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IN THE SUPREME COURT OF THE STATE OF WASHINGTON

WASHINGTON IMAGING SERVICES, LLC,

) ) ) Respondent, ) ) v. ) ) WASHINGTON STATE DEPARTMENT ) OF REVENUE, ) ) Petitioner. ) _______________________________________)

No. 84101-2

En Banc

Filed May 19, 2011

MADSEN, C.J.--This is a business and occupation (B&O) tax case.1 The taxpayer, Washington Imaging Services, is a medical imaging company that retains Overlake Imaging Associates, a professional corporation, as an independent contractor whose radiologists interpret the images that Washington Imaging generates. After patients and their insurers pay Washington Imaging for the imaging services, Washington Imaging pays Overlake a percentage of net receipts pursuant to the terms of contracts between Washington Imaging and Overlake. Although the patients are aware that the

B&O taxes are imposed on the gross income of a business for the privilege of engaging in business activities in Washington.
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No. 84101-2 images created by Washington Imaging are interpreted by a physician, they do not know of Overlake's involvement or of the contractual arrangements between Washington Imaging and Overlake. The issue is whether Washington Imaging must pay B&O tax on the entire amount received from the patients and their insurers, or whether the amounts that Washington Imaging pays to Overlake qualify as "pass-through" payments on which Washington Imaging does not owe B&O tax. The trial court granted summary judgment in favor of the Department of Revenue (the Department), ruling that the amounts paid to Overlake do not qualify for pass-through treatment. The Court of Appeals reversed. We reverse the Court of Appeals. Washington Imaging's payments to Overlake do not qualify for pass-through treatment because Washington Imaging does not make the payments on behalf of the patients as their agent. Put another way, the patients have no obligation to pay Overlake, and Washington Imaging does not act in an agent's capacity to pass payments from the patients through to Overlake. All of the payments received by Washington Imaging constitute gross income to Washington Imaging and the B&O tax is owed on the entire amount that Washington Imaging receives. FACTS Washington Imaging is a limited liability company that operates medical imaging facilities in Bellevue and Issaquah, providing medical imaging services to patients who are referred to Washington Imaging by their physicians. Overlake is a Washington professional services corporation that employs radiologists. Pursuant to contracts 2

No. 84101-2 between Washington Imaging and Overlake, after Washington Imaging generates a medical image (such as an x ray or CT (computed tomography) scan), an Overlake radiologist provides interpretation of the image. The first contract dates from 1996 and governs terms and conditions under which Overlake provides its radiologists' interpretations. A second contract addresses financial arrangements and provides that Washington Imaging will bill and collect payment for both the imaging and the interpretation. By contract, Washington Imaging compensates Overlake by paying a percentage of the amounts that Washington Imaging collects. The amount that Washington Imaging must pay Overlake is determined by their contracts.2 The resulting product provided by Washington Imaging is a written report that assists the patients' physicians in diagnosing and treating patients. This product requires both the production of the medical image (referred to by the parties as the technical component) and the medical interpretation of the image by a radiologist (the professional component). Both of these components are essential to the medical imaging services that Washington Imaging provides; the technical component alone is incomplete in and of itself and does not constitute the medical imaging service that Washington Imaging provides. Patients are not aware of the arrangements between Washington Imaging and Overlake. When a patient is referred to Washington Imaging, Washington Imaging
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Originally, the percentages of net collections that were paid to Overlake were based on Medicare reimbursements for specific procedures, with numerous procedures averaged into broad categories of imaging. Even though Medicare reimbursements have changed over time, the percentage split between Washington Imaging and Overlake has remained the same.

