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March 3, 2026 Get Citation Alerts Download PDF Add Note

9w Halo v. Ador

Arizona Supreme Court

• Citations: None known

• Docket Number: CV-24-0288-PR

• Opinion

• Authorities (16)

• Cited By (0)

• Summaries (0)

• Similar Cases (194)

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Combined Opinion

                        by John R. Lopez, IV

IN THE

SUPREME COURT OF THE STATE OF ARIZONA
9W HALO OPCO, LP,
Plaintiff/Appellant,

v.

ARIZONA DEPARTMENT OF REVENUE,
Defendant/Appellee.

No. CV-24-0288-PR
Filed March 3, 2026

Appeal from the Arizona Tax Court,
The Honorable Erik Thorson, 1 Judge
No. TX2020-000967
REVERSED AND REMANDED

Memorandum Decision of the Court of Appeals
Division One
No. 1 CA-TX-23-0003
Filed November 7, 2024
VACATED

COUNSEL:

Dawn R. Gabel, Ryan Legal Services, PLLC, Scottsdale; Bennett Evan
Cooper (argued), Alexandra Crandall, Dickinson Wright PLLC, Phoenix,
Attorneys for 9W Halo OPCO, LP

Kristin K. Mayes, Arizona Attorney General, Clinten N. Garrett (argued),
Benjamin H. Updike, Syreeta Tyrell, Assistant Attorneys General, Phoenix,
Attorneys for Arizona Department of Revenue

Julie M. Kriegh, City Attorney, Office of the City Attorney, John C. Shafer,
III (argued), Assistant City Attorney, Karen Stillwell, Assistant Chief

1
The name of the Judge has been changed pursuant to Maricopa
County Superior Court Order Changing Name of Adult issued December
2, 2024.
9W HALO V. ADOR
Opinion of the Court

Counsel, Phoenix, Attorneys for City of Phoenix

Nancy L. Davidson, League of Arizona Cities and Towns, Phoenix,
Attorney for Amicus Curiae League of Arizona Cities and Towns

VICE CHIEF JUSTICE LOPEZ authored the Opinion of the Court, in which
CHIEF JUSTICE TIMMER and JUSTICES BOLICK, BEENE,
MONTGOMERY, KING and CRUZ joined.

VICE CHIEF JUSTICE LOPEZ, Opinion of the Court:

¶1 A.R.S. § 42-5159(B)(1) exempts from taxation “[m]achinery, or
equipment, used directly in manufacturing, processing, fabricating, job
printing, refining or metallurgical operations.” We consider the meaning
of “processing operations” in this tangible personal property use tax
exemption statute. We hold that the “processing operations” use
exemption applies to machinery or equipment that a taxed entity uses to
change the marketability of a product. Here, because the industrial
healthcare textile laundry facility changes the marketability of the textiles it
markets, it qualifies for the § 42-5159(B)(1) use exemption as a “processing
operation.”

¶2 We also consider whether the downstream transactions of a
taxpayer’s business—whether it sells or rents a product—are relevant to the
taxpayer’s eligibility for § 42-5159(B)(1)’s use exemption as a “processing
operation.” We hold that downstream transactions are irrelevant to the
“processing operation” inquiry, which only examines distinct operations
within the entire business.

BACKGROUND

¶3 Plaintiff-Appellant, 9W Halo OPCO, LP, d/b/a Angelica
Textile Services, LP (“Angelica”), rents reusable healthcare textiles—such
as bedsheets, patient gowns, and surgical scrubs— to hospitals, outpatient
facilities, and long-term care centers in Arizona. Angelica’s facility
processes 30 million pounds of healthcare textiles a year. Used healthcare

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9W HALO V. ADOR
Opinion of the Court

textiles are routinely contaminated with viruses and bacteria, such as E.
coli, and cannot be re-used in patient care unless they are specially
laundered and sterilized. Angelica cannot even offer new textiles to
healthcare facilities for use before processing them because it must remove
any bacteria introduced during the manufacturing process. Angelica’s
operation is subject to federal and local regulations concerning healthcare
textiles.

