Wash. Imaging Serv. Llc v. Wash. State Dep't of Revenue

• Decision Date: 19 May 2011
• Docket Number: No. 84101–2.,84101–2.
• Citation: 171 Wash.2d 548,252 P.3d 885
• Parties: WASHINGTON IMAGING SERVICES, LLC, Respondent,v.WASHINGTON STATE DEPARTMENT OF REVENUE, Petitioner.
• Court: Washington Supreme Court

171 Wash.2d 548

252 P.3d 885

WASHINGTON IMAGING SERVICES, LLC, Respondent,

v.WASHINGTON STATE DEPARTMENT OF REVENUE, Petitioner.

No. 84101–2.

Supreme Court of Washington, En Banc.

Argued Jan. 27, 2011.Decided May 19, 2011.

Heidi A. Irvin, Atty. General's Office/Revenue Div., Peter B. Gonick, Washington Attorney General's Office, Olympia, WA, for Petitioner.Greg Montgomery, Miller Nash LLP, Monica Langfeldt, Ogden Murphy Wallace P.L.L.C., Seattle, WA, for Respondent.Kent Charles Meyer, Seattle City Attorney's Office, Seattle, WA, amicus counsel for City of Seattle.Garry George Fujita, Davis Wright Tremaine LLP, Seattle, WA, amicus counsel for Carr Krueger.MADSEN, C.J.

[171 Wash.2d 551] ¶ 1 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 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.

¶ 2 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.

[171 Wash.2d 552] ¶ 3 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

¶ 4 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 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.

¶ 5 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

[171 Wash.2d 553] ¶ 6 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.

¶ 7 Patients are not aware of the arrangements between Washington Imaging and Overlake. When a patient is referred to Washington Imaging, Washington Imaging 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.

[252 P.3d 888 , 171 Wash.2d 554]

¶ 8 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 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.

¶ 9 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.

¶ 10 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 “pass-through” payments on which it is not liable for B & O tax under WAC 458–20–111 (Rule 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 Wash.App. 281, 222 P.3d 801 (2009).

DISCUSSION

¶ 11 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 Wash.2d 273, 280–81, 242 P.3d 810 (2010); Wilson v. Steinbach, 98 Wash.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 Wash.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 Wash.2d 397, 403, 858 P.2d 494 (1993) (same); In re Estate of Jones, 116 Wash. 424, 426, 199 P. 734 (1921) (same).

¶ 12 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.

¶ 13 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. ¶ 14 The issue is whether the total of the payments received by Washington Imaging is gross...