Could a dentist exclude a tenant's half of shared building insurance and utilities from Washington B&O gross income as reimbursements?

Plain-English summary

The Washington Department of Revenue held that a dentist had to include a tenant's payments for half of shared building insurance and utilities in service B&O gross income because the owner was personally liable and was not acting solely as the tenant's agent.

The dentist owned the building, occupied half for his practice, and rented the other half to another dentist. Their arrangement was verbal. Because vendors would not accept multiple checks, the owner paid the full insurance and utility charges in his own name, and the tenant later paid half.

Washington gross income includes value accruing from business transactions without deduction for costs. The owner provided the shared insurance and utilities and received payment in return.

The reimbursement exclusion required the tenant alone to owe the third-party charge and the taxpayer to have no liability except as agent. Here, the owner was the liable customer, and no evidence showed that the tenant controlled the owner as an agent or owed the vendors directly.

Result: petition denied.

What this means for you

Landlords sharing utilities or insurance

Tenant repayments may be taxable gross receipts when vendor accounts and liability are in the landlord's name.

Businesses claiming an agency reimbursement

Use written agreements and vendor documentation showing the client alone owes the cost and controls the taxpayer's limited payment role.

Related professionals sharing space

Informal or friendly arrangements do not change the statutory gross-income and agency tests.

Common questions

Q: Why were the payments gross income?

A: They were consideration received for insurance and utilities the owner provided to the tenant.

Q: What was missing for reimbursement treatment?

A: Sole tenant liability, a proven agency relationship, and the owner's lack of independent liability.

Q: Did the absence of a written lease help?

A: No. The actual payment and liability facts controlled.

Citations and references

• RCW 82.04.080 and RCW 82.04.090 (gross income and value accruing)
• RCW 82.04.290(2) (service and other activities B&O tax)
• WAC 458-20-111 (advances, reimbursements, and sole-agent liability)
• Washington Imaging Services, LLC v. Department of Revenue, 171 Wn.2d 548, 252 P.3d 885 (2011) (agency requirement)

Source

• Landing page: Washington Tax Decisions ZIP files
• Original PDF: 37WTD197.pdf
• Source archive: Volume 37 ZIP (member 37WTD197.pdf)

Original ruling text

Det. No. 17-0305, 37 WTD 197 (July 31, 2018)

197

Cite as Det. No. 17-0305, 37 WTD 197 (2018)

BEFORE THE ADMINISTRATIVE REVIEW AND HEARINGS DIVISION
DEPARTMENT OF REVENUE
STATE OF WASHINGTON
In the Matter of the Petition for Correction of )
Assessment of
)
)
)
...
)
)

DETERMINATION
No. 17-0305
Registration No. . . .

WAC 458-20-111; RCW 82.04.080: GROSS INCOME – ADVANCEMENTS OR REIMBURSEMENTS – SHARED EXPENSES. A taxpayer is not acting as an agent of its tenant when it pays insurance or utilities in its name for building space shared with the tenant. Unless the taxpayer is an agent of its tenant, those payments do not qualify for exclusion under WAC 458-20-111. Headnotes are provided as a convenience for the reader and are not in any way a part of the decision or in any way to be used in construing or interpreting this Determination. Simons, T.R.O. – A Washington dentist petitions for the correction of an assessment of service and other activities business and occupation (“B&O”) tax on payments received for a tenant’s portion of shared building insurance and building utilities . . . . Taxpayer’s petition is denied.1 ISSUE Whether payments from a tenant for building insurance, building utilities, and shared supplies, constitute advances or reimbursements under WAC 458-20-111 that are excluded from the gross income of the business.
...
FINDINGS OF FACT
. . . (“Taxpayer”) operated a dental practice in . . . Washington.2 Taxpayer owns the building where his dental practice is located. During the period at issue, and the preceding two decades, Taxpayer’s dental practice occupied half of the building space and he rented the remaining half to his friend and fellow dentist, . . . (“Tenant”). Taxpayer and Tenant operated separate dental practices, in separate dental practice areas, but shared a common reception area.

1
2

Identifying details regarding the taxpayer and the assessment have been redacted pursuant to RCW 82.32.410. Taxpayer has since closed his practice.

Det. No. 17-0305, 37 WTD 197 (July 31, 2018)