¶4 Angelica uses a variety of washing and drying equipment to
clean and disinfect the textiles. After a pre-wash, the textiles undergo a
twelve-module cleaning cycle, which requires injection of up to eight
different chemicals in precise amounts that vary by textile type. The
application of chemicals during the cleaning process changes the
composition of the textiles by removing all potential contaminants from the
textile fibers.

¶5 From 2014 to 2018, Angelica purchased equipment and
chemicals to use in its textile laundering and disinfecting process and
remitted State and City of Phoenix (“City”) use taxes for these purchases.
In 2018, Angelica submitted claims for use tax refunds based, in part, on
§ 42-5159(B)(1) and Phoenix City Code §§ 14-110(a)(1) and 14-660(g). After
initially denying Angelica’s refund claim, Defendant-Appellee, the Arizona
Department of Revenue (“Department”), revised its assessment in 2020 and
denied roughly half of the requested refund. 2 Angelica appealed the
Department’s decision to the Arizona Tax Court and subsequently moved
for summary judgment.

¶6 In its tax-court motion, Angelica argued that the purchased
laundry equipment qualified for a use tax exemption because it is used in a
“processing operation” under § 42-5159(B)(1). The Department, joined by
the City, cross-motioned for summary judgment, alleging that Angelica’s
“linen rental business” did not qualify as a tax-exempt “processing

2 The Department also denied part of Angelica’s claim under P.C.C.
§§ 14-110(a)(1), -660(g). Although the City Code uses the term
“income-producing capital equipment,” the sections adopt a use tax
exemption identical to § 42-5159(B)(1). Compare P.C.C. §§ 14-110(a)(1),
-660(g) with A.R.S. § 42-5159(B)(1). Both the tax court and the court of
appeals focused solely on the application of § 42-5159(B)(1), the issue
currently before this Court.
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9W HALO V. ADOR
Opinion of the Court

operation” because Angelica does not change raw materials into finished
products. The tax court upheld the Department’s decision and granted it
summary judgment. In its ruling, the tax court reasoned that it “must look
at Angelica’s business as a whole” to determine whether it qualified for the
use tax exemption under § 42-5159(B)(1). Angelica appealed the tax court’s
decision.

¶7 The court of appeals affirmed the tax court’s ruling, reasoning
that the commonly understood meaning of “processing” is the “preparation
for market” or “to convert [a product] into marketable form.” 9W Halo
OPCO, LP v. Ariz. Dep’t of Revenue, No. 1 CA-TX 23-0003, 2024 WL 4702300,
at *4 ¶ 23 (Ariz. App. Nov. 7, 2024) (mem. decision). The court found that
Angelica’s business model—namely, renting healthcare textiles and
repeatedly processing the same articles for rental—did not satisfy the
court’s definition of “processing.” Id. at *5 ¶¶ 26–28.

¶8 Angelica petitioned this Court for review. We granted review
to resolve a recurring issue of statewide importance: how § 42-5159(B)(1)’s
use tax exemption for “processing operations” applies to businesses in
Arizona. We have jurisdiction under article 6, section 5(3) of the Arizona
Constitution.

DISCUSSION

¶9 Summary judgment is appropriate if there are no genuine
issues of material fact, and one party is entitled to judgment as a matter of
law. Ariz. R. Civ. P. 56(a). “[W]e review a grant of summary judgment de
novo,” viewing the facts in a light most favorable to the party against whom
judgment was granted. Dabush v. Seacret Direct LLC, 250 Ariz. 264, 267 ¶ 10
(2021).

¶10 The parties do not dispute the material facts concerning the
technical operation of Angelica’s business. Instead, they dispute whether
§ 42-5159(B)(1)’s use exemption applies to Angelica’s operation. We review
questions of statutory interpretation de novo. Planned Parenthood Ariz., Inc.
v. Mayes, 257 Ariz. 137, 142 ¶ 13 (2024).

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9W HALO V. ADOR
Opinion of the Court

I.

¶11 We must resolve the parties’ dispute over two threshold
statutory interpretative issues before we define “processing” under
§ 42-5159(B)(1): whether the court of appeals erred by (1) adopting the
“commonly understood meaning” of “processing” in 1989, and
(2) invoking the doctrine of legislative acquiescence. 9W Halo, 2024 WL
4702300, at *4 ¶¶ 22–23.

