as the rental of tangible personal property, because
such rentals fall under the laundry service exclusion. The Court held that where operations are
“inseparably connected” to each other, they are not considered separate transactions for tax
purposes. The Court further found that the vendors were not “reselling” taxable personal
property, but rather using such property to perform an exempt service. Therefore, tangible
personal property purchased only for use in performing an exempt service, such as laundering, is
not considered to be purchased for resale and therefore is not exempt from sales tax. See 20
NYCRR § 526.6(c)(7).
However, simply being “inseparably connected” to a service is not always enough to
prevent an item from being deemed a separate transaction for sales tax purposes. The Court of
Appeals in EchoStar found that certain items necessary to provide EchoStar’s satellite service

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were acquired for the purpose of rental and, as such, they were resale purchases within the
meaning of the statute. See 20 NY3d 286 (2012), citing Matter of Albany Calcium Light Co., 44
NY2d 987 (1978) and Galileo Int’l P’ship v Tax Appeals Tribunal, 31 AD3d 1072, 1074-75, (3rd
Dep’t 2006). The Court found in EchoStar that, even though the equipment rented in conjunction
with the provision of satellite service could not be used for any other purpose, it still qualified for
the resale exclusion because: the equipment was not merely incidental to the service, the
customer agreements were structured as leases, the equipment rental fees were directly
proportional to the number of items provided, and the equipment charges were separately
delineated on monthly invoices. See EchoStar, 20 NY3d at 292.
Here, Petitioner provides garments, linens and other textiles to its Customers for an
established fee, which includes laundry services. Although Petitioner characterizes its service as
a rental, Customers may not rent these items without engaging the laundry service and nonpersonalized items are part of the general inventory and are not set aside for the exclusive use by
any particular Customer. Further, the rental charge for the textiles is not stated separately from
the laundry charges. The mere characterization of an agreement as a rental is not conclusive, if
the nature of the transaction would indicate otherwise. See Greene & Kellogg, Inc. v. Chu, 134
AD2d 755 (3d Dep’t 1987). In this instance, the fee charged is not based solely on the rental
value of the items without taking into account the value of the laundry service. For example, by
the terms of the rental agreement, if the agreement is terminated or service is discontinued, the
Customer is required to purchase all customized items for the full replacement cost. The
agreement does not provide for any prorated credit based on the previously paid rentals.
Therefore where the Customer actually purchases the “rented” articles for full replacement cost,
the past rental payments are credited solely to the laundry and delivery services.
Although Petitioner’s provision of linens to the Customers are characterized as “rentals”
in the customer agreement and the rental fee is proportional to the linens provided, the fees
charged to the Customers for laundering and delivering those linens are included in the rental fee
and are not separately stated. Based on the holding in Atlas noted above, the provision of linens
is incidental to a laundry service, falling under the laundry service exclusion. Therefore, such
items are not purchased for resale. Hence, the purchase of these items is subject to sales tax at
the time of purchase by Petitioner. To the extent that Petitioner’s purchases are articles of
clothing, those items would be exempt from New York state sales tax if the price per item is less
than $110. It should be noted that local sales tax may still apply to articles of clothing exempt
from New York State sales tax. See Publication 718-C, Sales and Use Tax Rates on Clothing
and Footwear.
The Petitioner also characterizes its provision of hampers, lockers and mats as rentals.
These rentals incur a fee that is separately stated in the agreement. Although these items are not
rented independently of the laundry services, and are not available to the Customer for outright
purchase, Customers determine the number, if any, of these items they require and may rent
additional items to use for other purposes unrelated to the garment and linen rentals.
Consequently, the rental of hampers and lockers and other tangible items can be characterized as
rentals not integral to the laundry service, and therefore may be purchased by Petitioner for
resale. Therefore, Petitioner must collect sales tax on its receipts from its rentals of such
property.

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May 12, 2015

Although monogramed garments generally are items of tangible personal property subject
to sales tax, where a laundry service applies a monogram to garments that are provided only in
conjunction with such service, the monogram, like the garment, is not a separate “sale” and is
treated as incidental to the laundry service.
See TSB-M-06-(6)(S).
Therefore the
monogramming fee charged by Petitioner is not subject to sales or use tax.
Finally, we conclude that the lost item fee is not subject to sales tax. The Division of Tax
Appeals in Matter of Tristate Industrial Laundries Inc. (1989 WL 138593) found that a fee for a
predetermined lost or unreturned item was actually a penalty for losing the item, not a sale.
Because the purpose of charging a fee for unreturned items is to deter loss or theft of the items
and does not anticipate the sale of those items, the fee is not subject to sales tax. However, any
charge Petitioner imposed on a Customer for customized items would be subject to sales tax
whether the charge is made because the contract was terminated before its stated end date, or
because the customer wished to purchase those items after the end of the contract period. To the
extent that those items are articles of clothing, those items would be exempt from New York
state sales tax if the price per item is less than $110. It should be noted that local sales tax may
still apply to articles of clothing exempt from New York State sales tax. See Publication 718-C,
supra.

DATED: May 12, 2015

NOTE:

/S/
DEBORAH R. LIEBMAN
Deputy Counsel

An Advisory Opinion is issued at the request of a person or entity. It is limited to the
facts set forth therein and is binding on the Department only with respect to the
person or entity to whom it is issued and only if the person or entity fully and
accurately describes all relevant facts. An Advisory Opinion is based on the law,
regulations, and Department policies in effect as of the date the Opinion is issued or
for the specific time period at issue in the Opinion. The information provided in this
document does not cover every situation and is not intended to replace the law or
change its meaning.