City of Tacoma v. WILLIAM ROGERS COMPANY

• Court: Washington Supreme Court
• Writing for the Court: CHAMBERS, J.
• Citation: City of Tacoma v. WILLIAM ROGERS COMPANY, 60 P.3d 79, 148 Wash.2d 169 (Wash. 2002)
• Decision Date: 19 December 2002
• Docket Number: No. 71050-3.
• Parties: CITY OF TACOMA, a Municipal Corporation, Petitioner, v. The WILLIAM ROGERS COMPANY, INC., Respondent.

60 P.3d 79

148 Wash.2d 169

CITY OF TACOMA, a Municipal Corporation, Petitioner, v. The WILLIAM ROGERS COMPANY, INC., Respondent.

No. 71050-3.

Supreme Court of Washington, En Banc.

Argued March 12, 2002.

Decided December 19, 2002.

As Amended January 8, 2003.

Harding Roe, Kari Sand, Asst. Tacoma City Attorneys, Tacoma, for Petitioner.

Vandeberg, Johnson & Gandara, James Krueger, Daniel Montopoli, Tacoma, for Respondent.

Franklin Dinces, Dinces Law Firm, Seattle, amicus curiae on behalf of Washington Staffing Association.

Thomas Carr, Seattle City Attorney, Cynthia Seu, Asst., Seattle, amicus curiae on behalf of City of Seattle.

Christine Gregoire, Attorney General, Donald Cofer, Asst., Cameron Comfort, Asst., Anne Egeler, Asst., Olympia, amicue curiae on behalf of the Department of Revenue.

CHAMBERS, J.

The City of Tacoma contends that the trial court erred in ordering a partial refund of municipal business and occupation (B & O) taxes to the William Rogers Company, Inc., doing business as Evergreen Staffing (Evergreen). The trial court held that Evergreen, a temporary staffing service, was a mere agent or paymaster of its clients and therefore the wages paid to its workers were deductible as a "pass through" expense. We reverse and hold that Evergreen functioned as the actual employer of its temporary workers and is thus liable for the tax.

B & O tax is a tax on the gross revenue of a business. Because this tax is on gross income, the Department of Revenue and the City of Tacoma adopted a rule excluding from gross income receipts that are strictly "pass through" reimbursements for advances. The rule provides an exemption when the taxpayer receives reimbursement for advances made on behalf of a customer within its business, and also exempts services for which the taxpayer's customer is solely liable. Thus, a travel agency that collects ticket fares on behalf of an airline does not include the ticket fare in its gross income, because the travel agent is collecting the fare as an agent of the client.¹

FACTS

Evergreen is a temporary help service² that provides temporary clerical workers and other workers to client firms throughout the Puget Sound. Its main office is in Tacoma. Evergreen functions as the employer of record, withholding payroll taxes and filing the employer's state and federal tax returns. A very small portion of Evergreen's business consists of providing a payroll service to those clients who hire their own workers.

Evergreen recruits its workers through advertising, referrals, and other services. Prospective workers fill out an employment application, after which Evergreen evaluates their skills and abilities. Clerical workers are tested on typing and computer software skills. Laborers are given an orientation and shown a video on industrial safety. After evaluation, workers are placed in Evergreen's database as available for assignment. They are provided with an employee handbook that "gives them basic instruction on how to perform their job." Verbatim Report of Proceedings at 36-37. The handbook states, "You remain our employee no matter where we assign you to work." Clerk's Papers (CP) at 72. Employees are entitled to certain paid holidays and vacation days, the cost of which is incorporated into the billing rate.

When a client requests a temporary worker, Evergreen quotes a billing rate and a charge for any special services such as background checks. Sometimes Evergreen fills the position from its inventory of available workers, but more often must advertise for qualified personnel. The client provides the necessary work space, equipment, tools, and materials required by the temporary worker. The worker is not paid except when performing work for a client. Evergreen's billing to its clients is in the form of a bill of sale.

Evergreen guarantees satisfactory performance by the workers and agrees to provide all payroll functions. The client agrees to provide a suitable workplace and adequate training, and assumes responsibility for losses to equipment used by the worker and for compliance with health and safety standards. Evergreen provides a money-back guaranty to its clients, and if the client is dissatisfied or fails to pay, Evergreen remains liable for paying the worker. Evergreen does not describe itself as the agent of its clients.

