Are dental insurance premiums exempt from Washington B&O tax, and can outside-agency guidance support penalty relief?

Plain-English summary

The Washington Department of Revenue held that dental insurance premiums excluded from Washington's insurance premium tax were subject to service-and-other-activities B&O tax. The insurance-business exemption in RCW 82.04.320 applies to insurance business on which Washington gross-premium tax is paid. Because the dental premiums at issue were excluded from premium tax under RCW 48.14.020(2)(a), that B&O exemption did not apply.

The insurer also argued that taxing its premium income and taxing dentists on their service income amounted to impermissible double taxation. The determination rejected that argument. The policyholder's premium payment to the insurer and the insurer's payment to a dentist were two transactions between separate persons. Washington's B&O tax can apply at successive stages unless a deduction or exemption says otherwise, and the insurer itself was not taxed twice.

Finally, the Department upheld a 5% substantial-underpayment penalty, 29% delinquent penalties, and interest. General or implied guidance from the Office of the Insurance Commissioner was neither written guidance from the Department of Revenue nor a circumstance beyond the taxpayer's control. The 24-month waiver was unavailable because the insurer registered only after it had begun doing business in Washington, and the statutory grounds for waiving interest were absent.

What this means for you

Insurers

Do not read the premium-tax "in lieu of" language as exempting every insurance-related receipt from B&O tax. The B&O exemption follows income on which Washington premium tax is actually paid; premium-tax-excluded receipts need a separate B&O exemption or deduction.

Related providers and networks

Payments among separate legal persons remain separate taxable transactions even when the parties are related or participate in one commercial arrangement. Washington generally does not eliminate intercompany transactions from the B&O-tax base.

Tax and compliance teams

Guidance from another regulator does not substitute for written Department of Revenue instructions about B&O tax. Insurers with apportionable income also need timely annual reconciliations; missing the October 31 following-year correction deadline can expose additional tax to penalties.

Common questions

Q: Why were the dental premiums subject to B&O tax?

A: The premiums were not subject to Washington premium tax, so the insurance-business B&O exemption did not apply. With no other exemption, the receipts fell into the service-and-other-activities classification.

Q: Did the dentist's B&O tax make the insurer's tax unlawful double taxation?

A: No. The insurer earned premiums from policyholders, while dentists earned compensation from the insurer for dental services. Those were separate transactions earned by separate taxpayers.

Q: Could implied guidance from the Office of the Insurance Commissioner support a penalty waiver?

A: No. The claimed guidance was neither written nor issued by the Department of Revenue, and misunderstanding the tax obligation was not beyond the taxpayer's control.

Q: Why was the 24-month delinquent-penalty waiver unavailable?

A: The insurer registered with the Department after it had already begun Washington business activities. The rule's first-return relief requires registration before engaging in business when the taxpayer has operated for less than 24 months.

Q: Could the Department waive the interest as a matter of fairness?

A: No. Interest was mandatory, and the decision found neither qualifying written Department instructions nor a Department-convenience extension—the two limited grounds discussed in RCW 82.32.105(3) and WAC 458-20-228(10).

Citations and references

• RCW 82.04.080, .220, .290, and .320 (gross income, B&O tax, service classification, and insurance exemption)
• RCW 48.14.020(2)(a) and .080 (premium-tax exclusion and in-lieu provision)
• RCW 82.04.462(4) and WAC 458-20-19402(602) (receipts-factor reconciliation)
• RCW 82.32.050, .090, and .105; WAC 458-20-228 (interest, penalties, and waiver authority)
• WAC 458-20-163 and .203 (insurance income and separate entities)
• City of Seattle v. Paschen Contractors, Inc., 111 Wn.2d 54, 758 P.2d 975 (1988)
• Drury the Tailor v. Jenner, 12 Wn.2d 508, 122 P.2d 493 (1942)
• Washington Sav-Mor Oil Co. v. Tax Commission, 58 Wn.2d 518 (1961)

Source

• Landing page: Washington Tax Decisions ZIP files
• Original PDF: 45WTD020.pdf
• Source archive: Volume 45 ZIP (member wtdvol45/45WTD020.pdf)

Original ruling text

Det. No. 23-0009, 45 WTD 020 (March 6, 2026)

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Cite as Det. No. 23-0009, 45 WTD 020 (2026)
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. 23-0009
Registration No. . . .

