Rho Company v. Department of Revenue

Dore, J.

(dissenting)—I dissent.

No one should mistake the fact that the majority has inflicted a catastrophic loss of revenue on the State. The wider implications of this decision should be recognized, if only as a measure of how wrong the decision is. First, although it directly concerns only the business and occupation (B&O) tax, this case necessarily will have an enormous impact on the calculation of the state sales tax. Since the B&O and retail sales tax statutes share a number of key definitions, many sales of services fall under the category of "retail sales" for B&O and sales tax purposes. By removing this sale of services from the B&O tax rolls, the majority's opinion threatens to remove many other sales of services from the retail sales tax rolls as well. Second, the majority's reasoning offers a generous opportunity to evade B&O taxation to those taxpayers willing and able to restructure their business relations into agencies—not a very difficult task for most.

These implications are all the more disturbing given the fact that the majority's reasoning is clearly flawed. Rho is not the agent of its customers; it is a seller of services. Its contracts refer to it as a seller and never as an agent. It provides the services pursuant to "purchase orders". Rho *575 provides its services by means of its own employees; it does not merely retain third parties on behalf of its customers. Rho's compensation is a function of the hours of service provided, not a proportion of the proceeds of the transaction. Even if Rho were an agent, however, that would not resolve this case. The cost of its engineers' salaries is a cost to Rho of doing business regardless of whether Rho is an agent, because Rho's status as an agent would not excuse it from liability to those engineers in the first instance. Consequently, the engineers' salaries must be included in gross income for B&O tax purposes.

The Effect on Revenues

The majority's decision allows a taxpayer to treat a sale of services as something other than what it is, and thus to escape the bulk of its tax liability. I doubt that the implications of that decision will escape the notice of other sellers of services for long. They will soon reorganize their transactions to take advantage of the opportunities the majority has extended. The majority should recognize the full implications of its decision.

There are a large number of services which are treated as "retail sales" for both B&O and sales tax purposes. See RCW 82.04.050; WAC 458-20-141; 458-20-149; 458-20-152; 458-20-156; 458-20-170; 458-20-172; 458-20-173. This is due to the fact that, under RCW 82.08.010(4), certain key definitions from RCW 82.04, the chapter on B&O taxes, are incorporated into the chapter on sales taxes, RCW 82.08. Specifically, the definition of a "retail sale" is the same for both systems.

If a transaction falls outside the definition of a retail sale for B&O tax purposes, it will be taxed at a lower B&O tax rate. See 2 Wash. Tax Dec. 87-76, at 391 (1987). More importantly, however, the shared definition of "retail sale" means that the transaction will also fall outside the scope of the retail sales tax. Since the majority's opinion permits a taxpayer to treat a sale of services as a nontaxable transaction between an agent and a principal, it removes many *576 sales of services not only from the B&O tax, but also from the retail sales tax. A simple example will indicate the scope of the revenue loss at stake.

Suppose a plumber is hired by a homeowner for a job worth $100. The transaction is taxable under the B&O tax as a retail sale and under the retail sales tax. WAC 458-20-170. The B&O taxes amount to .495 percent of the gross proceeds of the sale, or about 50 cents. RCW 82.04.250; 82.04.2904(1). Retail sales tax due would be 7.15 percent of the sales price, or $7.15. RCW 82.08.020; 82.04.2904(2). The total revenue collected would be approximately $7.65.

Now suppose that the homeowner contacted a company similar to Rho, which employed plumbers itself and contracted with homeowners to provide plumbers who would work directly for the homeowner, at the homeowner's direction, just as if the homeowner had hired the plumbers himself. Under the majority's reasoning, this plumbing company would be the agent of the homeowner. Most of the $100 payment would pass through to the plumber himself, and the company would retain only a small commission, say $10. The $90 received by the plumber would not be taxable, since he is an employee. WAC 458-20-105. Only the $10 would now be taxable under the B&O tax and sales tax. The State would receive revenue of about 77 cents. Under the majority's reasoning, a slight alteration in business organization results in a loss of $6.88 in revenue on this one small transaction.