A.

¶12 The court of appeals moored its interpretation of
§ 42-5159(B)(1) to Meredith Corp. v. State Tax Comm’n, 23 Ariz. App. 152, 153
(1975), which held that courts must apply the statute in a manner
“consistent with the ordinary man’s understanding of what constitutes a
‘processing operation’, rather than a scientific or technical interpretation.”
See 9W Halo, 2024 WL 4702300, at *4 ¶ 22. Notably, the court’s
interpretation mirrors the Legislature’s directive that “processing” and
similar terms in the statute “refer[] to and include[] those operations
commonly understood within their ordinary meaning.” § 42-5159(B)(1)
(emphasis added); 9W Halo, 2024 WL 4702300, at *4 ¶ 20.

¶13 Angelica, undeterred by this, contends that State ex rel. Ariz.
Dep’t of Revenue v. Capitol Castings, Inc., 207 Ariz. 445 (2004), requires courts
to interpret the use exemption statute using flexible and industry-specific
definitions. In Capital Castings, this Court considered whether
§ 42-5159(B)(1) applied to particular equipment used to manufacture
grinding balls for the mining industry. 207 Ariz. at 446 ¶¶ 1–2. We
instructed courts to “apply flexible and commonly used definitions of
machinery and equipment within the relevant industry.” Id. at 450 ¶ 24
(emphasis added). But the “flexible” and “industry” qualifiers from Capital
Castings only apply when defining machinery and equipment. By contrast,
the statute expressly commands that “processing” be defined as it is
commonly understood within its ordinary meaning. § 42-5159(B)(1) (“The
term[] . . . ‘processing’ . . . as used in this paragraph refer[s] to and
include[s] those operations commonly understood within their ordinary
meaning.”).

¶14 The court of appeals correctly followed the Legislature’s
instruction to use the “ordinary meaning” of “processing.” This approach

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9W HALO V. ADOR
Opinion of the Court

also aligns with this Court’s directive that, in tax cases, it is important to
“gain the[] fair meaning” of the statute’s words to avoid gathering “new
objects of taxation by strained construction or implication.” Ariz. State Tax
Comm’n v. Staggs Realty Corp., 85 Ariz. 294, 297 (1959).

B.

¶15 Angelica also argues that the court of appeals misapplied the
“legislative acquiescence” doctrine. The doctrine’s main principle is that
“the legislature, when it passes a statute, knows the existing laws.” Daou v.
Harris, 139 Ariz. 353, 357 (1984). But the application of the doctrine is
limited to “instances in which the [L]egislature has considered and declined
to reject the relevant judicial interpretation.” Delgado v. Manor Care of
Tucson AZ, LLC, 242 Ariz. 309, 314 ¶ 24 (2017) (internal quotations omitted)
(quoting Sw. Paint & Varnish Co. v. Ariz. Dep’t of Env’t Quality, 194 Ariz. 22,
25 ¶ 21 (1999)). The doctrine applies only “where a statute which has been
construed by a court of last resort is reenacted in the same or substantially
the same terms.” Madrigal v. Indus. Comm’n, 69 Ariz. 138, 144 (1949); see also
Calvert v. Farmers Ins. Co. of Ariz., 144 Ariz. 291, 297 (1985) (noting that the
Arizona Supreme Court is the court of last resort in the state).

¶16 Angelica claims that the court of appeals misapplied the
legislative acquiescence doctrine by observing that “the [L]egislature is
aware of the state of the law when it adopts or amends a statute,”
immediately after citing G.B Inv. Co. v. Ariz. Dept. of Revenue, No. 629-88-S
(Ariz. Bd. of Tax App. June 20, 1989), to determine the meaning of
“processing” at the time § 42-5159’s precursor was adopted. 9W Halo, 2024
WL 4702300, at *3–4 ¶¶ 19–21. We disagree. Although the doctrine of
legislative acquiescence is inapplicable here because the Arizona Board of
Tax Appeals is not the court of last resort, we are not convinced that the
court of appeals’ passing reference to the Legislature ever invoked the
doctrine at all.

II.

¶17 Having resolved the preliminary interpretive issues, we turn
to the parties’ first primary dispute—the meaning of “processing
operation” under § 42-5159(B)(1).