[1]
WAC 458-20-163; RCW 82.04.320, RCW 82.04.290, RCW 48.14.080 – B&O TAX – EXEMPTION FOR BUSINESS OF INSURANCE. If an insurance premium is not subject to the premium tax under title 48 RCW, then it is subject to B&O tax unless some other exemption applies.
[2]
WAC 458-20-203; RCW 82.04.080; ETA 3134.2009 – B&O TAX –
DOUBLE TAXATION: While intra-company transactions are not taxable, business transactions between different persons are subject to taxation unless there is a specific deduction or exemption. The fact that entities are related does not change the fact that they are separate persons for tax purposes.
[3]
WAC 458-20-228; RCW 82.32.105 – PENALTIES – WAIVER: General
guidance provided by agencies other than the Department of Revenue is insufficient to warrant waiver of penalties. 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. NATURE OF THE CASE Gabriella Herkert, T.R.O. (Successor to R. Orwick) – A provider of dental insurance products protests the Department of Revenue’s (Department) assessment of service and other activities business and occupation (B&O) tax on dental insurance premiums, arguing that the premiums are exempt from B&O tax. Taxpayer argues that the Department has impermissibly taxed Taxpayer twice. Taxpayer also requests waiver of interest and penalties based on its reliance of general guidance provided by the Office of Insurance Commissioner (OIC). We deny Taxpayer’s petition.1 ISSUES

1. Under RCW 82.04.290 and WAC 458-20-163 (Rule 163), are dental insurance premiums
   subject to B&O tax classified as service and other activities? 1

Identifying details regarding the taxpayer and the assessment have been redacted pursuant to RCW 82.32.410.

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2. Under RCW 82.04.080(1), WAC 458-20-203 (Rule 203), and Excise Tax Advisory 3134.2009
   (ETA 3134), has the Department impermissibly imposed tax twice on Taxpayer?
3. Under RCW 82.32.105 and WAC 458-20-228 (Rule 228), is Taxpayer entitled to a waiver of
   tax, penalties and interest when, it argues, it filed its returns consistently with general guidance offered by the OIC? FINDINGS OF FACT
   . . . (Taxpayer) is a life insurance company headquartered [out-of-state]. Taxpayer offers a variety of life, disability, health, and annuity products to its customers. Taxpayer registered with the Department [in] 2018. In 2021, the Department’s Audit Division (Audit) conducted an examination of Taxpayer’s records for the period January 1, 2017, through December 31, 2020 (Audit Period). During its review, Audit determined that Taxpayer did not pay B&O tax on dental insurance premiums received during the Audit Period.[2] Taxpayer does not dispute this fact. On November 21, 2021, the Department issued . . . an assessment (Assessment) against Taxpayer. The Assessment totaled $ . . ., which consisted of $ . . . in tax liability, $ . . . in interest, and $ . . . in penalties. The tax liability consisted of $ . . . in service and other activities B&O tax and an additional $ . . . in service and other activities B&O tax (for gross revenue exceed[ing] one million dollars in the prior year). The penalties consisted of a $ . . . assessment penalty for substantial underpayment and $ . . . in delinquent penalties for failing to file annual reconciliations of apportionable income. On January 28, 2022, Taxpayer timely requested review of the Assessment. Taxpayer argues that the premium tax it pays on its Washington insurance business is imposed “in lieu of” all other state, county, city, or other political subdivision taxes except certain other specifically enumerated taxes under RCW 48.14.080. Taxpayer argues that since Washington’s B&O tax is not a specifically enumerated exception to the premium tax, B&O tax cannot be imposed on any portion of its income. Taxpayer argues that “in lieu of” precludes imposition of any other tax. Taxpayer also argues that taxing insurance premiums results in double taxation. Taxpayer explains double taxation would occur when a policyholder pays its premiums to Taxpayer and then receives dental services from a dentist. Taxpayer reimburses the dentist for the value of the services provided to the policyholder. As such, B&O tax would be levied against the dentist for providing the service to the policyholder. Taxpayer contends that the B&O tax imposed on the dentist is an indirect tax on it for providing insurance services to the policyholder in Washington. Taxpayer requests waiver of tax, interest, and penalties. Taxpayer argues it is inequitable to impose tax, penalties, and interest when Taxpayer alleges it relied on general guidance from the OIC that
   [2 Taxpayer pays insurance premium tax under RCW 48.14.020 on most of its Washington premium income. However, premiums for providing certain dental insurance are excluded from the insurance premiums tax. RCW 48.14.020(2)(a). Only Taxpayer’s dental insurance premium income is at issue.]

