TAX RELEASE: Clean Towel and Uniform Providers

Statutes: Sections 77.52(2)(a)6. and 10., and 77.54(2), Wis. Stats. (2009-10)

Wis. Adm. Code: Section Tax 11.72(2), Wis. Adm. Code (May 2010 Register) and sec. Tax 11.41(2)(a)15., Wis. Adm. Code (November 2010 Register)

Introduction: The tax treatment of services and products provided by clean towel and uniform providers depends on whether (1) the towels or uniforms are owned by the provider, and (2) whether a valid exemption exists. This tax release provides examples of sales by clean towel and uniform providers.

Note: This tax release supersedes any previous rulings on this topic.

Background: Section 77.52(2)(a)6., Wis. Stats. (2009-10), imposes Wisconsin sales tax, in part, on "[l]aundry, dry cleaning, pressing and dyeing services, except when performed on raw materials or goods in process destined for sale …"

With certain exceptions, sec. 77.52(2)(a)10., Wis. Stats. (2009-10), imposes Wisconsin sales tax on certain services, including cleaning, of all items of tangible personal property unless, at the time of such service, a sale of the type of property serviced would have been exempt to the customer, with certain exceptions.

Section 77.54(2), Wis. Stats. (2009-10), provides, in part, an exemption from Wisconsin sales and use taxes for the following:

"The sales price from the sales of and the storage, use, or other consumption of tangible personal property … that is used exclusively and directly by a manufacturer in manufacturing an article of tangible personal property or item or property under s. 77.52 (1) (b) or (c) that is destined for sale and … is consumed or destroyed or loses its identity in manufacturing …"

Section Tax 11.72(2), Wis. Adm. Code (May 2010 Register), provides, in part, that tax applies to the sales price “…from leasing, licensing, or renting clothing, including uniforms, towels, linens, or similar items, including cloth diapers, to commercial establishments or household users under agreements which provide for furnishing items and cleaning the items when they become soiled …”

Section Tax 11.41(2)(a)15., Wis. Adm. Code (November 2010 Register), provides that the following property is exempt from tax if used exclusively and directly by a manufacturer in manufacturing tangible personal property or items or property under s. 77.52 (1) (b) or (c), Stats., destined for sale and is consumed, destroyed, or loses its identity in manufacturing the property or item that is destined for sale:

"Gloves and other wearing apparel, including hair nets, beard nets and facemasks used by employees working on the production line to prevent contamination of the product while it is being manufactured."

The following examples illustrate the tax treatment when the towel and uniform provider owns the towels and uniforms versus when a laundry service is provided to the towels and uniforms.

Index to Examples:

  • Example 1 - Towel Service Owns Towels, Exempt Rental of Towels
  • Example 2 - Towel Service Owns Towels, Taxable Rental of Towels
  • Example 3 - Towel Service Owns Towels, Purchases Laundry Service to Towels
  • Example 4 - Towel Service Does Not Own Towels, Towel Service Provides Laundry Services
  • Example 5 - Uniform Provider Rents Smocks, Laundry Services Included
  • Example 6 - Uniform Provider Rents Smocks, Separate and Optional Charge for Laundry Services

Example 1 - Towel Service Owns Towels, Exempt Rental of Towels:

  • Towel Service provides a supply of towels to Manufacturer for a monthly fee. The fee is based on the number of towels that Manufacturer uses.
  • Manufacturer's only use of the towels is to clean machinery to prevent contamination of its product during its manufacturing process. The manufactured products (tangible personal property) are sold to Manufacturer's customers.
  • Towel Service retains ownership of the towels and makes no use of the towels other than to provide them to Manufacturer.
  • It is the responsibility of Towel Service to maintain and provide a supply of clean towels. Towel Service 's monthly fee is not reduced if Manufacturer chooses to clean the towels all or some of the time.
  • Periodically, Towel Service picks up soiled towels and provides clean towels to Manufacturer.
  • Towel Service cleans the soiled towels.
  • Towel Service continues to provide the cleaned towels to Manufacturer until the towels can no longer be cleaned.
  • The towels are then disposed of by Towel Service.
  • Manufacturer is required to return each towel to Towel Service that it receives, even if it is no longer in a usable condition.

Tax Treatment for Example 1: Towel Service is renting the towels to Manufacturer and may purchase these towels without tax for resale. Manufacturer may provide a fully completed exemption certificate to Towel Service claiming the exemption for rental of tangible personal property (the towels) that is used exclusively and directly by a manufacturer in manufacturing tangible personal property and is consumed or destroyed in the manufacture of tangible personal property destined for sale (sec. 77.54(2), Wis. Stats. (2009-10)).

Example 2 - Towel Service Owns Towels, Taxable Rental of Towels: Same as Example 1, except that Manufacturer's employees use the towels to clean tools after working on the machinery.