6
9W HALO V. ADOR
Opinion of the Court

A.

¶18 “When interpreting statutes, we begin with the text.” Franklin
v. CSAA Gen. Ins. Co., 255 Ariz. 409, 411 ¶ 8 (2023). The best indication of
legislative intent is a statute’s plain language, which, when clear, “we apply
[] unless an absurd or unconstitutional result would follow.” Premier
Physicians Grp., PLLC v. Navarro, 240 Ariz. 193, 195 ¶ 9 (2016). If the text is
“reasonably susceptible to differing interpretations,” it is ambiguous, and
this Court turns to “secondary factors, such as the statute’s context, subject
matter, historical background, effects and consequences, and spirit and
purpose.” Id.

¶19 We strictly construe tax exemption statutes and presume
against exemptions. Tucson Transit Auth., Inc. v. Nelson, 107 Ariz. 246, 252
(1971). However, tax exemptions “should not be so strictly construed as to
defeat or destroy the legislative intent and purpose.” Capitol Castings, Inc.,
207 Ariz. at 447 ¶ 10 (citation modified). With these principles in mind, we
turn to the statute.

¶20 Section 42-5159(B)(1) provides a tangible personal property
use tax exemption for:

Machinery, or equipment, used directly in manufacturing,
processing, fabricating, job printing, refining or metallurgical
operations. The terms “manufacturing”, “processing”,
“fabricating”, “job printing”, “refining” and “metallurgical”
as used in this paragraph refer to and include those
operations commonly understood within their ordinary
meaning.

Section 42–5159(B)(1)’s purpose is “to stimulate business investment in
Arizona in order to improve the state’s economy and increase revenue from
other taxes, such as income and property taxes.” Capitol Castings, Inc., 207
Ariz. at 448 ¶ 13.

¶21 Before § 42–5159(B)(1)’s enactment, in Moore v. Farmers Mut.
Mfg. & Ginning Co., we defined “processing” as “to subject (especially raw
material) to a process of manufacturing, development, preparation for the
market, etc[.]; to convert into marketable form.” 51 Ariz. 378, 382 (1938)
(quoting Webster’s New International Dictionary) (internal quotations

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9W HALO V. ADOR
Opinion of the Court

omitted). Here, the court of appeals adopted Moore’s definition. 9W Halo,
2024 WL 4702300, at *4 ¶ 24. The Department contends that Moore renders
raw material a requirement of any “processing operation.” We are
unpersuaded. When adopting its “processing” definition, Moore clarified
that it was the one that “obviously applies to an operation like the ginning
of cotton”—a raw material—the “processing” at issue in the case. Moore, 51
Ariz. at 382. We do not interpret Moore to require raw material as an
element of “processing” under the statute.

¶22 Furthermore, Moore interpreted different statutes, as applied
to cotton ginning, and its definition’s parenthetical reference to “especially
raw material” does not exclude processing of other material. 3 To be sure,
Moore provides relevant context for the historical meaning of “processing.”
But we are unconvinced that the Legislature intended to limit “processing”
to raw materials when it enacted § 42–5159(B)(1) nearly thirty years later.

B.

¶23 If a statute does not define a term, we “may consider
dictionaries and written publications to discern the word’s common
meaning and usage, respectively, at the time the legislature enacted the
statute.” Garibay v. Johnson, 259 Ariz. 248, 255 ¶ 24 (2025). Here, as noted,
the Legislature clarified that “processing” refers to “those operations
commonly understood within their ordinary meaning.” See § 42-5159(B)(1)
(emphasis added). Thus, the statute expressly requires that “operation”
and “processing” be read together as “processing operation.” Accordingly,
we turn to dictionary definitions to determine the common and ordinary

3 “Especial” means “not general” and “distinguished among others of the
same class as exceptional in degree.” Especial, Webster’s Collegiate
Dictionary (5th ed. 1936) (a dictionary based on Webster’s New
International Dictionary, the reference cited in Moore for the definition of
“process”). As used in Moore, “especially” means “in reference to one
person or thing in particular” as distinguished from others. Especially,
Webster’s Universal Dictionary of the English Language (1937). While
synonymous with words like “particularly” and “mainly,” the term
“especially” does not mean “exclusively.” See id.; Especial, Webster’s
Collegiate Dictionary (5th ed. 1936) (synonyms include “peculiar” and
“uncommon”).
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Opinion of the Court

meaning of a “processing operation,” see Garibay, 259 Ariz. at 255 ¶ 24,
before examining our relevant jurisprudence.