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dental premiums are exempt from premium tax. Taxpayer argues that since the OIC did not require it to refile its rate sheet to reflect the imposition of B&O tax, the OIC implied that dental premiums were not subject to B&O tax. Taxpayer contends that it relied on the OIC’s implied general advice when it failed to file and pay B&O tax on its dental insurance premiums. ANALYSIS

1. Dental Insurance Premiums
   Washington levies a B&O tax for the act or privilege of engaging in business activities in Washington. RCW 82.04.220. The B&O tax measure is “the application of rates against value of products, gross proceeds of sales, or gross income of the business, as the case may be.” Id. The rate used is determined by the type of activity in which a taxpayer engages. See generally Chapter 82.04 RCW. Income from any business activity that is not expressly classified in Chapter 82.04 RCW is taxed under the service & other activities B&O tax classification. RCW 82.04.290(2). RCW 82.04.320 provides an exemption from B&O tax for insurance businesses stating: Except as otherwise provided in this section, this chapter [82.04 RCW] does not apply to any person in respect to insurance business upon which a tax based on gross premiums is paid to the state. The Department promulgated Rule 163, providing additional guidance for insurance companies. Specifically, “income earned by insurance companies…is generally subject to the service and other activities business and occupation (B&O) tax, unless the law provides an exemption or deduction.” Rule 163(1). Rule 163(2)(a) states: RCW 82.04.320 provides an exemption to any person with respect to insurance business upon which a tax based on gross premiums is paid to the state of Washington. . . . On October 2, 2019, the Department issued an Interim Guidance statement regarding the application of insurance business exemption (Interim Guidance). The Interim Guidance states the exemption from B&O tax “only applies to amounts received in respect to insurance business upon which a gross premium tax is paid to Washington. Amounts received in respect to other activities are not exempt.” Thus, Taxpayer’s dental insurance premiums are not subject to B&O tax if the dental insurance premiums are subject to the premium tax under RCW 48.14.020. RCW 48.14.020 imposes a tax on premiums charged by authorized insurers. The premium tax imposed under Chapter 48.14 RCW is imposed in lieu of all other taxes except those specifically listed under RCW 48.14.080(2). RCW 48.14.080. . . . RCW 48.14.020(2)(a) states: The taxes imposed in this section do not apply to amounts received by any life and disability insurer for health care services included within the definition of practice of dentistry under RCW 18.32.020 except amounts received for pediatric oral services that qualify as coverage for the minimum essential coverage requirement under P.L. 111-148 (2010), as amended, and for stand-alone family dental plans as

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defined in RCW 43.71.080(4)(a), only when offered in the individual market, as defined in RCW 48.43.005, or to a small group, as defined in RCW 48.43.005. (Emphasis added.) Thus, according to RCW 48.14.020(2)(a), [certain] dental insurance premiums are not subject to the premium tax imposed under RCW 48.14.020. Taxpayer’s dental insurance premiums [appear to be of the type that are excluded from] the premium tax imposed under RCW 48.14.020. When we [consider] RCW 82.04.320, RCW 48.14.080, . . . Rule 163, and the Interim Guidance, we are left with the conclusion that if a premium is not subject to the premium tax under title 48 RCW, then it is subject to B&O tax unless some other exemption applies. . . . The exemption under RCW 82.04.320 states that B&O tax does not apply to gross revenue that is subject to the premium tax. As Taxpayer’s dental insurance premiums are not subject to the premium tax, the exemption under RCW 82.04.320 does not apply, and B&O tax does. As dental insurance premiums are not explicitly subject to a B&O tax under title 82.04 RCW, then they are classified as service and other activities for B&O tax purposes. RCW 82.04.290.