Tacoma levies a B & O tax on businesses operating within the city limits. The tax is not an income tax. It is based on gross income from business activity conducted within the city, with no deductions allowed for costs incurred in running the business. Tacoma Municipal Code (TMC) 6.68.070,.220. Until 1996, Evergreen paid the tax without deducting the wages paid to its workers. However, in 1996, Evergreen learned about a Revenue Policy Memorandum issued by the State Department of Revenue to clarify the question of when a business qualifies for deductions under WAC 458-20-111 (State Rule 111). Evergreen then sought a refund of state B & O taxes from the Department of Revenue. The department initially rejected the request but later reversed its decision and refunded $257,167 for wages and payroll taxes that had been paid to Evergreen's employees by its clients and "passed through" to the employees by Evergreen. CP at 327. The department found that although Evergreen was the employer of record, it was functioning solely as a payroll agent.

Having succeeded on the state level, Evergreen applied to Tacoma for a similar refund of city B & O taxes paid during the same period. The City denied the refund. On appeal, the Tacoma hearing examiner ruled against the city. The examiner concluded that Evergreen was entitled to a refund of $37,508.80 for taxes overpaid during the two years preceding the refund request.³ CP at 25. Tacoma then appealed to Pierce County Superior Court, which ruled for Evergreen, concluding that the control exercised by Evergreen's clients over the employees was so pervasive that it amounted to "basically exclusive control" and Evergreen merely advanced the wages on behalf of its clients. RP at 316. The city petitioned this court for direct review.

ANALYSIS

Because the B & O tax is based on gross income, no deduction is permitted for expenses involved in conducting a business.⁴ TMC 6.68.070. However, because amounts that merely "pass through" a business in its capacity as an agent cannot be attributed to the business activities of the agent, such amounts are not taxable. See Walthew, Warner, Keefe, Arron, Costello & Thompson v. Dep't of Revenue, 103 Wash.2d 183, 188, 691 P.2d 559 (1984). Thus, the city has adopted an administrative rule that allows taxpayers to deduct advances or reimbursements from gross income as "pass through" payments where the liability of the taxpayer is solely that of an agent:

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.

City of Tacoma, Department of Tax & License, Rule 111 (1984).⁵

Rule 111 provides several examples of how the exception is intended to work. For example, an automobile dealer who collects from a buyer, in addition to the sales price, the licensing fees and taxes, is not required to pay the B & O tax on the fees and taxes collected and paid to the government. Similarly an attorney advancing filing fees and other fees on behalf of the lawyer's client is not required to pay B & O tax on the reimbursed fees.⁶

In two previous cases concerning State Rule 111, this court has held that 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. The first concerned payments made by a law firm to attorneys in another city on behalf of the client. The parties stipulated that the out of town attorneys understood they were working directly for the clients. Christensen, O'Connor, Garrison & Havelka v. Dep't of Revenue, 97 Wash.2d 764, 769, 649 P.2d 839 (1982). The second held that filing fees paid by a lawyer on behalf of a client are tax deductible because the Rules for Lawyer Discipline forbade the law firm from advancing fees to the client on a nonrefundable basis. Walthew, 103 Wash.2d at 186, 691 P.2d 559. In these cases, the taxpayer clearly had no liability for the payments.

Evergreen relies very heavily upon a third case decided by this court interpreting Rule 111, Rho Co. v. Dep't of Revenue, 113 Wash.2d 561, 782 P.2d 986 (1989). The taxpayer in Rho supplied manufacturers with temporary workers with technical engineering skills. In addressing whether the taxpayer was acting as an agent or as a principal in employing and paying the workers, the Board of Tax Appeals restricted its analysis to the parties' written contracts.

This court held that the board erred in relying solely on the contracts. We held that determination of an agency relationship is not controlled by the manner in which the parties contractually describe their relationship. Rho, 113 Wash.2d at 570, 782 P.2d 986. We further held that the standard definition of agency should be used in analyzing Rule 111, absent any specific legislative or regulatory...