Recent Sales and Use Tax Developments in Arizona, Missouri, and Washington

Executive Summary

• Arizona – The Arizona Supreme Court held that a healthcare linen rental company qualifies for the use tax manufacturing exemption, concluding that equipment used in sanitization “processing operations” changes the marketability of the product, regardless of whether the product is sold or rented.
• Missouri – The Missouri Department of Revenue amended its temporary storage rule to formally reflect Missouri Supreme Court precedent disqualifying the exemption when in‑state testing and certification exceed mere storage.
• Washington – Washington’s Department of Revenue announced a temporary penalty relief program for businesses impacted by the 2025 expansion of the sales and use tax base to additional services, including advertising and IT‑related services.

Source Deloitte

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Detailed Discussion

Arizona – State High Court Vacates Appellate Court and Holds Linen Rental Company Qualifies for Use Tax Manufacturing Exemption

Case No. CV‑24‑0288‑PR, Ariz. (Mar. 3, 2026)

The Arizona Supreme Court vacated a 2024 Arizona Court of Appeals decision and ruled in favor of a linen rental company that cleans and sanitizes large volumes of healthcare textiles, holding that its equipment qualifies for Arizona’s use tax manufacturing exemption.

At issue was whether the company’s industrial laundry and sanitization equipment constituted exempt machinery used in a “processing operation” under Arizona’s use tax statute. The taxpayer owns linens that it rents to healthcare customers, then repeatedly retrieves, cleans, chemically and mechanically sanitizes, and re‑rents those same linens.

In reversing the appellate court, the Supreme Court emphasized that the statutory focus of the exemption is on whether machinery and equipment are used in processing operations that change the marketability of a product. The Court concluded that the taxpayer’s sanitization process materially alters the condition of the linens such that they are suitable for healthcare use, thereby changing their marketability and qualifying the equipment for exemption.

Importantly, the Court rejected the argument that the taxpayer’s downstream transactions—specifically, renting rather than selling the linens—should affect eligibility for the exemption. The Court explained that the “processing operation” inquiry examines distinct operational activities within the business, not how the processed product is ultimately transferred to customers.

This decision provides meaningful clarification for businesses engaged in industrial cleaning, refurbishing, or conditioning activities, particularly where ownership of the processed property is retained and the product is leased or rented rather than sold.

Missouri – Amended Rule Reflects Caselaw Disqualifying Temporary Storage Exemption Due to In‑State Testing and Certification

Amended 12 CSR 10‑113.300, Temporary Storage, Mo. Dept. of Rev. (Mar. 2, 2026)

The Missouri Department of Revenue amended its regulation governing the state’s temporary storage exemption to incorporate long‑standing Missouri Supreme Court precedent addressing the scope of taxable “use.”

The amended rule expressly references a 2012 Missouri Supreme Court decision that denied the temporary storage exemption where a taxpayer conducted in‑state testing and certification of purchased parts prior to shipment out of state. The Court held that these activities went beyond mere temporary storage and constituted a taxable use within Missouri.

The Department adopted the amended rule as originally proposed in November 2025, without changes. By codifying this judicial interpretation, the Department reinforces that the temporary storage exemption does not apply when in‑state activities involve operational, functional, or quality‑assurance processes rather than passive holding of property.

The amended rule becomes effective 30 days after its March 2, 2026 publication in the Missouri Register. Taxpayers that rely on the temporary storage exemption—particularly those with logistics, testing, or certification operations in Missouri—may wish to reevaluate their exemption positions in light of the clarified regulatory guidance.

Washington – Department of Revenue Announces Temporary Penalty Waiver Program for Newly Taxable Services

ESSB 5814 Penalty Relief Program, Wash. Dept. of Rev. (Mar. 4, 2026)

The Washington Department of Revenue announced a temporary program offering potential penalty relief for businesses impacted by the expansion of Washington’s sales and use tax base under legislation enacted in 2025 and effective October 1, 2025.

The legislation, ESSB 5814, significantly broadened the tax base to include numerous additional services, including defined advertising services (digital and nondigital), information technology training, technical support, network operations and support assistance, help desk services, in‑person software and hardware training, and custom website development services.

Recognizing that these changes were challenging for many businesses to interpret and implement before the law took effect, the Department will consider waiving certain penalties—excluding evasion, negligence, and tax avoidance penalties—for:

• Uncollected Washington retail sales tax and unpaid Washington use tax attributable to ESSB 5814; and
• Reporting periods from October 1, 2025, through December 31, 2026.

To qualify, taxpayers must owe tax specifically due to the ESSB 5814 changes and submit an application for penalty relief by September 30, 2027. For preexisting contracts that qualified for temporary sales tax relief, penalty relief begins when the contract no longer qualifies for such relief or on April 1, 2026, whichever occurs first, and ends on December 31, 2026.

This program provides a limited compliance window for affected businesses to voluntarily report and pay tax while mitigating exposure to penalties associated with Washington’s expanded service taxation regime.

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