2. Double Taxation
   It is the nature of Washington’s B&O tax to “pyramid”, [sic] meaning that the same increment of income is taxed more than once when it passes to more than one taxable person. See Det. No. 91079R, 11 WTD 135 (1991); Det. No. 88-386, 6 WTD 459 (1988). [Taxpayer implicitly contends that any “double taxation” is prohibited. However], the Washington State Supreme Court stated in City of Seattle v. Paschen Contractors, Inc., 111 Wn.2d 54, 60, 758 P.2d 975 (1988), “[E]xposure to double taxation is not in itself evidence of unlawful discrimination.” Similarly, “There is no constitutional prohibition against double taxation, as applied to excise taxes.” Drury the Tailor v. Jenner, 12 Wn.2d 508, 514, 122 P.2d 493 (1942). . . . Vis-à-vis double taxation, there is no error. Furthermore, even if we accepted Taxpayer’s contention that double taxation was impermissible, it did not occur here. In Det. No. 16-0158, 36 WTD 038 (2017), we addressed the issue of transactions between separate legal entities. In that case, the taxpayer underwrote title insurance policies for a related entity and also earned management fee income for providing corporate and financial services for that entity. As we stated in that case: The question of whether transactions between related entities are taxable is not new. As ETA 3134 states: The Department has addressed the question of transactions between related entities on many occasions. . . . . Rule 203 states: Each separately organized corporation is a "person" within the meaning of the law, notwithstanding its affiliation with or relation to any other corporation through stock ownership by a parent corporation by the same group of individuals. Each corporation shall file a separate return and include therein the tax liability accruing to such corporation. This applies to each

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corporation in an affiliated group, as the law makes no provision for filing of consolidated returns by affiliated corporations or for the elimination of intercompany transactions from the measure of tax. .
..
The principles of Rule 203 apply to all business organizations . . . . [See also RCW 82.04.030]. While intra-company transactions are not taxable (see WAC 458-20-201), business transactions between different persons are subject to taxation unless there is a specific deduction or exemption. The fact that entities are related does not change the fact that they are separate persons for tax purposes. Rule 203; Washington SavMor Oil Co. v. Tax Comm., 58 Wn.2d 518 (1961).
[See also ETA 3194.2015 (“Compensation for services is subject to B&O tax regardless of whether the services are provided by an affiliate or by an unrelated person.”).] 36 WTD 038. There are two transactions in this case. The first is the policyholders’ payment of premiums to Taxpayer in exchange for dental insurance. In the first transaction, the policyholder is the customer and Taxpayer is the service provider. Taxpayer earns “compensation for the rendition of services” for the services it provides to the policyholders, which is included in the definition of “gross income of the business” under RCW 82.04.080(1). Gross income for Washington B&O tax purposes includes all gross proceeds, without deduction for expenses, including payment to the separate legal entities providing services. RCW 82.04.080(1). The second transaction is the subcontracting of dentists’ services by Taxpayer under agreements between the Taxpayer and the dentist. In this second transaction, Taxpayer is the customer, and the dentist is the service provider subject to B&O tax. The subcontracting dentist earns “compensation for the rendition of services” for the services it provides to the Taxpayer, which is included in the definition of “gross income of the business” under RCW 82.04.080(1). Such income is also subject to B&O tax, pursuant to RCW 82.04.220. These are business transactions between separate persons under Rule 203. Even if double taxation were impermissible in Washington, Taxpayer was not taxed twice. We deny Taxpayer’s petition as to this issue.

3. Waiver of penalties and interest
   RCW 82.32.090(2) imposes an additional assessment penalty for substantial underpayment: If the department of revenue determines that any tax has been substantially underpaid, there is assessed a penalty of five percent of the amount of the tax determined by the department to be due. . . . No penalty so added may be less than