Tax Treatment for Example 2: Towel Service is renting the towels to Manufacturer and may purchase these towels without tax for resale. Manufacturer's rental of the towels is subject to tax, and Manufacturer may not provide Towel Service with an exemption certificate.

Example 3 - Towel Service Owns Towels, Purchases Laundry Service to Clean the Towels: Same as Example 1, except that when Towel Service picks up the towels from Manufacturer, Towel Service hires Laundry Service to clean the towels.

Tax Treatment for Example 3: The tax treatment is the same as the tax treatment stated in Example 1. Towel Service may provide Laundry Service with an exemption certificate claiming resale for its purchase of laundry services to towels that it rents to Manufacturer. The tax on laundry services does not apply to property that is only held for sale or rental (sec. 77.52(2)(a)6., Wis. Stats. (2009-10)).

Example 4 - Towel Service Does Not Own Towels, Towel Service Provides Laundry Services:

  • Manufacturer purchases towels from Vendor.
  • Manufacturer hires Towel Service to clean the towels for a monthly fee.
  • Manufacturer's only use of the towels is to clean machinery to prevent contamination of its product during the manufacturing process. The manufactured products (tangible personal property) are sold to Manufacturer's customers.
  • Periodically, Towel Service picks up soiled towels from Manufacturer.
  • Towel Service cleans the soiled towels and returns the towels to Manufacturer.
  • Towel Service continues to clean the towels owned by Manufacturer until the towels can no longer be cleaned.
  • The towels are then disposed of by Towel Service or Manufacturer.

Tax Treatment for Example 4: When purchasing the towels, Manufacturer may provide Vendor an exemption certificate claiming the exemption for tangible personal property (the towels) that is consumed or destroyed in the manufacture of tangible personal property destined for sale (sec. 77.54(2), Wis. Stats. (2009-10)).

Towel Service's sale of laundry services to Manufacturer's towels is subject to Wisconsin sales or use tax. Manufacturer may not provide Towel Service with an exemption certificate claiming the exemption in sec. 77.54(2), Wis. Stats. (2009-10).

Although Manufacturer's purchase of the towels qualifies for exemption, the laundry service to such towels is subject to tax. There is no exemption or exclusion in the law for receipts from laundering services for property (towels) that is exempt (unless the property is exempt for resale).

The imposition of tax on laundry services under sec. 77.52(2)(a)6., Wis. Stats. (2009-10), does not exclude laundry services if the underlying property is exempt. While an exclusion is provided for cleaning services to exempt property under sec. 77.52(2)(a)10., Wis. Stats. (2009-10), there is no similar exclusion for laundry services. Although laundry services are cleaning services, there is a separate, specific imposition of tax on laundry services. Therefore, we must look to this more specific imposition in sec. 77.52(2)(a)6., Wis. Stats. (2009-10), when determining the tax treatment of laundered items.

Example 5 - Uniform Provider Rents Uniforms, Laundry Services Included:

  • Uniform Provider supplies uniforms to Hotel for a monthly fee. The fee is based on the number of uniforms that Hotel uses.
  • Hotel's employees wear the uniforms during their work hours.
  • Uniform Provider retains ownership of the uniforms and makes no use of the uniforms other than to provide them to Hotel.
  • It is the responsibility of Uniform Provider to maintain and provide a supply of clean uniforms. Uniform Provider's monthly fee is not reduced if Hotel chooses to clean the uniforms all or some of the time.
  • Periodically, Uniform Provider picks up soiled uniforms and provides clean uniforms to Hotel.
  • Hotel cleans the soiled uniforms.
  • Uniform Provider continues to provide the cleaned uniforms to Hotel until the uniforms can no longer be cleaned or are worn out.
  • The uniforms are then disposed of by Uniform Provider.
  • Hotel is required to return each uniform to Uniform Provider that it receives, even if it is no longer in a usable condition.

Tax Treatment for Example 5: Uniform Provider is renting the uniforms to Hotel and may purchase these uniforms without tax for resale. Uniform Provider's charge for renting the uniforms to Hotel is subject to sales tax.

Example 6 - Uniform Provider Rents Uniforms, Separate and Optional Charge for Laundry Services: Same as Example 5, except that Hotel has the option to clean the uniforms itself and pay a lesser monthly fee for the uniform rental (i.e., if Uniform Provider charges a fee for cleaning the uniforms, it is a separate and optional charge).

Tax Treatment for Example 6: Uniform Provider is renting the uniforms to Hotel and may purchase these uniforms without tax for resale. Uniform Provider's charge for renting the uniforms to Hotel is subject to sales tax. Uniform Provider's separate and optional charge for the cleaning of the uniforms is for a taxable laundry service.