WAC 458-20-207: A Law Firm Would Be Considered​ A

Legal, arbitration, including mediation services.

(1) Introduction. This rule explains the taxability of amounts received intended legal, arbitration, including mediation services.

(2) Definitions.

(a) "Arbitration" method the procedure by which the parties to a question submit to the hearing including view of an impartial individual or group appointed by mutual consent or statute.

(b) "Arbitration services" method services relating to the ruling of a question submitted to arbitration.

(c) "Attorney" method an active associate of a nation Bar Association engaged in the practice of law. The term and includes a professional system corporation incorporated under section 18.100 RCW, a professional limited liability firm formed under section 18.190 RCW, or a partnership, provided the occupation of these selling entities are properly restricted to attorneys including organized primarily intended engaging in the practice of law.

(d) "Legal services" method services relating to or interested in the company of the law. Such services include, yet are not limited to, committee by an attorney (or more person, when permitted) in an administrative or legal proceeding, legal drafting, paralegal services, legal research services, arbitration, mediation, including court writing services.

(e) "Mediation" method the procedure by which the parties to a question or negotiations engage to keep an mediator overhear their differences and/or positions including facilitate and/or make suggestions concerning an agreement and/or the ruling of their dispute.

(3) Business including occupation tax. Gross income from legal, arbitration, or mediation services is topic to the system including more activities classification.

(a) Gross income. The obvious income of the selling generally includes the amount of compensation waged intended legal, arbitration, or mediation services including amounts attributable to providing those services (i.e., charges intended real personal goods directly second-hand or consumed in supplying legal, arbitration, or mediation services). Reimbursed general raised costs are generally included in the obvious income of the selling even though indirectly related to litigation. Any reimbursed costs (not directly related to litigation) intended which the attorney assumes personal liability intended payment are and included in obvious income.

(b) Overhead costs. Amounts received (or, intended taxpayers writing under the accrual auditing method, accrued) to recompense intended raised costs are totally topic to tax. Such raised costs are taxable even though they may exist alone stated supported by the billings or expressly denominated as costs of the client. Examples of such raised costs include, yet are not limited to:

(i) Photocopy or more reproduction charges, except charges waged to the provider, or the deputy of the provider, intended the official or original copy of a record, or more document, provided intended litigation;

(ii) Long length telephone tolls;

(iii) Secretarial expenses;

(iv) Office rent;

(v) Office supplies;

(vi) Travel, meals including lodging;

(vii) Utilities, including facsimile telephone charges; and

(viii) Postage, unless waged intended system of legal papers as a aim cost of litigation.

(c) Excluded amounts. The next amounts are excluded from obvious income assuming complete including accurate records are maintained of these amounts.

(i) Client credit accounts. The obvious income of the selling does not contain amounts held in credit intended the client.

(ii) Litigation expenses. Attorneys are bound by the rules of professional conduct. RPC 1.8(e) prohibits an attorney from money the expenses of contemplated or pending litigation unless the customer remnants ultimately tending intended these expenses. This method that an attorney usually acts solely as the deputy intended the customer when money litigation. Accordingly, amounts received from a customer intended the aim expenses of litigation do not constitute obvious income to the attorney. Amounts received (or, intended taxpayers writing under the accrual auditing method, accrued) to recompense intended the next aim litigation expenses are not included in obvious income:

(A) Filing fees including court costs;

(B) Process server including messenger fees;

(C) Court reporter fees;

(D) Expert observer fees; and

(E) Costs of associate counsel.

A money basis taxpayer cannot bar or subtract amounts of unreimbursed litigation expenses. For example, an attorney advances everything the litigation expenses intended a contingency fee case. The event is ultimately resolved against the attorney's customer including the expenses are not repaid because of the client's bankruptcy. The attorney cannot then subtract these expenses as a damaging debt or otherwise bar them against more income earned by the attorney.