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five dollars. As used in this section, “substantially underpaid” means that the taxpayer has paid less than eighty percent of the amount of tax determined by the department to be due for all of the types of taxes included in, and for the entire period of time covered by, the department’s examination, and the amount of underpayment is at least one thousand dollars. Taxpayer did not pay any service and other B&O tax on the income from dental insurance premiums received during the Audit Period. Taxpayer owed more than $1,000. The Department was required to impose the additional assessment penalty for substantial underpayment. RCW 82.32.090(2). RCW 82.32.090(1) imposes a late payment penalty: If payment of any tax due on a return to be filed by a taxpayer is not received by the department of revenue by the due date, there is assessed a penalty of nine percent of the amount of the tax; and if the tax is not received on or before the last day of the month following the due date, there is assessed a total penalty of nineteen percent of the amount of the tax under this subsection; and if the tax is not received on or before the last day of the second month following the due date, there is assessed a total penalty of twenty-nine percent of the amount of the tax under this subsection. However, pursuant to RCW 82.04.462(4), the penalties imposed by RCW 82.32.090 will not apply to taxpayers with apportionable income who correct their receipts factor by October 31st of the tax year following the current year. 3 It states: A taxpayer may calculate the receipts factor for the current tax year based on the most recent calendar year for which information is available for the full calendar year. If a taxpayer does not calculate the receipts factor for the current tax year based on the previous calendar year information as authorized in this subsection, the business must use current year information to calculate the receipts factor for the current year. In either case, a taxpayer must correct the reporting for the current tax year when complete information is available to calculate the receipts factor for that year, but not later than October 31st of the following tax year. Interest will apply to any additional tax due on a corrected tax return. . . . Penalties as provided in RCW 82.32.090 will apply to any such additional tax due only if the current tax year reporting is not corrected and the additional tax is not paid by October 31st of the following tax year. RCW 82.04.462(4) (emphasis added). WAC 458-20-19402(602) is the Department’s interpretation and implementation of the statute. The rule states:

3

Income apportionable under RCW 82.04.460(4)(a) covers activities under the service and other activities B&O tax classification.

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Regardless of how a taxpayer reports its taxable income under . . . this rule, when the taxpayer has the information to determine the receipts factor for an entire calendar year, it must file a reconciliation and either obtain a refund or pay any additional tax due. The reconciliation must be filed on a form approved by the department. . . . If the reconciliation is completed prior to October 31st of the following year, no penalties will apply to any additional tax that may be due. In this case, for Taxpayer's 2017 through 2019 tax years, Taxpayer needed to file its reconciliation with the Department by October 31 of the following year. Taxpayer did not report income from dental insurance premiums during the audit period. The service and other activities B&O tax on the dental insurance premiums due remained unpaid after the last day of the second month following the due date for payment. Taxpayer failed to file the reconciliation and pay the tax liability by the respective deadlines. Accordingly, a 29 percent delinquent penalty was applied to the unpaid tax liability per RCW 82.32.090(1) and RCW 82.04.462(4). Having determined that the Department validly assessed the subject penalties, our analysis now turns to whether we have the authority to waive them. The Department is an administrative agency, and its authority to waive or cancel interest and penalties is restricted to the authority granted by the Legislature. The Legislature has granted the Department limited authority to waive or cancel penalties. RCW 82.32.105 and RCW 82.32A.020. The Department has no discretionary authority to waive or cancel penalties. Det. No. 98-85, 17 WTD 417 (1998); Det. No. 99-285, 19 WTD 492 (2000). RCW 82.32.105(1) provides, in pertinent part: If the department of revenue finds that the payment by a taxpayer of a tax less than that properly due or the failure of a taxpayer to pay any tax by the due date was the result of circumstances beyond the control of the taxpayer, the department of revenue must waive or cancel any penalties imposed under this chapter with respect to such tax. RCW 82.32.105(1) does not define what the term “circumstances beyond the control of the taxpayer” means, but the Department explained the term, and gave examples, in Rule 228(9). Rule 228(9)(a)(ii) states, in pertinent part: Circumstances beyond the control of the taxpayer are generally those which are immediate, unexpected, or in the nature of an emergency. Such circumstances result in the taxpayer not having reasonable time or opportunity to obtain an extension of the due date or otherwise time[ly] file and pay. Rule 228(9)(a)(ii) lists examples of circumstances that are generally considered to be beyond a taxpayer’s control sufficient to cancel penalties, including erroneous written information from the Department. Rule 228(9)(a)(iii) also lists examples of situations that are generally not considered to be beyond the control of a taxpayer. Specifically, it is not considered beyond the control of the taxpayer when taxpayer’s failure to file and pay is the result of a misunderstanding or lack of