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No. 84101-2 schedules the patient for the requested medical image. At the imaging facility, the patient is advised that the image will be interpreted by a qualified physician--thus, the patient knows that the imaging involves both creation of the image and interpretation of the image by a physician. The patient is not told, however, that Overlake is involved or that he or she has any obligation to pay Overlake. Instead, the patient signs an agreement to be financially responsible to Washington Imaging and assigns any insurance payments to Washington Imaging: PRIVATE PAY: The undersigned agrees, whether signing as agent or as patient to be financially responsible to Washington Imaging Services, LLC for charges not paid by insurance. I understand this amount is due upon billing. INSURANCE COVERAGE: I hereby assign payment directly to Washington Imaging Services, LLC for benefits otherwise payable to me, but not to exceed the charges for service. Any portion of charges not paid by the insurance company will be billed to me and is then due and payable within 30 days of invoice. Clerk's Papers (CP) at 141. Patients' insurance companies also contract with Washington Imaging, but not Overlake, to reimburse for medical imaging services provided at the Washington Imaging facilities. For each medical imaging services transaction, Washington Imaging issues a bill for both the technical and the professional components of the medical imaging service in a single charge, i.e., global billing. However, the bill is for one amount--there are no separate charges for imaging and interpretation. If the patient is insured, the bill is sent to the insurer and an informational statement is sent to the patient. The bills are on

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No. 84101-2 Washington Imaging letterhead and ask that payments be remitted to Washington Imaging. The bills do not mention Overlake or any agreement or obligation to pay Overlake. If insurance does not cover the entire amount, a secondary bill is sent to the patient for a co-pay or deductible. This bill shows the initial charge, any adjustment of the charge by the insurer, the amount paid by the insurance company, and the amount the patient still owes. This bill contains the name of the radiologist, but it does not mention Overlake or give any indication of any amounts paid to or owed to Overlake. Patients have no say in how much of the global fees collected by Washington Imaging are sent on to Overlake--as explained, they are unaware of Overlake's existence or the contractual arrangements between Washington Imaging and Overlake. Similarly, the insurance companies have no say in how much of what they pay goes to Overlake. Pursuant to the contract between Washington Imaging and Overlake, if the global bill sent by Washington Imaging is not paid, then Washington Imaging does not owe any payment to Overlake. The Department audited Washington Imaging for the period January 2000 through July 2005 and issued B&O tax assessments on the amounts that Washington Imaging paid to Overlake. The Department's Appeals Division affirmed, and Washington Imaging paid. In September 2007, Washington Imaging commenced this refund action in Thurston County Superior Court pursuant to RCW 82.32.180. Washington Imaging moved for summary judgment, contending that the amounts it pays to Overlake are "passthrough" payments on which it is not liable for B&O tax under WAC 458-20-111 (Rule 5

No. 84101-2 111). The trial court denied Washington Imaging's motion and granted summary judgment in favor of the Department. Washington Imaging appealed and the Court of Appeals reversed. Wash. Imaging Servs., LLC v. Dep't of Revenue, 153 Wn. App. 281, 222 P.3d 801 (2009). DISCUSSION This matter is on review of summary judgment. A grant of summary judgment is reviewed de novo, with the court engaging in the same inquiry as the trial court. TracFone Wireless, Inc. v. Dep't of Revenue, 170 Wn.2d 273, 280-81, 242 P.3d 810 (2010); Wilson v. Steinbach, 98 Wn.2d 434, 437, 656 P.2d 1030 (1982). Summary judgment is proper if there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. CR 56(c). Here, there are no disputed issues of material fact. Rather, the issue is how the B&O tax statutes and Rule 111 apply to the facts of this case, which is a question of law reviewed de novo. See, e.g., Erwin v. Cotter Health Ctrs., 161 Wn.2d 676, 678, 167 P.3d 1112 (2007) (application of law to the facts of a case is a question of law reviewed de novo); Tapper v. Emp't Sec. Dep't, 122 Wn.2d 397, 403, 858 P.2d 494 (1993) (same); In Estate of Jones, 116 Wash. 424, 426, 199 P. 734 (1921) (same). As the taxpayer seeking a refund of B&O taxes that it paid, Washington Imaging has the burden of proving that the Department incorrectly assessed the tax and it is entitled to a refund. RCW 82.32.180. Thus, Washington Imaging has the burden of showing that it is not subject to B&O tax on the payments it makes to Overlake. 6