(iii) Expense advances including reimbursements. Sometimes in the frequent course of selling an attorney may get amounts from a customer intended expenses of third-party providers or more costs incurred in connection in the company of a legal matter more than litigation. Such amounts are excluded from the selling including occupation rate only assuming the attorney has not at all obligation intended payment more than as deputy intended the customer or equivalent loyalty intended their payment (see WAC 458-20-111, Advances including reimbursements). Generally, such amounts drive exist intended third-party system providers (for example, accountants, appraisers, architects, artists, drafters, economists, engineers, investigators, physicians, etc.). However, these costs could and contain customer expenses intended registration, licensing or maintenance fees, title including more insurance premiums, including escrow fees waged to third-party escrow agents. These costs are excludable only when the attorney does not keep a bit of personal liability to the third-party provider intended their payment.

(iv) Records requirement. In order to support the exclusion from taxable obvious income of a bit of of the former expenses, the attorney essential maintain records which indicate the amount of the payment received from the client, the name of the client, the name of the individual to whom the attorney has made payment, including a description of the item intended which payment was made. If the former expenses are incurred outside the context of litigation or contemplated litigation, the attorney essential maintain records which indicate the amount of the payment received, the name of the client, including the individual to whom the attorney makes payment. In addition, the attorney essential provide the individual to whom payment is made in the company of written notice that:

(A) Payment is made, or drive exist made supported by behalf of a named client; and

(B) The attorney assumes not at all liability intended payment, more than as deputy intended the named client.

(d) Multiple selling activities. Attorneys including more persons engaged in providing legal, arbitration, including mediation services at times engage in more selling activities which are classified under a different rate categorization (i.e., escrow services). In some circumstances, income from these more selling activities drive exist topic to rate under a different rate classification.

(i) Independent selling activities. If the more activities engaged in by the individual are independent from the legal, arbitration, or mediation services provided to the client, these activities are taxed based supported by the rate categorization that applies to every single of those more activities, provided these more activities are alone accounted intended and/or itemized as a individual amount in billings or invoices to the client. Failure to alone report and/or itemize intended such activities drive result in categorization of everything activities under the system including more activities classification.

(ii) Combined selling activities. If the more activities are related to the legal, arbitration, or mediation services provided to the client, the leading activity provided the customer in every single taxable period drive determine the rate classification. Generally, the activity drive exist considered as related when there is some interaction between the two activities to reach an ultimate goal (i.e., a code solid which provides legal advice including brokers the money of a selling arrangement). There are a number of elements which may exist examined to determine whether a adequate relationship between the multiple activities exist. Some elements considered are the timing intended the selection including provision of services, the relationship between the contracting parties, the procedure second-hand in the selection process, the dependence of the relationship between the two or more activities, the relationship of the prices between the two activities, including the method of payment selected intended the activities.

(iii) Examples. The next examples identify a number of facts including then nation a conclusion. These examples should exist second-hand only as a general guide. The rate status of every single situation essential exist resolute after a review of everything of the facts including circumstances.

(A) A code solid has an escrow department. This escrow department is run by employees who are not attorneys (but the supervising employee is a limited practice executive who has understanding as a certified escrow agent), has a individual phone number, individual bank account, individual credit account, individual computer system, including maintains its own auditing system. Contracts intended the escrow services nation that the code solid is being retained as an independent escrow deputy including not to represent a bit of individual involved in the transaction. Further, the contract states that the code solid shall not give legal advice upon the transaction. The escrow department of this code solid would exist considered an independent selling activity including exist taxed alone under the retailing categorization intended escrow businesses (see WAC 458-20-156, Abstract, title insurance, including escrow business).

(B) A code solid limits its practice to true estate. It primarily provides escrow services including true estate closings. Even though this solid has chosen to limit its practice, it is the nature including the character of its activities which drive determine the leading activity intended every single closing. When a closing includes the preparation, selection, or drafting of the deed between the customer including seller, drafting legal documents to obtain clear title, and/or the preparation, selection or drafting of the promissory notes, deeds of trust, mortgages, including agreements modifying these documents, it drive exist presumed that the leading activity performed intended the customer is providing these legal services.