1.

¶24 We begin by surveying dictionary definitions. The
Legislature first enacted the precursor to § 42-5159(B)(1) in 1967 and
reenacted the statute in its current form in 1989. Compare 1967 Ariz. Sess.
Laws, ch. 2, § 3 (3d Special Session) with 1989 Ariz. Sess. Laws, ch. 132, § 35.
Accordingly, we consider definitions from 1967 and 1989, as well as the
intervening period.

¶25 Standard dictionary definitions of “process” included “a
series of actions or operations conducing to an end” in 1967, and “a
systematic series of actions directed to some end” in 1989. Process,
Webster’s Seventh New Collegiate Dictionary (1967); Process, Webster’s
Encyclopedic Unabridged Dictionary of the English Language (1989). In
1989, “process” was also described as “a series of progressive and
interdependent steps by which an end is obtained.” Process, Webster’s
Encyclopedic Unabridged Dictionary of the English Language (1989).
Ultimately, the standard dictionary definitions emphasize “a series of
actions” directed to an end.

¶26 The relevant legal definitions of “process” are consistent with
this finding. In 1967, Black’s Law defined “process” as “a series of actions,
motions or occurrences; progressive act or transaction; continuous
operation; method, mode or operation, whereby a result or effect is
produced; . . . a chemical process . . . .” Process, Black’s Law Dictionary (4th
ed. 1968) (the 4th edition was revised in 1968 and current in 1967). By 1989,
Black’s Law had expanded the definition of “process” to include a “means
to prepare for market or to convert into marketable form.” Process, Black’s
Law Dictionary (5th ed. 1979) (citing Emp. Sec. Comm’n of Ariz. v. Bruce
Church, Inc., 109 Ariz. 183 (1973)). Both Black’s Law definitions include the
phrases “a series of actions” and a “method, mode or operation, whereby a
result . . . is produced.” Compare Process, Black’s Law Dictionary (4th ed.
1968) with Process, Black’s Law Dictionary (5th ed. 1979).

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9W HALO V. ADOR
Opinion of the Court

2.

¶27 We next consider our jurisprudence defining “processing.”
This Court first defined “processing” in 1938 in Moore. The Moore definition
adopted a meaning similar to the dictionary definitions, including
“preparation for the market” and “convert into marketable form.” Moore,
51 Ariz. at 382. Thirty-five years after Moore, we considered the term
“processing” in a different statute and noted, consistent with standard
dictionary and Black’s Law definitions, that “a process has been defined as
a mode, method or operation, whereby a result is produced.” Bruce Church,
Inc., 109 Ariz. at 186. In Bruce Church, we also observed that “process” had
“been defined as to prepare for market or to convert into marketable form.”
Id. In fact, Black’s Law cited Bruce Church for one definition of “process” in
its fifth edition—the edition in effect in 1989. See Process, Black’s Law
Dictionary (5th ed. 1979).

¶28 In 1977, the court of appeals expanded the interpretive focus
under the statutory precursor to § 42-5159(B)(1) to “include those items
which are essential to [the exempt] operation and which make it an
integrated system.” Duval Sierrita Corp. v. Ariz. Dep’t of Revenue, 116 Ariz.
200, 206 (App. 1977). Duval Sierrita’s “integrated system” concept
establishes a baseline for defining the scope of the exempt “operation”
under § 42-5159(B)(1).