No. 84101-2 B&O taxes are assessed on every person "for the act or privilege of engaging in business activities." RCW 82.04.220(1). The tax is assessed on the "gross income" of the business. Id. "Gross income" of the business is defined as "the value proceeding or accruing by reason of the transaction of the business engaged in" without deductions for business expenses. RCW 82.04.080. Included in gross income is "compensation for the rendition of services." Id. The issue is whether the total of the payments received by Washington Imaging is gross income of the business, with no reduction for amounts paid to Overlake. During the relevant period "[Washington Imaging] presented itself as dedicated to providing stateof-the-art outpatient medical imaging services utilizing the most sophisticated imaging equipment. [Washington Imaging's] product is a written interpretation of images acquired through its imaging technologies in the context of the patient's history by a qualified physician." CP at 135 (Resp. to the Department's First Interrogs., No. 9). The equipment and technician necessary to produce the medical images are provided by Washington Imaging. Washington Imaging obtains the necessary medical interpretation of the images, embodied in a report, under its contract with Overlake. Thus, "the business engaged in" is the business of providing medical imaging services, which involves a "product" that is a report with both technical and professional components. Both of these components, creation of the image and interpretation of the image, are necessary to medical imaging services, the business in which Washington Imaging is engaged. The image alone--the technical component--is incomplete. The 7

No. 84101-2 global payments that Washington Imaging receives are "value proceeding or accruing by reason of the transaction of the business engaged in" in the form of compensation for rendering medical imaging services. Washington Imaging maintains, however, that the money it pays to Overlake is not part of its gross income because the contract between Washington Imaging and Overlake states that Washington Imaging is to have no ownership interest in the Overlake portion of the billing. Washington Imaging cannot avoid its B&O tax obligation merely because of its private contract with Overlake. See Rho Co. v. Dep't of Revenue, 113 Wn.2d 561, 782 P.2d 986 (1989) (terms of contract between taxpayer and another provider of service did not control whether money received by the taxpayer was the gross income of the taxpayer for B&O tax purposes). The agreement also declares that Washington Imaging acts as a collection agent for Overlake. Washington Imaging contends that because it acted only as a collection agent, the amounts it received from patients that were paid to Overlake do not constitute its own income, but rather Overlake's income. For Washington Imaging to prevail on the argument that it acted only as a collection agent of Overlake, it must have collected money owed to Overlake. But the patients contracted solely with Washington Imaging to pay for medical imaging services and have no separate obligation to Overlake. The patient registration form, Washington Imaging's contracts with patients' insurers, and the bills that Washington Imaging sent to patients all establish that patients owed payment only to Washington Imaging, not 8

No. 84101-2 Overlake. Therefore, regardless of what the contract between Washington Imaging and Overlake states, for purposes of its B&O tax liability, Washington Imaging was not acting as an agent of Overlake collecting payments owed by the patients to Overlake. There is no evidence at all that the patients owed money to Overlake or that Washington Imaging collected money owed to Overlake. Therefore, based on the undisputed facts we reject Washington Imaging's argument that it acted only as a collection agency and the amounts paid by patients were not its own income. Washington Imaging also argues, in reliance on Walthew, Warner, Keefe, Arron, Costello & Thompson v. Dep't of Revenue, 103 Wn.2d 183, 691 P.2d 559 (1984), that the money it received and then paid to Overlake was not "compensation for the rendition of services" within the contemplation of RCW 82.04.080. Washington Imaging contends that Walthew supports the proposition that when a business is legally barred from engaging in the practice of medicine, it cannot share in the profits of professional medical services and is not subject to B&O tax on amounts received for them. In Walthew, 103 Wn.2d at 185-90, we held that litigation costs paid to third parties by a lawyer on behalf of a client were not part of gross income, reasoning in part that attorney ethics rules mandate that clients retain ultimate liability for such expenses. Washington Imaging contends that similar to the circumstances in Walthew, it is legally barred from rendering professional medical services because it has nonphysician ownership and under the corporate practice of medicine doctrine it therefore cannot share in the management or profits of a medical practice. 9