Not all service transactions fall under both the B&O and the sales tax systems. Sales of services like Rho's fall under the provision for "business or service activities," which imposes a tax of 1.50 percent on the gross income of the business. RCW 82.04.290. Even here, however, the majority's reasoning will encourage businesses to reorganize their operations into agency relationships, with a consequent reduction in tax revenues.

Suppose, for example, that Company A's employees B, C and so on provide services to Company Z which brings $100 *577 to Company A. Company A pays its employees' salaries equivalent to 90 percent of its gross. If, like Rho, Company A falls under RCW 82.04.290, it will pay $1.50 in B&O tax on the transaction with Company Z. Suppose, however, that Company A writes its contracts so as to act as Company Z's "agent" with regard to A's employees in the same transaction. Under the majority's reasoning, Company A's gross income is now only $10, and the State will receive 15 cents in revenue. The net loss in revenue is $1.35.

The lost revenue in these examples may not seem like much, but we are dealing here with a tax calculated on the gross proceeds generated by every service transaction conducted in this state. The $100 of my example represents hundreds of millions of dollars of business revenue in the real world. The revenue loss the majority inflicts on the State today is huge and totally unjustifiable.

Rho Is Not an Agent

The majority remands for a determination on whether Rho was the agent of its customers. As shown below, answering that question will not resolve this case. All of the confusion on those points could be avoided, however, if the majority would frankly acknowledge that Rho is a seller of services, and not an agent at all.

A major part of the service Rho provided was to bear the expense of recruiting and interviewing engineers. In doing so, Rho sought to find engineers who would meet the needs of its customers, but this does not mean that Rho was the agent of those customers in this recruiting process. Rho collected a pool of qualified engineers, from which its customers could make a selection. If Rho did not find the right engineer for the job, however, a customer was under no obligation to the engineer or to Rho. The customer could seek out engineers elsewhere. If, on the other hand, Rho did find an engineer which met its customer's requirements, the engineer was not hired by the customer; he was placed on Rho's payroll. Rho sought out qualified engineers which *578 would meet the needs of its customers, and that was a service to those customers. It does not follow, however, that Rho was an agent in such instances.

There is an administrative rule which sets out a clear standard for distinguishing between sellers and agents, WAC 458-20-159 (Rule 159), and we should apply it to this case. The majority contends, without argument, that the rule is inapplicable here because it deals with sales of tangible personal property rather than sales of services. Majority, at 573 footnote 6. On the contrary, however, there is every reason to use Rule 159 here. First, the same logic which supports treating certain sellers of goods as agents, and therefore free of tax liability, applies equally to a seller of services. 7 Second, the B&O system as a whole does not make a consistent distinction between sellers of goods and sellers of services. As noted above, the B&O tax system treats a number of services as retail sales, subject to the same rates as retail sales of goods. Third, and most importantly, Rule 159 states a simple, commonsense standard for weeding out exactly the sort of after-the-fact claim of agency status that we are presented with here.

Rule 159 sets forth two requirements for a taxpayer's being treated as an agent not subject to taxation:

(1) The books and records of the broker or agent show the transactions were made in the name and for the account of the principal, and show the name of the actual owner of the property for whom the sale was made, or the actual buyer for whom the purchase was made.

(2) The books and records show the amount of gross sales, the amount of commissions and any other incidental income derived by the broker or agent from such sales.

WAC 458-20-159. We have a substantial record before us, with what is clearly an adequate sample of Rho's business records. When examined in light of Rule 159, the only possible conclusion one can draw from these records is that Rho is a seller of engineering and drafting services.

*579 Rho's records simply were not kept in the manner required by the rule to establish agency status. I cannot find a single instance in Rho's records where the terms agent and principal are used to refer to Rho and its customer. On the contrary, Rho and its customers are consistently referred to as "Seller" and "Buyer". The plain language of these transactions indicates that Rho was a seller of services, and we should treat it as one. Anything else gives undue credit to an ingenious but untrue after-the-fact characterization of this relationship.

