Washington B&O Tax Determination May Impact the Health Care Industry

A recent tax determination issued by the Washington Department of Revenue (DOR) may have implications for health care providers that globally bill patients for work performed by multiple persons or entities.

Tax Determination No. 15-0065R, 35 WTD 319 (7-29-2016), referred to as Det. No. 15-0065R, serves as a warning call to third-party billing service providers that plan on taking any deduction on their Washington business and occupation (B&O) tax returns for amounts passed to other entities or individuals performing the actual health care services.

Washington allows taking such a deduction in limited circumstances, which is described in greater detail below. What’s most noteworthy is that the taxpayer in Det. No. 15-0065R carefully complied with all of the requirements for such a deduction—at least as the taxpayer understood them. The DOR, however, disagreed. In fact, the DOR’s position appears to foreclose deductions of this nature to all global billers, except in the rarest of cases.


The taxpayer in Det. No. 15-0065R was an outpatient medical imaging services provider. It performed imaging services, but outsourced the interpretation of its images to a physician’s group. On its customers’ invoices, the taxpayer’s billing manager globally billed patients and insurers for both the imaging services and the interpreting services, and then routed portions of the payment to the taxpayer and physician’s group.

Following an audit assessment imposing B&O tax on the taxpayer’s total invoiced amounts, the DOR denied the taxpayer’s original petition for review in Det. No. 15-0065. In its subsequent petition for reconsideration, the DOR again denied the taxpayer’s petition, concluding that the taxpayer’s billing manager didn’t act as a billing agent for the physicians or as an agent of the patients.

Rule 111 and “Advances” and “Reimbursements”

With relatively few exceptions, the B&O tax applies to a taxpayer’s gross receipts without any deduction for expenses or other costs of goods sold. That means a taxpayer generally may not deduct amounts it pays to third-party service providers that are necessary as a cost of doing business.

However, the state provides an exemption in Washington Administrative Code Section 458-20-111 (Rule 111) for amounts that represent “advances” or “reimbursements.” To meet Rule 111, three conditions must be met:

  • The payments must be “customary reimbursement for advances made to procure a service for the client.”
  • The payments must “involve services that the taxpayer did not or could not render.”
  • The taxpayer must not be liable for paying the third party, except as an agent of the client.

The third requirement has two components. A taxpayer must:

  • Have an agency relationship with its client
  • Establish that its liability to pay the providers constitutes solely agent liability

The Future of Washington Imaging and Rule 111

The facts in Det. No. 15-0065R are indisputably similar to Washington Imaging Services, LLC v. Dep’t of Revenue in 2011, which involved another medical imaging service provider that billed its patients for both its imaging services and the interpretation services (the latter was performed by an outside physician's group).

In Washington Imaging, the Washington Supreme Court concluded the taxpayer didn’t qualify for Rule 111 treatment because it failed to meet the “agency” requirement. As evidence, the court pointed to the fact that the patients didn’t know the contractual arrangement between Washington Imaging and the physician’s group, nor did they have any obligation to pay the physician’s group directly. In essence, Washington Imaging failed to establish it collected money owed to the physician’s group. 

The taxpayer in Det. No. 15-0065R appears to have structured its payment and invoicing practices with Rule 111 and Washington Imaging in mind. Each invoice that its billing manager sent to its patients contained a statement in bold print, explaining:

  • The billing manager acted as billing agent for the taxpayer.
  • The imaging and interpretation services were performed by separate persons or entities.
  • The billing manager was responsible for remitting the applicable portion for each service provider’s fees on the patient’s behalf.

In addition, all patients signed a financial policy agreement in which they consented to the taxpayer collecting on their behalf and remitting payment to the physician’s group. However, the DOR stated that even though the taxpayer uses the term “agent” in the financial agreement and in its invoices, the facts didn’t show that the taxpayer’s billing manager was acting under the direction and control of the patients in choosing the physician’s group to interpret the images.

The DOR focused on the fact that the taxpayer had an exclusivity agreement with the physician’s group, making it impossible for the patient to control the choice of professional services—as one would expect in an agency relationship. It also highlighted that the taxpayer’s bills didn’t provide break-outs for amounts that each party was billing for (imaging services versus interpretation services, for example).

The key takeaway: Even with all of the proper documentation in place, a taxpayer must nonetheless show a true agency relationship exists, measured by the patient’s ability to direct and control the agent. 

We're Here to Help

Rule 111 and its related cases are complex and vexing to most taxpayers seeking to exclude pass-through payments from B&O tax. Contact your Moss Adams professional if you believe your billing practices may be impacted by this determination, or if you have other questions regarding Rule 111.

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