No. 84101-2 It is true that under the common law corporate practice of medicine doctrine, absent legislative authorization, a business may not engage in the practice of medicine by employing licensed physicians. Columbia Physical Therapy, Inc. v. Benton Franklin Orthopedic Assocs., PLLC, 168 Wn.2d 421, 430, 228 P.3d 1260 (2010).3 Washington Imaging could not itself employ physicians to interpret its images. However, the common law corporate practice of medicine doctrine does not prevent persons without medical licenses from providing medical services through independent contractor physicians. Indeed, this is exactly how Washington Imaging operates. "Business" for purposes of the B&O tax liability at issue "includes all activities engaged in with the object of gain, benefit, or advantage to the taxpayer or to another person or class, directly or indirectly." RCW 82.04.140. A business that employs an independent contractor does not thereby become exempt from B&O tax liability for any income derived in whole or in part because of the work the independent contractor does for the taxpayer. For example, a general contractor is liable for B&O taxes on its gross income without any reduction in income for amounts that it pays to independent subcontractors. Pilcher v. Department of Revenue, 112 Wn. App. 428, 49 P.3d 947 (2002), is illustrative. There, the taxpayer, a physician under contract to provide emergency department physician services at a hospital retained a number of other physicians as

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The Professional Service Corporation Act, chapter 18.100 RCW, is a statutory exception, allowing members of a professional limited liability company to provide professional services for which they are licensed. It appears that Overlake is such a company.

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No. 84101-2 independent contractors working for him to help staff the department. He contended that he was not subject to B&O taxes on the amount he received from the hospital that went toward paying the independent contractors he hired. The Court of Appeals disagreed on the basis that the taxpayer was in the business of providing services to the hospital that consisted of his management services and the services of the physicians he hired as independent contractors. Id. at 436. He was not entitled to deduct labor costs related to this business, including labor costs paid to independent contractors. Id. Here, Overlake acted as an independent contractor and the amount due Overlake was determined by the contract between Washington Imaging and Overlake. There is no statutory or ethical bar to Washington Imaging contracting with Overlake as an independent contractor with the obligation of paying Overlake from its own funds. The fact that Washington Imaging does not have a medical license and paid an independent contractor because it could not employ doctors as employees does not relieve Washington Imaging from liability for B&O tax on the full amount it receives from its business of medical imaging services. Accordingly, unless Rule 111 applies, the Department is correct that Washington Imaging is liable for B&O tax on the total payments that it receives from patients and their insurers, regardless of Washington Imaging's expenses in retaining Overlake to provide radiological interpretations. Whether Rule 111 applies depends upon whether the amounts that Washington Imaging owes to Overlake pursuant to their contracts qualify for "pass-through" treatment under Rule 111. Qualifying "pass-through" payments made 11

No. 84101-2 by a taxpayer business to another entity solely as a payment agent for the taxpayerbusiness's clients or customers are not subject to the B&O tax. The concept is that "amounts that merely `pass through' a business in its capacity as an agent cannot be attributed to the business activities of the agent" and therefore "such amounts are not taxable." City of Tacoma v. William Rogers Co., 148 Wn.2d 169, 175, 60 P.3d 79 (2003). Thus, for Rule 111 to apply, Washington Imaging must be an agent of the patients to whom it provides the medical imaging services. But as the Department maintains, Washington Imaging is not an agent of the patients and Rule 111 does not apply to relieve Washington Imaging of B&O tax liability on the total of the payments it receives. Rule 111 provides (with emphasis added): The word "advance" as used herein, means money or credits received by a taxpayer from a customer or client with which the taxpayer is to pay costs or fees for the customer or client. The word "reimbursement" as used herein, means money or credits received from a customer or client to repay the taxpayer for money or credits expended by the taxpayer in payment of costs or fees for the client. The words "advance" and "reimbursement" apply only when the customer or client alone is liable for the payment of the fees or costs and when the taxpayer making the payment has no personal liability therefor, either primarily or secondarily, other than as agent for the customer or client. There may be excluded from the measure of tax amounts representing money or credit received by a taxpayer as reimbursement of an advance in accordance with the regular and usual custom of his business or profession. The foregoing is limited to cases wherein the taxpayer, as an incident to the business, undertakes, on behalf of the customer, guest or client, the payment of money, either upon an obligation owing by the customer, guest or client to a third person, or in procuring a service for the customer, guest or client which the taxpayer does not or cannot render and 12