Rho's contracts with its customers describe the subject of the transaction as "the furnishing of said personnel to Buyer by Seller" and "the use of Seller's employees." Clerk's Papers, at 88-92. Those contracts do not say that Rho is to engage personnel on the customer's behalf; they do not describe an agency relationship. The subject of the contracts before us was the sale of a service.

Rho supplied its services pursuant to purchase orders. Again, the plain language of the transactions before us show that this was a sale, a purchase, of services by one party from another. It was not a matter of one party acting on behalf of another. We should be governed by these plain words because the parties chose to be governed by those words and those words alone give a true picture of their relationship. The record shows that Rho began to think of itself as an agent only after the tax bill came. We are not required to credit such a self-interested characterization.

Rho's engineers were its employees, not third parties to an agency transaction. In the terms of Rule 159, Rho's contracts with its engineers were not made in the name of its customers nor on the account of the customer. All the business records before us refer to the engineers as Rho's employees, in both Rho's contracts with the engineers and its contracts with its customers. In hiring its engineers, Rho clearly did not treat them as third parties to an agency relationship. On the contrary, Rho took on substantial obligations to its engineer employees. Rho agreed to pay all the *580 withholding taxes, workers' compensation and unemployment insurance of the engineers, just like an ordinary employer. If Rho had been acting only on the account of its principal as contemplated in Rule 159, the engineers would have obligations to and rights against the principal alone.

Rho's compensation was also never treated as an agent's commission, as required by Rule 159. The contracts say "Price for Services". Rho was compensated based on the hours worked by the engineer in question. Rho was not compensated with a proportion of its engineer's compensation nor a proportion of its customer's profit from the engineer's work. Rho received a price for a service provided, calculated in the only reasonable manner available: as a function of the hours of service provided. Taking any faint resemblance between this and the payment of a commission as dispositive would require us to ignore everything else we know about this transaction.

In short, there is no sign in the record before us that Rho was treated as an agent of its customers in the ordinary course of its business. While the majority manages to obscure the issue, the question is really very simple. Is Rho's "agency” status the sort of ad hoc characterization that the requirements of WAC 458-20-159 were designed to eliminate? There is no need to remand this case to make that determination. Rho has engaged in an after-the-fact rationalization of its actions. The Board was not fooled. While we review its findings for errors of law, we also should defer to its expertise. This is a clear case where such deference would be appropriate.

WAC 458-20-111 (Rule 111) Is Inapplicable Here

In remanding for a determination on agency, the majority assumes that if Rho is an agent it is free of all liabilities incurred in connection with its principal's business. That is, the majority assumes that all such costs are necessarily passed through to Rho's clients and cannot be counted as part of Rho's cost of doing business nor, consequently, as part of Rho's taxable gross revenue.

*581 However, it is not true that an agent is always free of liability in matters connected with its principal's business. An agent can be liable in such matters on a variety of theories, some directly applicable to Rho's conduct here. It follows that, even if Rho is an agent, it still can incur costs and liabilities which are not passed through, and which ought be counted as part of its gross revenue—even if those costs are in some manner connected with its principal's business. The majority simply fails to consider this possibility.

In order to see why Rho's status as an agent does not necessarily make its engineers' salaries pass-through expenses, it is helpful to set the question of agency aside for a moment, and to apply the remainder of Rule 111. Approaching the case in this way makes it possible to see how a taxpayer's being an agent may or may not affect the calculation of gross income.

Rule 111 provides in part:

The word "advance" as used herein, means money or credits received by a taxpayer from a customer or client with which the taxpayer is to pay costs or fees for the customer or client.

The word "reimbursement" as used herein, means money or credits received from a customer or client to repay the taxpayer for money or credits expended by the taxpayer in payment of costs or fees for the client.

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 therefor, either primarily or secondarily, other than as agent for the customer or client.

There may be excluded from the measure of tax amounts representing money or credit received by a taxpayer as reimbursement of an advance in accordance with the regular and usual custom of his business or profession.

