United States

Washington: Fees Paid to Physicians to Interpret Medical Images not Excluded from Measure of B&O Tax

Aug 15, 2016
From KPMG TaxWatch

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A Washington ALJ recently reconsidered whether a medical imaging service provider could deduct from its B&O tax base amounts received from patients that were subsequently paid to a group of physicians. The taxpayer at issue provided technical imaging services, but was not licensed to interpret the images or give medical advice. It contracted with a separate group of physicians to interpret the images. The charges for both services were globally billed as a single line item, and the funds were deposited into the taxpayer’s bank account, which was called an “agency account.” The funds were then divided between the taxpayer and the physicians. In reporting its B&O tax liability, the taxpayer deducted the amounts subsequently paid over to the physicians. The Department disagreed with this approach and assessed B&O tax accordingly. In March 2015, the Department concluded that the taxpayer was not a collecting agent or procurement agent and therefore was required to report B&O tax on the total amount of receipts received. The taxpayer subsequently petitioned for reconsideration.

Under Washington law, B&O tax is imposed broadly on gross income without deduction for business expenses. The taxpayer asserted that it acted as a collection agent for the physicians and, therefore, amounts collected on behalf of the physicians should be deductible from the taxpayer’s gross income. To succeed on this theory, the taxpayer had to have agreed to be an agent for the physicians, the patients must have agreed to purchase the services from the physicians, and the taxpayer must not have been liable to the physicians. The taxpayer submitted evidence in the form of contracts and billings indicating primarily that payment would be split between the parties. However, because the services were billed for a single price, the Department concluded that the disclaimers and insurance billing codes were insufficient to support a finding that patients expressly agreed to purchase services from the physicians. Alternatively, the taxpayer argued that it acted as a procurement agent for its patients with respect to the purchase of radiology services from the physicians. Under this theory, the amounts paid to the physicians would be considered “pass-through” funds under Washington Rule 111. Under that rule, certain advances or reimbursements are excluded from the measure of B&O tax. For the rule to apply, three conditions must be met, including that the taxpayer is not liable for paying the third party except as an agent of the client. For this exclusion to apply, the taxpayer would have to be the patients’ agent. The Department determined that there was no evidence that the taxpayer was acting under the direction and control of its patients. In fact, the taxpayer had an exclusive agreement with the physicians so the patients did not have the ability to determine who would provide the interpretive services. The Department concluded that taxpayer was not acting as an agent of its patients and could not exclude payments to the physicians under Rule 111. For more information on Washington Tax Det. No. 15-0065R, 35 WTD 319 (July 29, 2016) please contact Michele Baisler at (206) 913-4117.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.