If you are a business that rents out linens, pays to rent linens, or pays to have your linens laundered, it is important to understand which transactions are subject to Vermont tax. Depending on the situation, Vermont Sales and Use Tax applies to transactions involving the rental of linens and similar types of tangible personal property (TPP), such as dishware, cutlery, and glassware. It also applies to rental transactions involving machinery, equipment, tools, floormats, uniforms, and similar items.
There are two possible transactional arrangements involving linen cleaning services:
The customer owns linens and pays for a service to have them collected and laundered.
A rental business or laundry service owns the linens and effectively rents them out to the customer.
Linens Owned by the Customer
In this arrangement, a customer, such as a hotel, restaurant, or catering business, owns its own linens and pays a laundry service business to collect and clean the linens. In this case, the laundry cleaning is not subject to sales and use tax because it is a nontaxable service. There is no sale or rental of tangible personal property in the transaction between the customer and the laundry service. Instead, sales tax applies when the hotel or restaurant originally purchases the linens.
Linens Owned by a Rental Business
Similar to the arrangement described above, a rental business owns its own linens, equipment, or other tangible personal property and rents them to customers. The business must charge sales tax to its customers on the rental charge. Then, if it doesn’t have its own cleaning equipment, it sends soiled items to a laundry or cleaning service. The cleaning service is not subject to tax.
Linens Owned by the Laundry Service
Other times, a laundry service business provides linens and periodically changes and cleans them. This is always considered a rental of the linens, which is subject to the 6% Vermont Sales and Use Tax. The transaction is taxable, whether the service is paid on a monthly basis, a per cleaning basis, or some other pricing structure.
A cleaning service must collect tax for the full sales price charged, including any itemized charges for cleaning, delivery, or similar fee. The cleanliness of the linens is a necessary part of the rental transaction. Vermont Sales Tax applies to delivery charges and charges necessary to complete a rental transaction. Reg. § 1.9701(4) –1, Vermont Sales and Use Tax Regulations.
Services that are clearly separate from rental charges may be nontaxable. For example, a laundry service rents tablecloths to a restaurant and periodically exchanges used tablecloths with new ones. The laundry service also periodically cleans drapes owned by the restaurant. The full price charged for the tablecloth rental is subject to tax, but the charge for cleaning the drapes is not subject to tax. The laundry service should itemize the bill to clearly separate the taxable and nontaxable charges.
Note: A laundry service is not required to pay sales tax when it originally purchases linens that are to be rented out. That is because the sale is a nontaxable sale for resale (or lease).
When Vermont Meals and Rooms Tax Applies
When linens and similar items are rented out as part of a meal, whether itemized or not, the 9% Vermont Meals and Rooms Tax applies to all components of the meal service
Vermont Sales and Use Tax
A sales tax of 6% is imposed on the retail sales of tangible personal property (TPP) unless exempted by Vermont law. Sales tax is destination-based, meaning the tax is applied based on the location where the buyer takes possession of the item or where it is delivered. Sellers should collect Vermont Sales Tax on TPP delivered to destinations in Vermont at the time and place of the sale.
Businesses are responsible for collecting sales tax from their customers and then filing and paying the tax to the State of Vermont. Sales tax is reported using the accrual basis, requiring that sales tax be charged at the time of the sale and reported even if full payment for the sale has not been received by the seller.
Use tax is paid by the buyer of an item when the purchase subject to Vermont sales tax is made from a seller that is not registered by the state of Vermont to collect tax. Sales tax and use tax work together to create the same tax result whether a seller collects sales tax or not. Use tax has the same rate, rules, and exemptions as sales tax.
Learn more about Vermont Sales and Use Tax.
Local Option Tax May Apply
Some Vermont municipalities impose a local option tax of 1% in addition to state sales tax or meals and rooms tax. Businesses are responsible for collecting and remitting local option tax to the Vermont Department of Taxes. Note: Local option tax does not apply to use tax.
Vermont Business Tax Account and License
Businesses and nonprofits must register for a Vermont Business Tax Account and license before collecting Vermont tax. Registration is free.