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 *582 be purchased by the taxpayer in carrying on the business in which the taxpayer engages.

. . . [N]o charge which represent an advance payment on the purchase price of an article or a cost of doing or obtaining business, even though such charge is made as a separate item, will be construed as an advance or reimbursement. Money so received constitutes a part of gross sales or gross income of the business, as the case may be.

WAC 458-20-111.

As the last paragraph quoted makes clear, the broad intent of the rule is to segregate those expenses which are part of a company's cost of doing business from those expenses which are not. The distinction arises from the very fact that the B&O tax is calculated on the basis of gross income. If costs of doing business were excluded from the taxable amount, the tax would be applied to a net, rather than a gross, figure. On the other hand, if a company functions only as a conduit of funds, those funds cannot be considered part of its income. Articulating this "pass-through" concept is the purpose of the remainder of Rule 111.

The basic tool the rule uses to make this distinction between costs of doing business and pass-through costs is liability on the part of the taxpayer. If the taxpayer is liable for the amounts in question, they are costs of doing business. If the taxpayer is not liable for the amounts at issue, the costs are by definition passed on and cannot be considered part of gross income.

If we adhere to the basic concept of liability to the taxpayer, it is clear that Rho's taxable gross income includes the salaries and wages it pays to the engineers it has hired. Rho is liable to the engineers for their compensation. Both the contracts between Rho and the engineers and between Rho and its clients explicitly so provide. Furthermore, Rho's contracts with its clients expressly provide that Rho shall pay all social security, income tax withholding, employment compensation, workers' compensation and similar fees payable in connection with the engineers' *583 employment. While these obligations are contained in the Rho-client contract, they are obligations which necessarily operate to the benefit of the engineers. 8 Because of this, the obligations could he enforced by the engineers. Lonsdale v. Chesterfield, 99 Wn.2d 353, 361 , 662 P.2d 385 (1983). For Rule 111 purposes then, these obligations must be considered liabilities on the part of Rho to its engineers. Since Rho is liable for the cost of its engineers' employment, that cost is a cost of doing business which is not deductible under Rule 111.

These points can be seen clearly in distinguishing this case from our two previous cases on Rule 111. We recognized taxpayer liability as the determining factor in Rule 111 questions in both Walthew, Warner, Keefe, Arron, Costello & Thompson v. Department of Rev., 103 Wn.2d 183 , 691 P.2d 559 (1984) and Christensen, O'Connor, Garrison & Havelka v. Department of Rev., 97 Wn.2d 764 , 649 P.2d 839 (1982).

In Christensen, a Seattle law firm which assisted its clients in obtaining patents customarily arranged for the assistance of attorneys in Washington D.C. and for the services of draftsmen specializing in patent illustrations. The Seattle firm paid the Washington D.C. attorneys and the draftsmen, but was reimbursed by its clients and so deducted the amounts from its gross income under Rule 111. We upheld this deduction. A key point in the law firm's favor was the fact that all parties concerned agreed that the D.C. attorneys and the draftsmen were employed by the law firm's client, not the firm itself, and that the law firm was not liable to the D.C. attorneys or the draftsmen for payment. 97 Wn.2d at 769-71 .

The difference between Christensen and this case could not be more clear. Where the law firm was free of liability for the costs at issue, Rho is unquestionably liable to its *584 engineers for their salaries and benefits. The Board of Tax Appeals found that relieving its clients from such liabilities is a crucial element in the service provided by Rho. Since the taxpayer's freedom from liability for the costs at issue is the dispositive factor under Rule 111, as Christensen shows, Rho cannot possibly qualify for a deduction under the rule.

In Walthew, we considered another deduction by a law firm under Rule 111, this time for expenses connected with litigation. Once again, the taxpayer's liability for the costs at issue was the decisive factor. Our decision to uphold the deduction turned on the fact that the firm could not take on liability for the expenses as a matter of law. 103 Wn.2d at 188 .

