Opinion ID: 1405774
Heading Depth: 1
Heading Rank: 3

Heading: deductions claimed on account of retainage

Text: Paschen contends that the trial court erred by failing to deduct amounts withheld from Paschen for payment of subcontractors or materialmen, and taxes. RCW 60.28.010(1) provides in part: Contracts for public improvements or work, other than for professional services, by the state, or any county, city, town, district, board, or other public body, herein referred to as public body, shall provide, and there shall be reserved by the public body from the moneys earned by the contractor on estimates during the progress of the improvement or work, a sum not to exceed five percent, said sum to be retained by the state, county, city, town, district, board, or other public body, as a trust fund for the protection and payment of any person or persons, mechanic, subcontractor or materialman who shall perform any labor upon such contract or  the doing of said work, and all persons who shall supply such person or persons or subcontractors with provisions and supplies for the carrying on of such work, and the state with respect to taxes imposed pursuant to Title 82 RCW which may be due from such contractor. The funds are retained by the public body until 30 days after final acceptance of the project. RCW 60.28.010(2). RCW 60.28.020 provides: After the expiration of the thirty day period, and after receipt of the department of revenue's certificate, and the public body is satisfied that the taxes certified as due or to become due by the department of revenue are discharged, and the claims of materialmen and laborers who have filed their claims, together with a sum sufficient to defray the cost of foreclosing the liens of such claims, and to pay attorneys' fees, have been paid, the public body shall pay to the contractor the fund retained by it or release to the contractor the securities and bonds held in escrow. Paschen contends that the funds retained by the State are pass-through payments and should be deducted from the total contract price when calculating B&O taxes. SMC 5.44.030(E) provides that the B&O tax shall be based on the gross income of the business. MICC 4.10.030(D) includes a similar provision. Gross income is defined by both Seattle and Mercer Island as: [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. (Italics ours.) MICC 4.10.020(J); see SMC 5.44.020(A)(8); see also RCW 82.04.080.  In support of its argument, Paschen cites Walthew, Warner, Keefe, Arron, Costello & Thompson v. Department of Rev., 103 Wn.2d 183, 691 P.2d 559 (1984), which addressed whether client reimbursements to attorneys who had made advances for such things as expert fees, fall within the definition of gross income under RCW 82.04.080. In Walthew, the State assessed B&O taxes on reimbursements for payments made by the law firm to court reporters, doctors, and process servers. Walthew, at 184. The court stated that pass-through payments of the type represented here ... are not the type of reimbursements the Legislature contemplated for inclusion in gross income ... Walthew, at 186. The court noted that the attorney is merely acting as an agent for the client in making the initial payments to the third parties, and has no personal liability for these payments. Walthew, at 188. [4] The type of payments at issue in this case are not analogous to the reimbursements described in Walthew. In this case, the money actually belongs to the contractor, and is only retained by the State if the contractor fails to fulfill its financial obligations to others. Allowing a deduction for B&O tax purposes would provide an economic advantage in having laborers and taxes paid through the fund and would discourage the prompt payment of claims when due  one of the main purposes of statutory retainage. Funds which are retained or held back but which ultimately will be paid over to the contractor form a part of the total contract price. It is proper that such funds be included in the base upon which the tax rate is to be applied. They are a portion of the consideration to Paschen. See E.I. Du Pont de Nemours & Co. v. State, 44 Wn.2d 339, 267 P.2d 667 (1954). We conclude that the imposition of B&O taxes on the full contract price by Seattle and Mercer Island does not constitute unlawful discrimination, nor does it violate due process requirements. Furthermore, Paschen is not entitled to any deduction in taxes for the amount retained by the State pursuant to RCW 60.28.010. We affirm the trial  court's decision granting summary judgment in favor of Seattle and Mercer Island. PEARSON, C.J., and UTTER, BRACHTENBACH, DOLLIVER, DORE, ANDERSEN, GOODLOE, and DURHAM, JJ., concur. Reconsideration denied November 16, 1988.