No. 84101-2 for which no liability attaches to the taxpayer. It does not apply to cases where the customer, guest or client makes advances to the taxpayer upon services to be rendered by the taxpayer or upon goods to be purchased by the taxpayer in carrying on the business in which the taxpayer engages.[4] Rule 111 "excludes from the definition of `gross income' certain `advances' and `reimbursements' for which the taxpayer assumes solely agent liability." Rho, 113 Wn.2d at 567; accord William Rogers, 148 Wn.2d at 176 ("in a traditional `pass through' scenario, the client has sole liability for an expense paid on its behalf and is responsible for advancing the cost to the taxpayer or reimbursing the taxpayer"); Walthew, 103 Wn.2d at 188 ("Rule 111 excludes those reimbursements for advances which are merely pass-throughs, where the taxpayer liability, if any, to the third party is solely agent
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The rule includes the following examples: For example, where a taxpayer engaging in the business of selling automobiles at retail collects from a customer, in addition to the purchase price, an amount sufficient to pay the fees for automobile license, tax and registration of title, the amount so collected is not properly a part of the gross sales of the taxpayer but is merely an advance and should be excluded from gross proceeds of sales. Likewise, where an attorney pays filing fees or court costs in any litigation, such fees and costs are paid as agent for the client and should be excluded from the gross income of the attorney. On the other hand, no charge which represents an advance payment on the purchase price of an article or a cost of doing or obtaining business, even though such charge is made as a separate item, will be construed as an advance or reimbursement. Money so received constitutes a part of gross sales or gross income of the business, as the case may be. For example, no exclusion is allowed with respect to amounts received by (1) a doctor for furnishing medicine or drugs as a part of his treatment; (2) a dentist for furnishing gold, silver or other property in conjunction with his services; (3) a garage for furnishing parts in connection with repairs; (4) a manufacturer or contractor for materials purchased in his own name or in the name of his customer if the manufacturer or contractor is obligated to the vendor for the payment of the purchase price, regardless of whether the customer may also be so obligated; (5) any person engaging in a service business or in the business of installing or repairing tangible personal property for charges made separately for transportation or traveling expense. WAC 458-20-111.

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No. 84101-2 liability" (emphasis added)). Therefore, Washington Imaging must be acting solely as an agent for its patients in making payments to Overlake. More specifically, for the rule to apply, three conditions must be met: "(1) the payments are `customary reimbursement for advances made to procure a service for the client'; (2) the payments `involve services that the taxpayer did not or could not render'; and (3) the taxpayer `is not liable for paying the associate firms except as the agent of the client.'" Rho, 113 Wn.2d at 567-68 (quoting Christensen, O'Connor, Garrison & Havelka v. Dep't of Revenue, 97 Wn.2d 764, 769, 649 P.2d 839 (1982) (emphasis original)) (hereafter referred to as "Christensen test"). To satisfy the third condition, a true agency relationship between the client or customer and the taxpayer is required. "The existence of that agency relationship is not controlled by how the parties described themselves" and "standard agency definitions should be used in analyzing the existence of the agency relationship." William Rogers Co., 148 Wn.2d at 177-78. "An agency relationship generally arises when two parties consent that one shall act under the control of the other." Rho, 113 Wn.2d at 570; see Restatement (Third) of Agency

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