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Washington Imaging Services, LLC v. Wash. Dept. of Rev., 252 P3d 885 (Wash. 2011)

Washington Imaging Services, LLC v. Wash. Dept. of Rev., 252 P3d 885 (Wash. 2011)

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Published by Paul Masters

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Published by: Paul Masters on Oct 27, 2011
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10/27/2011

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B&O taxes are imposed on the gross income of a business for the privilege of engaging in business activities in Washington.
IN THE SUPREME COURT OF THE STATE OF WASHINGTON
WASHINGTON IMAGING SERVICES,)LLC,)No. 84101-2)Respondent,))v.)En Banc)WASHINGTON STATE DEPARTMENT)OF REVENUE,))Petitioner.) Filed May 19, 2011 _______________________________________)MADSEN, C.J.—This is abusiness and occupation(B&O)tax case.
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Thetaxpayer, Washington Imaging Services, is a medical imaging company that retainsOverlake Imaging Associates, a professional corporation, as an independent contractor whose radiologists interpret the images that Washington Imaginggenerates. After  patients and their insurers pay Washington Imagingfor the imaging services, WashingtonImagingpays Overlake a percentage of net receipts pursuant to the terms of contracts between Washington Imagingand Overlake. Although the patients are aware that the
 
 No. 84101-22images created by Washington Imagingare interpreted by a physician, they do not knowof Overlake’s involvement or of the contractual arrangementsbetween WashingtonImagingand Overlake.The issue is whether Washington Imagingmust pay B&O tax on the entire amountreceived from the patients and their insurers, or whether the amounts that WashingtonImagingpays to Overlake qualify as “pass-through” payments on which WashingtonImagingdoes 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 donot qualify for pass-through treatment. The Court of Appeals reversed.We reverse the Court of Appeals. Washington Imaging’s payments to Overlake donot qualify for pass-through treatment because Washington Imagingdoes not make the payments on behalf of the patients as their agent. Put another way, the patients have noobligation to pay Overlake,and Washington Imaging does not act in an agent’s capacityto pass paymentsfrom the patients through to Overlake.All of the payments received byWashington Imagingconstitute gross income to Washington Imagingand the B&O tax isowed on the entire amount that Washington Imagingreceives.FACTSWashington Imagingis a limited liability company that operates medical imagingfacilities in Bellevue and Issaquah, providing medical imaging services to patients whoare referred to Washington Imagingby their physicians. Overlake is a Washington professional services corporation that employs radiologists. Pursuant to contracts
 
 No. 84101-23
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Originally, the percentages of net collections that were paid to Overlake were based onMedicare reimbursements for specific procedures, with numerous procedures averaged into broadcategories of imaging. Even though Medicare reimbursements have changed over time, the percentage split between Washington Imaging and Overlake has remained the same.
 between Washington Imaging and Overlake, after Washington Imaginggenerates amedical image(such as an x ray or CT (computed tomography) scan), an Overlakeradiologist provides interpretation of the image.The first contract dates from 1996 and governs terms and conditions under whichOverlake provides its radiologists’ interpretations. A second contract addresses financialarrangements and provides that Washington Imaging will bill and collect payment for  both the imaging and the interpretation. By contract, Washington Imaging compensatesOverlake by paying a percentage of the amounts that Washington Imaging collects. Theamount thatWashington Imaging must pay Overlake is determined by their contracts.
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The resulting product provided by Washington Imagingis a written report thatassiststhe patients’ physicians in diagnosing and treating patients. This product requires both the production of the medical image (referred to by the parties as the technicalcomponent) and the medical interpretation of the image by a radiologist (the professionalcomponent). Both of these components are essential to the medical imaging services thatWashington Imagingprovides; the technical componentalone is incomplete in and of itselfanddoes not constitute the medical imaging service that Washington Imaging provides.Patients are not aware of the arrangements between Washington Imaging andOverlake. When a patient is referred to Washington Imaging, Washington Imaging

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