¶29 To delineate the parameters of a qualifying processing
operation’s integrated system, we turn to our jurisprudence. In Moore, we
held that cotton ginning was “processing” because it was a required step to
“prepar[e] [the product] for the market.” Moore, 51 Ariz. at 383. Thus,
Moore instructs that a “processing operation” is a necessary component of
product development. See id.; see also Alsco, Inc. v. Tennessee Dep’t of Revenue,
No. M2022-01019-COA-R3-CV, 2023 WL 5737452, at *9 (Tenn. Ct. App.
Sept. 6, 2023) (holding that an industrial-laundry sanitization process
qualified for a use tax exemption because it “result[s] in the textiles
undergoing a change in state or form” from soiled to sanitized). Capital
Castings is in accord. In that case, we opined that the inquiry into whether
machinery is used directly in processing operations must include whether
equipment touched, manipulated, affected, or added value to raw material
or a work in process. 207 Ariz. at 451 ¶ 25. Moreover, we clarified that
equipment used in post-production activities did not fall within the scope
of a processing operation. See id. Thus, the use tax exemption hinges on

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Opinion of the Court

whether the machinery or equipment was integral to the transformation of
a product. See Moore, 51 Ariz. at 382 (providing, as an example of
processing, the “sorting and repacking” of fruits and vegetables); Bruce
Church, 109 Ariz. at 187 (noting that “[c]ooling of a perishable product”
constitutes “preparation for market,” a key component of processing).

C.

¶30 We can synthesize the relevant dictionary definitions of
“processing” and “operation” and our jurisprudence interpreting
§ 42-5159(B)(1), its predecessor, and similar statutes into a single, operative
definition that reflects the commonly understood and ordinary meaning of
these statutory terms. A “processing operation” under § 42-5159(B)(1) is “a
series of integrated actions or methods that prepares a product for the
market or converts a product into marketable form.” See Moore, 51 Ariz.
at 382; Process, Black’s Law Dictionary (5th ed. 1979); Bruce Church, 109 Ariz.
at 186; see also Ariz. Dep’t of Revenue v. Sonee Heat Treating Corp., 178 Ariz.
278, 279 (Tax Ct. 1994) (“Processing means a series of actions or operations
conducing to an end . . . .” (internal quotations omitted)). “Series of
integrated actions or methods” defines the “operation,” while “prepares a
product for the market or converts a product into marketable form” defines
“processing.”

¶31 This definition is faithful to the Legislature’s directive to
utilize the ordinary meaning of “processing operation,” synthesizes
relevant dictionary definitions and our jurisprudence interpreting the term,
and adheres to the “common understanding” of the statute. Moreover, the
definition aligns with the Legislature’s purpose to prioritize the application
of the use tax exemption to industries and entities that contribute to the
market and the state economy. See Capitol Castings, Inc., 207 Ariz.
at 448 ¶ 13 (“Our interpretation of the statute therefore should further, not
frustrate, the policy of encouraging investment and spurring economic
development.”).

III.

¶32 We now consider the parties’ second primary
dispute—whether Angelica qualifies for the use tax exemption as a
“processing operation” under § 42-5159(B)(1).

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Opinion of the Court

A.

¶33 We first address whether § 42-5159(B)(1) requires or permits
consideration of a business’s downstream transactions. The court of
appeals gave dispositive, disqualifying force to Angelica’s business model
of renting healthcare textiles to its customers and retrieving and
reprocessing them for future rental. 9W Halo, 2024 WL 4702300,
at *5 ¶¶ 26–29. Indeed, the court described Angelica as a mere “laundry.”
Id. ¶ 29. The court reasoned that “preparation for market” does not include
renting a product to customers for later retrieval and reprocessing. Id. ¶ 28.
We disagree. The exemption statute does not contemplate, let alone
require, that a taxpayer’s downstream business transactions involve the
sale of a product to qualify as a “processing operation.” Thus, the court of
appeals’ reasoning is unsupported by the statute’s text.

B.

¶34 We next consider whether § 42-5159(B)(1)’s use tax exemption
is based on a business’s entire “operation.” The Department argues that
“operation” refers to an entire business. In support, the Department
contends that § 42-5159(G)(1)(b), which defines “manufacturing” as “the
performance as a business of an integrated series of operations,” evidences
the fungibility of the terms “operation” and “business” within the statutory
scheme. § 42-5159(G)(1)(b) (emphasis added). We are unpersuaded. Even
if “business” and “operation” may be used interchangeably in other
contexts, they are not synonymous under § 42-5159(B)(1). The
Department’s argument to the contrary fails for two reasons. First, the
(G)(1)(b) definition is limited to paragraph (G)(1). See § 42-5159(G)(1) (“For
the purposes of this paragraph: ‘[m]anufacturing’ means . . . .” (emphasis
added)). Second, (G)(1) addresses a tax exemption for “the purchase price
of electricity, natural gas or liquefied petroleum gas by: [a] qualified
manufacturing or smelting business.” See id. (emphasis added). In other
words, the (G)(1)(b) definition the Department invokes expressly applies to
a manufacturing or smelting business rather than an operation and creates a
different, inapplicable tax exemption.