Here, in contrast, Rho not only can take on liability for the costs in question; taking on those liabilities is the heart of the service it provides. Such liability is the determining factor under Rule 111, and this case is distinguishable from Walthew for the simple reason that in Walthew the taxpayer could not and did not take on liability, while in this case the taxpayer could and did do so.

Rho's situation is indistinguishable from the examples given in the rule itself of expenses which may not be excluded under Rule 111.

[N]o exclusion is allowed with respect to amounts received by (1) a doctor for furnishing medicine or drugs as a part of his treatment; (2) a dentist for furnishing gold, silver or other property in conjunction with his services; (3) a garage for furnishing parts in connection with repairs; (4) a manufacturer or contractor for materials purchased in his own name or in the name of his customer if the manufacturer or contractor is obligated to the vendor for the payment of the purchase price, regardless of whether the customer may also be so obligated; (5) any person engaging in a service business or in the business of installing or repairing tangible personal property for charges made separately for transportation or traveling expense.

WAC 458-20-111. The engineers Rho provides to its clients are paid for by Rho and are therefore directly analogous to the doctor's medicine, the dentist's gold, the repairman's parts and the manufacturer's materials. The fact that all *585 these businesses recover their costs from their clients does not make those costs pass-through costs under Rule 111.

The majority is misled by the fact that Rho deals in personnel and, as shown below, by the concept of agency. But the fact is that Rho is a personnel service providing a product—personnel—to its clients. The engineers retained by Rho are, with all due respect to the engineers themselves, Rho's inventory. Like any expenditures for inventory, the salaries paid to the engineers are a cost of doing business which must be included in gross income.

The fact that Rho obtains inventory on special order, pursuant to criteria supplied by its clients, does not change the fact that the cost of the engineers is a cost of Rho's business. As an analogy, automobile dealers often call around to other dealers in order to find the right combination of model, color and features for a customer. But just because the dealer has provided that service, it does not follow that the cost of a car obtained and sold in that manner is deductible under Rule 111. The cost of the car to the dealer is a cost of doing business and part of his gross income. In Rho's case, it is tempting to stress the service part of the transaction because Rho's "inventory" consists of human beings, and professionals at that. However, the determining question under Rule 111 is whether Rho is liable for the cost of what it supplies—whatever it may be— such that the cost is a cost of doing business. Rho supplies its customers with engineers. There can be no doubt that Rho is liable for the engineers' salaries, that this is a cost of its business and that Rho is therefore not entitled to a deduction under Rule 111.

Agency and Rule 111

The passage in Rule 111 that has led to the majority's confusion is this:

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 therefor, either primarily or secondarily, other than as agent for the customer or client.

*586 (Italics mine.) WAC 458-20-111. In Christensen and especially in Walthew, our analysis stressed the agency concept. Perhaps because of that, the majority has lost sight of the fact that the determining factor in Rule 111 analysis is the taxpayer's liability for the costs in question, not its status as an agent. While in Christensen and Walthew the concept of an agent worked as an adequate surrogate for non-liability, that is not always the case, and is clearly not the case here.

It is well established that an agent for a fully disclosed principal does not incur any liability to a third party with whom he contracts on the principal's behalf. Restatement (Second) of Agency § 320 (1958). It is likely that the drafters of Rule 111 had this principle in mind when they added the "agent" clause to the rule. Section 320 is probably the principle the court had in mind in Christensen and Walthew, when it equated costs incurred by an agent with pass-through costs under Rule 111. Clearly, the majority has the section 320 rule in mind when it makes the same assumption in this case.

However, the assumption that Rho's having the status of an agent will, by itself, relieve it of all possible liability to the engineers is simply not justified. Despite the fact that an agent for a disclosed principal does not become a party to the principal-third party contract, obligations from the agent to the third party can arise from the same transaction in a variety of ways.

