252 P.3d 885
Wash.2011Background
- Washington Imaging Services (WIS) provides medical imaging and bills patients/insurers for both imaging and interpretation in a global charge.
- Overlake Imaging Associates, a professional corporation, employs radiologists who interpret the images as independent contractors under contract with WIS.
- WIS pays Overlake a percentage of net receipts; patients are unaware of Overlake’s involvement or the contractual arrangement.
- The Department of Revenue assessed B&O tax on the full payments WIS received, arguing no pass-through; the trial court agreed with the Department, the Court of Appeals reversed, then the Supreme Court reversed again in favor of the Department.
- Rule 111 provides pass-through treatment for reimbursements/advances when the taxpayer is solely an agent for the client and the client is liable to third parties; the key issue is whether such agency relationship exists here.
- The Court held that WIS’s payments to Overlake do not qualify as pass-through because WIS was not acting as an agent for the patients; the payments are part of WIS’s gross income and subject to B&O tax; the contract between WIS and Overlake does not control agent status; WIS’s liability to Overlake was a contractual obligation, not solely agent liability.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Rule 111 pass-through applies. | Washington Imaging argues it acted as a pass-through agent. | Department argues no true agency; payments are gross income. | Rule 111 does not apply; payments are taxable gross income. |
| Whether WIS was the patients’ agent in paying Overlake. | Yes, as collection/agent for Overlake. | No true agency; patients owe Washington Imaging only. | No agency relationship; patients had no obligation to Overlake. |
| Whether the payments to Overlake are solely agent liability. | Payments are solely agent liability under Walthew-like reasoning. | Obligation arises from contract with Overlake, not solely agency. | Not solely agency liability; payments are a cost of doing business. |
| Does corporate practice of medicine doctrine affect B&O tax here. | Medical practice restriction should bar WIS from profits. | Corporation doctrine does not bar B&O tax on net income via independent contractors. | Doctrine does not negate B&O tax on gross income. |
| Is there a true agency under Christensen test (three prongs) for pass-through? | Facts show agency relationship. | No qualifying agency under Christensen; fails third prong. | Fails Christensen test; no pass-through. |
Key Cases Cited
- City of Tacoma v. William Rogers Co., 148 Wn.2d 169 (2002) (Pass-through requires true agency with client liability.)
- Rho Co. v. Dep’t of Revenue, 113 Wn.2d 561 (1989) (Agency liability framework for pass-through analysis.)
- Walthew, Warner, Keefe, Arron, Costello & Thompson v. Dep’t of Revenue, 103 Wn.2d 183 (1984) (Rule 111 excludes reimbursements that pass through as agency liability.)
- Pilcher v. Dep’t of Revenue, 112 Wn. App. 428 (2002) (Illustrates Christensen three-factor test for pass-through.)
- Medical Consultants Northwest, Inc. v. State, 89 Wn. App. 39 (1997) (Distinguishes MCN from Walthew; cautions fact stipulations.)
- William Rogers, 148 Wn.2d 169 (2002) (Clarifies agency vs. sole liability analysis in pass-through context.)