198

Taxpayer and Tenant’s rental arrangement was entirely verbal and the two never executed a written lease agreement. Taxpayer and Tenant shared the costs of building insurance, building utilities . .
. . However, to accommodate parties unwilling to accept more than one check for payment, Taxpayer would pay the entire costs of building insurance, building utilities, and the postage machine, and then Tenant would pay Taxpayer for his half of such expenses.
. . . On May 23, 2016, the Department . . . ruled that Taxpayer should report the payments it received from Tenant for building insurance [and] building utilities . . . under the service and other activities classification of the B&O tax. . . . Taxpayer petitioned for review of the May 23, 2016, ruling. On December 6, 2016, while awaiting review of the May 23, 2016, ruling, the Department issued a $ . . . assessment against Taxpayer. This assessment is comprised of the $ . . . in service and other activities B&O tax and $ . . . . On December 15, 2016, Taxpayer withdrew its petition for review of the May 23, 2016, ruling and petitioned for review of the assessment. ANALYSIS Washington imposes the B&O tax on every person for the act or privilege of engaging in business activities in Washington. RCW 82.04.220. “[T]he legislative purpose behind the B&O tax scheme is to tax virtually all business activity in the state.” Impecoven v. Dep’t of Revenue, 120 Wn.2d 357, 841 P.2d 752 (1992). The tax is measured by applying particular rates against the value of products, gross proceeds of sale, or gross income of the business, as the case may be. RCW 82.04.220. RCW 82.04.290(2) provides a “catch-all” B&O tax classification for taxpayers engaged in business activities not explicitly taxed elsewhere in Chapter 82.04 RCW. RCW 82.04.290(2). The statute provides: Upon every person engaging within this state in any business activity other than or in addition to an activity taxed explicitly under another section in this chapter or subsection (1) or (3) of this section; as to such persons the amount of tax on account of such activities shall be equal to the gross income of the business multiplied by the rate of 1.5 percent. The service and other activities B&O tax is calculated based on the “gross income of the business.” RCW 82.04.290. “Gross income of the business” is broadly defined and means:
[T]he value proceeding or accruing by reason of the transaction of the business engaged in and includes gross proceeds of sales, compensation for the rendition of services, gains realized from trading in stocks, bonds, or other evidences of indebtedness, interest, discount, rents, royalties, fees, commissions, dividends, and other emoluments however designated, all without any deduction on account of the cost of tangible property sold, the cost of materials used, labor costs, interest, discount, delivery costs, taxes, or any other expense whatsoever paid or accrued and without any deduction on account of losses.

Det. No. 17-0305, 37 WTD 197 (July 31, 2018)

199

RCW 82.04.080 (emphasis added). The phrase “value proceeding or accruing” is defined as “the consideration, whether money, credits, rights, or other property expressed in terms of money, actually received or accrued.” RCW 82.04.090. “Business” 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. Under these broad definitions, a service provider may not deduct any of its costs of doing business from its gross income. See Pilcher v. Dep't of Revenue, 112 Wn. App. 428, 49 P.3d 947 (2002) (citing Rho Co. Inc. v. Dep't of Revenue, 113 Wn.2d 561, 570, 782 P.2d 986 (1989)). Thus, unless a specific exemption, deduction, or exclusion applies, a taxpayer's gross income is subject to B&O tax without any deduction for overhead or other expenses. Here, Taxpayer provided insurance [and] utilities . . . to his Tenant, and, in exchange for these items, he received the payments at issue. These payments constitute a “value proceeding or accruing” under RCW 82.04.090, by reason of the transactions of Taxpayer’s business of providing insurance [and] utilities, . . . as such, they are included in Taxpayer’s gross income of the business under RCW 82.04.080, without deduction for Taxpayer’s cost of acquiring these items. Id. However, Taxpayer asserts that such payments are excluded from the gross income of the business because they are reimbursements under WAC 458-20-111 [(Rule 111)]. . . . . .

1. Reimbursements
   . . . Rule 111 is the Department’s administrative rule that sets forth criteria for excludable advances and reimbursements. [The rule recognizes that certain payments are mere reimbursements for expenses advanced by an agent for a client and thus are not the gross income of the business.] Rule 111 provides, in relevant part: 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 therefore, either primarily or secondarily, other than as agent for the customer or client.

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 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. (Emphasis added.) Rule 111 requires the existence of an agency relationship between the client and the taxpayer. See Washington Imaging Services, LLC v. Dep’t of Revenue, 171 Wn.2d 548, 562, 252 P.2d 885 (2011) and 33 WTD 160 (2014). Agency requires a factual determination that both parties consented to the agency relationship and that the principal exercised control over the agent. Id.; see also Nordstrom Credit, Inc. v. Dep’t of Revenue, 120 Wn.2d 935, 941, 835 P.2d 1331 (1993); Det. No.

Det. No. 17-0305, 37 WTD 197 (July 31, 2018)

200

05-0206E, 25 WTD 72 (2006); Det. No. 03-0128, 24 WTD 168 (2005); Restatement (Third) of Agency § 1.01 (2006). Once this element is satisfied, it must be determined if the taxpayer’s liability is “solely agent liability.” City of Tacoma v. Wm. Rogers Co., 148 Wn.2d 169, 178, 60 P.3d 79, 83 (2002). The court in that case determined that if a taxpayer is at all liable outside of its role as an agent, the payments may not be excluded. Id. In this case, Taxpayer purchased building insurance [and] utilities . . . , solely in his name, and Tenant paid Taxpayer for these items. Rule 111 requires that, in order for a payment to qualify as a reimbursement, the client (Tenant), alone, must be liable for the payment of the fee or cost and the taxpayer (Taxpayer) must have no personal liability for the fee or cost. Taxpayer has not presented any evidence that shows or suggests that Tenant had any liability for payment of building insurance [and] utilities . . . . The evidence shows the opposite: Taxpayer had personal liability for the payment of building insurance or utilities. Thus, the payments for building insurance [and] utilities . . . , fail to qualify as reimbursements under WAC 458-20-111.
...
DECISION AND DISPOSITION
Taxpayer's petition is denied.
Dated this 15th day of December 2017.