The most obvious is the creation of a distinct contract between the agent (Rho) and the third party (engineers) at the same time as or in connection with the agency relationship with the principal (Rho's clients). The case of Griffiths & Sprague Stevedoring Co. v. Bayly, Martin & Fay, Inc., 71 Wn.2d 679 , 430 P.2d 600 (1967) illustrates the principle. Both parties in Griffiths were aviation insurance brokers. Bayly directed Griffiths to obtain insurance from Lloyd's of London, through Griffiths' London affiliate, for Bayly's client, Cisco Aircraft. Griffiths paid the premium, as was standard practice in the industry. Cisco went bankrupt and *587 Griffiths sued Bayly for the premium. Bayly argued that it was the agent for a disclosed principal, Cisco, and therefore could not be liable to Griffiths. The court held that Bayly was liable to Griffiths, despite its status as an agent for Cisco, on a separate contract between Griffiths and Bayly alone.

We do not depart from the familiar rule that, when an agent makes a contract on behalf of a disclosed or partially disclosed principal whom he has power to bind, he does not thereby become liable for his principal's nonperformance. Restatement (Second), Agency § 328 (1958); 3 Am. Jur. 2d Agency § 294 (1962). But, regardless of the parties' position under the insurance code (RCW 48.17.020) [defining "broker" as an agent of the insured], it is the relationship between them in the instant transaction which governs here. If the facts surrounding the transaction allowed the jury to infer an agreement [between Bayly and Griffiths] to pay the premiums, then, under familiar and well-established rules, a reviewing court ought not disturb the verdict.

71 Wn.2d at 686 .

Rho and its engineers are in the same situation as Bayly and Griffiths. Despite the fact that Rho is acting as an agent for its clients, there is a separate set of contractual obligations which obtain between Rho and its engineers alone. Rho must pay its engineers, see to it that withholding, social security, unemployment compensation and workers' compensation fees are paid on their behalf, ensure that they receive certain holidays and pay overtime when necessary. Like Bayly, Rho is liable on that contract regardless of the fact that it also has an agency relationship with another party which is intimately connected with its obligations to the engineers. Rho's status as an agent is not a complete defense to B&O tax liability, because it is not a complete defense to contractual liability to the engineers. Since Rho is liable to its engineers, the cost of those engineers is a cost of Rho's business and is not deductible under Rule 111.

The case of Gray v. England, 69 Wn.2d 52 , 417 P.2d 357 (1966) also supports this analysis. In Gray , an escrow company was the agent of the buyer, England. England put the *588 company on notice that a portion of the escrow should be held for a third party, Gray. When the deal failed to close, the escrow was returned to England, but no notice was given to Gray. The court held that the escrow company was liable to Gray, despite its status as an agent, because it was a party to a third party beneficiary contract and owed a duty to Gray, the third party, on that ground.

This case is indistinguishable. As noted above, Rho is obliged in its contracts with its clients to pay the engineers' salaries and to pay taxes, workers' compensation and unemployment insurance fees in connection with the engineers' employment. The intent of both Rho and its clients in agreeing to these terms is to extend a benefit to the engineers: to compensate them for their work in accordance with applicable law. Given that the parties intend to confer a benefit on third parties, the contract is enforceable by those third parties, the engineers. This liability on the part of Rho to its engineers, regardless of its status as an agent for the client, again shows that the engineers' salaries are not deductible under Rule 111. Since Rho is liable, those costs are costs of doing business, not pass-through costs.

There is yet another theory on which liability from Rho to its engineers might exist, precluding deduction under Rule 111. Rho sometimes acts as an intermediary between its client and its engineers in determining the compensation to be paid. Rho undertakes to review its engineers' performance for the purpose of obtaining increased compensation for the engineer. Rho also sometimes represents engineers as independent contractors, not as employees of Rho itself. In these situations, Rho can be seen as the engineer's agent, with attendant liabilities.