¶35 Our conclusion that “business” and “operation” are not
perfect synonyms in the use tax scheme is not novel. In Bruce Church, we
implicitly acknowledged that “operation” is not necessarily synonymous
with “business” when we observed that “[c]ooling of a perishable

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Opinion of the Court

product . . . [and] sizing [and] sorting, etc. [] all [are] operations.” 109 Ariz.
at 187. By deeming each discrete step an “operation,” Bruce Church
supports our conclusion that the term “operation” is, in some instances,
narrower than “business” and may describe a single process within a
business.

¶36 This interpretation of “operation” also aligns with relevant
court of appeals opinions interpreting the use exemption statute. See, e.g.,
Duval Sierrita, 116 Ariz. at 206 (explaining that the “boundaries of the
exempt operation must be drawn taking into consideration the entire
operation as it is ‘commonly understood’ . . . .” (emphasis added)). The
reference to the “entire operation” in Duval Sierrita was to conveyors,
pipelines, and pumps that were “used directly” in mining and
metallurgical operations. Id. at 205. Thus, “entire operation” was narrowly
construed to include each individual operation, not the taxpayer’s entire
business operation. See id. at 206 (“The statute only exempts certain
operations and obviously these operations have a beginning and an end.
For example, the mining company which mines its ore in Arizona and ships
that ore by rail to Texas for smelting has completed the mining operation
when the ore is loaded and the smelting company has not begun its
metallurgical operation until that ore arrives in Texas.”).

¶37 Courts have misconstrued Duval Sierrita’s “entire operation”
phrase, resulting in jurisprudential misadventure in interpreting and
applying § 42-5159(B)(1) and its predecessor. In Duval Sierrita’s wake, the
court of appeals in Meredith pronounced that, in determining whether the
use tax exemption applied, “the question to be resolved is not whether the
equipment processes, but whether the recording, storage and later the
transmission of a television signal through the use of the equipment is a
‘processing operation.’” 23 Ariz. App. at 153. Concluding the exemption
did not apply, the court reasoned that “the ordinary man would think of
cotton or food as being processed and automobiles or toys as being
manufactured . . . [but] he would think of a television picture as being
broadcast and electricity as being generated.” Id. (emphasis added). Thus,
Meredith expanded the “entire operation” concept to include the common
man’s understanding of both the end product and the business as a whole.

¶38 On Meredith’s heels, the court of appeals in Ariz. Dep’t of
Revenue v. Blue Line Distrib., Inc. held that “the [use] exemption depends on
whether a [] business is commonly understood to be a manufacturing or

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Opinion of the Court

processing operation.” 202 Ariz. 266, 267 ¶ 9 (App. 2002) (emphasis added).
Blue Line reasoned that “manufacturing operation” and “processing
operation” generally “refer [] to such businesses as commercial glassworks,
sausage makers, grain mills, leather goods factories, slaughterhouses,
tanneries, and the like.” Id. at 268 ¶ 10 (emphasis added). Blue Line
effectively cabined the “processing operation” use exemption to a
taxpayer’s entire business operation—an interpretation inconsistent with
the structure and text of the use exemption statute. For this reason, we
disavow Blue Line. We also reject Meredith’s analysis to the extent it
suggests courts should analyze an entire business operation, rather than the
singular operations within a business.

¶39 The statutory text prescribes a narrow focus on individual
operations, rather than the transactions or nature of a business as a whole.
Section 42-5159 exempts only “machinery” or “equipment” that is “used
directly in . . . processing . . . operations.” (Emphasis added.) The statute
asks what operation the equipment is used in, rather than the type of
business for which the equipment is used.