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knowledge of a tax liability; or mistakes or misconduct on the part of employees or other persons contracted with the taxpayer. Rule 228(9)(a)(iii)(B) and (E). Both examples apply to Taxpayer. Taxpayer failed to file and pay B&O tax on its dental premiums because it misunderstood, or mistook, its obligation to do so. That is not a circumstance beyond its control for which the Department has authority to waive penalties under Rule 228(9)(a)(iii). Under Rule 228(9)(a), the Department has authority to waive or cancel penalties imposed under chapter 82.32 RCW when erroneous written information given to the taxpayer by a department officer or employee caused the delinquency. Rule 228(9)(a)(ii)(B). Taxpayer argues that it relied on general information from the OIC that, Taxpayer claims, implies dental premiums are not subject to B&O tax. Even if Taxpayer’s contention that the information it received from the OIC implies something with respect to Taxpayer’s B&O tax obligations, it is insufficient to warrant waiver under Rule 228(9)(a)(ii)(B) since the information was neither written nor from the Department. Furthermore, it is Taxpayer’s obligation to know its own tax liability[,] and Taxpayer’s lack of knowledge or mistake in filing are specifically not circumstances beyond its control under Rule 228(9)(a)(iii)(B). Beyond that, Taxpayer claims that imposing B&O tax under these circumstances is unfair. As previously discussed, the Department’s authority to waive penalties is limited. Taxpayer’s lack of knowledge of its tax liability is not a circumstance beyond its control under Rule 228(9)(a)(iii)(B) and, thus, the Department does not have authority to waive the subject penalties here. WAC 45820-228(9)(a)(iii); see also Det. No. 01-165, 22 WTD 5 (2003). Accordingly, based upon these provisions, we conclude the Department has no authority under RCW 82.32.105 to cancel the penalties imposed on Taxpayer under Rule 228(9). 24-month waiver RCW 82.32.105(2) establishes a twenty-four month waiver of the delinquent payment penalty. RCW 82.32.105(2) states, “the department must waive or cancel the penalty imposed under RCW 82.32.090(1) when the circumstances under which the delinquency occurred do not qualify for waiver or cancellation under subsection (1) of this section if: (a) The taxpayer requests the waiver for a tax return required to be filed under RCW 54.28.040, 82.32.045, 82.14B.061, 82.23B.020, 82.27.060, 82.29A.050, or 84.33.086; and (b) The taxpayer has timely filed and remitted payment on all tax returns due for that tax program for a period of twenty-four months immediately preceding the period covered by the return for which the waiver is being requested. Rule 228(9)(b)(i)(B) further states:
[I]f a taxpayer has obtained a tax registration endorsement with the department prior to engaging in business within the state and has engaged in business activities for a period less than twenty-four months, the taxpayer is eligible for the waiver if the taxpayer had no delinquent tax returns for periods prior to the period covered by the return for which the waiver is being requested.

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Rule 228(9)(b)(i)(B).
Thus, a taxpayer’s very first return is eligible for waiver under the twenty-four month review provision, provided the taxpayer had obtained a tax registration endorsement prior to engaging in business in Washington. Id. Here, Taxpayer is not eligible for a waiver of any of the delinquent payment penalties under the 24-month rule provided under RCW 82.32.105(2) and Rule 228(9)(b) because Taxpayer did not register with the Department until . . . 2018, after it engaged in business activities in the state. Interest When the Department determines that a tax or penalty has not been paid in full, it will assess the additional amount found to be due and add interest on the tax. RCW 82.32.050(1). The imposition of interest is not discretionary. The Legislature has mandated the imposition of interest where a taxpayer has failed to timely pay the requisite tax. RCW 82.32.050. The Department has the authority to waive interest in two limited circumstances: 1) where the failure to timely pay the tax was the direct result of written instructions given to the taxpayer by the department; or 2) where the extension of a due date for payment of an assessment of deficiency was not at the request of the taxpayer and was for the sole convenience of the department. RCW 82.32.105(3); WAC 45820-228(10). These limited circumstances are not present in Taxpayer’s case. As such, there is no basis to waive the assessed interest. DECISION AND DISPOSITION Taxpayer's petition is denied Dated this 17th day of January 2023.