The fact that Rho is an agent of its clients in these transactions does not preclude treating it as the agent of its engineers also. In other words, Rho can be seen as a broker. Brokerage relationships are common in the field of insurance, and are frequently identified as the justification for holding a defendant liable to the insured—for failure to obtain insurance, example—despite his status as an agent *589 for the insurance company. See Annot., Liability of Insurance Broker or Agent to Insured for Failure To Procure Insurance, 64 A.L.R.3d .398, 447-49 (1975); Dailey v. Elicker, 447 F. Supp. 436, 438 (D. Colo. 1978). The nature of a brokerage was stated in Gay v. Lavina State Bank, 61 Mont. 449, 457 , 202 P. 753 (1921):

Every broker is in a sense an agent, but every agent is not a broker. The chief feature which distinguishes a broker from other classes of agents is that he is an intermediary, or middleman, and, in accepting applications for insurance, acts in a certain sense as the agent of both parties to the transaction.

Here, Rho is in the business of bringing engineers together with manufacturers, and represents the interests of its engineers in the transaction just as much as the interests of its corporate clients. It arguably owes fiduciary duties to both. Whether it actually does owe such duties to its engineers need not be conclusively established here. The point is that the mere existence of an agency relationship between Rho and its clients is not sufficient to preclude the possibility of liability to its engineers. Remanding the case to determine whether Rho is an agent will not determine the central Rule 111 issue—whether Rho was liable for the cost of its engineers—and the record we already have indicates that Rho is liable, the costs in question are not pass-through costs and are therefore not deductible under the rule.

If we look at this case as a matter of construing the rule, the majority's approach is clearly indefensible. The question is how the taxpayer's being an agent for its customer or client relates to the rule's main requirement that the taxpayer have no liability for the costs in question. There are two possibilities. The "agent" clause may merely reiterate the nonliability requirement in different terms. Or, status as an agent may be a separate and distinct ground on which costs can be designated as "advances" and "reimbursements".

As I have shown above, the first interpretation is untenable because it simply is not true that status as an agent *590 necessarily precludes liability for the costs in question. There are at least three ways Rho can be seen as liable to its engineers, despite its status as an agent of its clients.

That leaves the second possibility: that agent status is a separate and distinct ground for deducting costs under Rule 111. The only difficulty with this interpretation is that it has no support in the logic of the B&O tax system and is inconsistent with the import of Rule 111 as a whole. The whole point of the rule is to distinguish between costs of doing business and pass-through costs, and the necessity of making that distinction arises out of the basic premise that B&O taxes are based on gross income, not net. There is no reason whatsoever to read Rule 111 as creating a deduction for expenses incurred in the course of an agency where those expenses are not also genuine pass-through costs. And, as explained above, their status as pass-through costs is a function of taxpayer liability.

By treating agency status alone as determinative, the majority gives credence to the second of these interpretations, suggesting that a taxpayer can obtain a deduction under Rule 111 merely by showing himself to be an agent. That interpretation of the rule is untenable. Not only is it not supported by the logic of the rule, it threatens to open a very wide hole in the B&O tax system. I cannot join in such a result.

Conclusion

Rho sold customers a service. In allowing Rho to characterize its activities as an agency, the majority permits that sale to escape B&O taxation. Because many sales of services fall under the retail sales tax as well as the B&O tax, the majority's reasoning will permit many taxpayers to escape sales taxes as well as B&O tax. The loss of revenue will be enormous.

This is all the more regrettable given that Rho clearly is not an agent. Rho was a seller of services, and was always designated as such in every business record we have before us. The mere fact that it tried to find engineers that met its *591 customers' needs does not make it an agent; providing the right person for the job was simply part of Rho's service.

Even if Rho were an agent of its clients, that is not the issue in this case. The issue is whether the cost of its engineers is a cost of doing business or a true pass-through. That issue in turn is governed by whether Rho is liable for the costs in question. Since Rho is liable to its engineers for their salaries and benefits, those costs are a cost of doing business and are not deductible under Rule 111. I would affirm the decision of the Board of Tax Appeals.

Utter, J., concurs with Dore, J.

As discussed below, this turns on the fact that they are not liable and so have not incurred a cost of doing business.

For example, the engineers are ultimately responsible for the payment of their taxes. Rho's failure to withhold pursuant to its contract with the client would breach a duty to the engineer.