¶40 An example illustrates this point. Section 42-5159(B)(1)
provides a use tax exemption for “‘[m]etallurgical operations’ [which]
include[] leaching, milling, precipitating, smelting and refining.”
Section 42-5159(B)(2) provides a use tax exemption for machinery or
equipment used directly in mining. A business could engage in one or more
of these activities. Duval Sierrita observed that a mining company which
mines and ships ore completes the mining operation upon shipment, while
a smelting company does not begin its metallurgical operation until it
receives the ore. 116 Ariz. at 206. In that scenario, each activity would
qualify for the use exemption under the statute. But what if a single
company, say a jeweler, purchased the mining and smelting operations?
Would each operation still qualify for the use tax exemption, or would the
company be precluded from exemptions based on the characterization of
its entire business as a jeweler? Of course, the answer is that the business
would be entitled to use exemptions for both mining and smelting because
the exemption is based on individual operations, rather than the
classification of the business as a whole.

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Opinion of the Court

C.

¶41 Having defined a “processing operation” under
§ 42-5159(B)(1) as “a series of integrated actions or methods that prepares a
product for the market or converts a product into marketable form,” we
must establish a framework for determining whether a processing
operation qualifies for the use tax exemption. To that end, we devise a
two-step inquiry, which asks whether: (1) an operation prepares a product
for the market or converts it into marketable form, and (2) the operation
uses machinery or equipment in a series of integrated actions or methods
during the preparation of the product. If both questions are answered in
the affirmative, the operation constitutes “processing” and qualifies for a
use tax exemption under the statute. However, only machinery or
equipment that touches, manipulates, affects, or adds value to a product
qualifies for the exemption. See Capitol Castings, Inc., 207 Ariz. at 451 ¶ 25.

D.

¶42 Angelica qualifies as a “processing operation” under
§ 42-5159(B)(1) because its textile laundering and disinfecting process
involves a series of integrated actions or methods that prepares a product
for the market or converts a product into marketable form. First, the
products in Angelica’s operation—healthcare textiles, new or used—are not
marketable for their intended use prior to the laundering and disinfecting
process. The fact that the textiles Angelica acquires may be marketable for
some other purpose before it processes them for the healthcare market is
irrelevant. See Bruce Church, 109 Ariz. at 187 (“The recognized test is not
whether a fruit or vegetable may be ready to eat at some given stage of the
process, but the proper test is whether the process is incident to the
preparation of the product for the market selected by the farmer.”). Second,
the twelve-module operation involves a series of integrated actions that
transform the healthcare textiles into a marketable form. Accordingly, the
machinery or equipment that touches, manipulates, affects, or adds value
to the healthcare textiles during Angelica’s cleaning process qualifies for
the use tax exemption. See Capitol Castings, Inc., 207 Ariz. at 451 ¶ 25. The
fact that Angelica’s processing operation prepares its product for market
rental rather than sale is irrelevant under the statute.

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Opinion of the Court

E.

¶43 Our definition of “processing operation” yields an analytical
framework that is true to § 42-5159(B)(1)’s text and purpose. It limits the
use tax exemption to the machinery and equipment used directly in an
operation involving a series of integrated actions or methods that prepares
a product for the market or converts a product into marketable form. And
it refocuses the scope of the exemption inquiry on the processing operation
rather than the entire business.

¶44 We acknowledge the Department’s concern about the limits
of our interpretation of § 42-5159(B)(1), including whether a restaurant or a
neighborhood laundromat may be entitled to a use tax exemption as a
processing operation. But our interpretation reflects the statute’s inherent
reach and scope, and our holding recognizing the use exemption for
Angelica’s federal and local-regulated, industrial medical textile
laundering and disinfecting operation is limited to its facts. We leave for
another day other businesses’ eligibility for the statute’s use tax exemption.

CONCLUSION

¶45 We vacate the court of appeals’ decision, reverse the tax
court’s summary judgment ruling in favor of the Department, and remand
to the tax court for further proceedings consistent with this Opinion.

¶46 We also deny Angelica’s request for an award of attorney fees
pursuant to A.R.S. § 12-348(B)(1) without prejudice to renewing its request
when the case is resolved.

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