(I) The code solid locked a true estate deal performing everything the escrow services. Except intended the escrow services provided, the solid represented the client in the closing. Although an attorney from the solid reviewed including approved the legal documents provided by the seller, the attorney did not arrange a bit of legal documents intended the transaction. Since the solid was representing a particular customer in this true estate closing, the escrow services are considered incidental to the legal services provided. Accordingly, the solid drive report the income from this deal under the system including more activities classification.

(II) The solid was engaged by both parties in a true estate deal to grip a true estate closing. An attorney intended the solid selected including prepared the earnest cash escrow agreement, the purchase including sales agreement, the closing agreement, including the deeds intended the transfer. Title was clear including did not require a bit of extra drafting. The solid and entered into an escrow agreement in the company of both parties including held in escrow the buyer's deposit including the seller's deed.Since an attorney intended the code solid was required to select, analyze, including review the legal documents in this transaction, the escrow activity drive exist considered incidental. This closing is reported under the system including more activities categorization intended legal services.

(III) A certified escrow agency, owned by a principal trained under APR 12 (the limited practice rule intended limited practice officers), provides both escrow including the limited legal services allowed under APR 12 to its clients. The escrow firm itemizes the services provided. APR 12(d) allows a limited practice executive to select, arrange including complete documents in a sort previously approved by the board intended use in closing a loan, wing of credit, sale or more transfer of true or personal property. The nature of this limited license prevents an escrow firm using limited practice officers from ever engaging in legal services as a leading activity in a true estate closing. Accordingly, the escrow firm drive report the income from escrow including closings under the retail sales categorization (see WAC 458-20-156, Abstract, title insurance, including escrow business).

(IV) The identical facts as above, yet the escrow firm hires employees who are attorneys to provide the permissible limited legal services. The result is the same. Under RPC 5.4, an attorney is barred from sharing legal fees in the company of a nonlawyer and, under RPC 5.5, cannot assist a individual who is not a associate of the Bar Association in the performance of an activity that constitutes the unauthorized practice of law, including under RPC 7.1 a lawyer cannot make false or misleading communications on the lawyer or the lawyer's services. Accordingly, an attorney hired by an escrow firm would not exist providing legal services to the escrow companies' clients except to the extent official intended a limited practice officer. Since only limited legal services can exist offered, the escrow firm would continue to report everything fees from both the escrow including closing services under the retail sales rate classification.

(4) Retail sales tax. Sales of real personal goods to attorneys intended use in performance professional services are retail sales upon which the retail sales rate essential exist collected. Such sales include, among others, sales of place of work furniture including equipment, stationery, place of work supplies, code books, including reference materials.

(5) Use tax.

(a) The use rate applies upon the use of articles purchased or manufactured intended use upon which retail sales rate has not been waged or collected. This includes, yet is not limited to, the following:

(i) Materials second-hand including consumed while performance legal, arbitration, or mediation services; and

(ii) Office supplies including place of work stock purchased by the solid intended its own use.

(b) The use rate and applies to everything purchases of real personal goods acquired without payment of retail sales rate including resold to clients yet not alone stated from legal services rendered supported by the agency's billing.

[Statutory Authority: RCW 82.32.300 including 82.01.060(2). WSR 04-13-091, § 458-20-207, filed 6/18/04, efficient 7/19/04. Statutory Authority: RCW 82.32.300. WSR 99-13-092, § 458-20-207, filed 6/14/99, efficient 7/15/99. Statutory Authority: RCW 82.32.300 including 34.05.410. WSR 95-15-013, § 458-20-207, filed 7/7/95, efficient 8/7/95. Statutory Authority: RCW 82.32.300. WSR 85-20-012 (Order ET 85-4), § 458-20-207, filed 9/20/85; Order ET 70-3, § 458-20-207 (Rule 207), filed 5/29/70, efficient 7/1/70.]

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