Worswick, J.
The Department of Revenue appeals a superior court determination that Fidelity Title Company should be classified, for business and occupation tax purposes, as an abstract, title insurance and escrow business (WAC 458-20-156) instead of as an insurance agent (WAC 458-20-164). The latter classification would result in a tax more than twice as much as would the former. We affirm.
This litigation began when the Department assessed Fidelity for a deficiency following an audit. Fidelity paid the tax and appealed directly to the Superior Court pursuant to RCW 82.32.180, rather than to the Board of Tax Appeals pursuant to RCW 82.03.190. The evidence developed during the ensuing trial de novo developed the following undisputed facts.
What is commonly known as the "title business" is conducted in this state by two kinds of entity: one, an independent, usually locally owned, company that owns a "title plant"
and performs the abstracting (title records research) necessary to produce title reports and the product known as title insurance; the other, a branch office of a title
insurer, which also owns a "title plant", and does exactly the same work as an independent company and produces the same products. Both entities usually provide other services too, such as furnishing limited liability title reports and escrow arrangements.
Only a title insurer has legal authority to underwrite title insurance policies. An independent title company issues policies as agent for a qualified title insurer, whereas an insurer’s branch office issues them for its parent company.
To receive a certificate of authority from the insurance commissioner, a title insurer must comply with RCW 48.29.020.
In practice, the requirement that the insurer own a title plant (RCW 48.29.020(2)) is satisfied if the insurer does business through an agent who owns such a plant.
See
RCW 48.29.160. If business is done this way, the insurer need only satisfy the financial responsibility requirement (RCW 48.29.020(3)) to qualify for its certificate. Insurer-agent arrangements thus involve marriages of a sort between the agent's title plant and personnel and the insurer's financial—and therefore risk underwriting— capacity.
Title insurance is unlike any other insurance. Insurers in other lines cannot control the risk beyond being careful in the selection of insureds. However, title companies do control the risk; they attempt to eliminate it by the work they do in determining the state of a title. Title insurance is not so much the assumption of an uncontrollable risk as it is a guaranty that the title company's work is accurate and therefore free of risk. Probably because of this difference, the insurance commissioner treats title insurance agencies
differently from other insurance agencies, paying them little attention after an initial inspection determines that they are equipped and competent to do business.
Abstracting constitutes 90 percent or more of the work necessary to the final product, be it title insurance or simply a title report. If insurance is issued, an agent remits to the insurer 10 to 12 percent of the fee collected from the customer and keeps the rest. This remittance is often referred to as an underwriting fee, rather than as a premium. Historically, about 3 percent of this remittance is paid out for losses. Should a loss occur, the agent, pursuant to its contract with the insurer, is responsible for the full amount up to a ceiling and thereafter shares the loss with the insurer up to another ceiling, above which the insurer pays the loss to the policy limits.
The Department contends that Fidelity is an insurance agent and should be classified under WAC 458-20-164,
because it is not legally qualified to underwrite insurance policies and is licensed only as an agent by the insurance commissioner. Fidelity contends that it should be classified as an abstract, title insurance and escrow business under WAC 458-20-156,
because its business is identical with that of a title insurer's branch office. The trial court agreed
with Fidelity and so do we.
Two misconceptions must be cleared away at the outset. First, the parties have treated this throughout as a contest over which of the two WAC provisions controls; they have cited little to the statutes and even less to the cases. The WAC provisions control nothing. The Department has authority to adopt only procedural rules; it cannot enact or amend the law by making rules. RCW 82.32.300;
Coast Pac. Trading, Inc. v. Department of Rev.,
105 Wn.2d 912, 917, 719 P.2d 541 (1986).
See also Downtown Traffic Planning Comm. v. Royer,
26 Wn. App. 156, 165, 612 P.2d 430 (1980). Second, the Department asserts that the form of a business activity, rather than its substance, controls tax classifications; it bases its assertion on
Sonitrol Northwest, Inc. v. Seattle,
84 Wn.2d 588, 528 P.2d 474 (1974). The Department misreads
Sonitrol,
which only holds that differences in the
functional method of doing
business afford a valid basis for different classifications. Here, there is no difference whatever in the functional method employed by the two types of entity engaged in the title business. The difference, if any, is in form, and form is
not to be exalted over substance in tax classifications.
Time Oil Co. v. State,
79 Wn.2d 143, 146, 483 P.2d 628 (1971).
The real issue is not how the insurance commissioner licenses Fidelity, but how the Legislature intended to classify Fidelity for B & O tax purposes. We hold that Fidelity must be classified as an abstract, title insurance and escrow business.
Most insurers are exempt from B & O tax pursuant to RCW 82.04.320
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Worswick, J.
The Department of Revenue appeals a superior court determination that Fidelity Title Company should be classified, for business and occupation tax purposes, as an abstract, title insurance and escrow business (WAC 458-20-156) instead of as an insurance agent (WAC 458-20-164). The latter classification would result in a tax more than twice as much as would the former. We affirm.
This litigation began when the Department assessed Fidelity for a deficiency following an audit. Fidelity paid the tax and appealed directly to the Superior Court pursuant to RCW 82.32.180, rather than to the Board of Tax Appeals pursuant to RCW 82.03.190. The evidence developed during the ensuing trial de novo developed the following undisputed facts.
What is commonly known as the "title business" is conducted in this state by two kinds of entity: one, an independent, usually locally owned, company that owns a "title plant"
and performs the abstracting (title records research) necessary to produce title reports and the product known as title insurance; the other, a branch office of a title
insurer, which also owns a "title plant", and does exactly the same work as an independent company and produces the same products. Both entities usually provide other services too, such as furnishing limited liability title reports and escrow arrangements.
Only a title insurer has legal authority to underwrite title insurance policies. An independent title company issues policies as agent for a qualified title insurer, whereas an insurer’s branch office issues them for its parent company.
To receive a certificate of authority from the insurance commissioner, a title insurer must comply with RCW 48.29.020.
In practice, the requirement that the insurer own a title plant (RCW 48.29.020(2)) is satisfied if the insurer does business through an agent who owns such a plant.
See
RCW 48.29.160. If business is done this way, the insurer need only satisfy the financial responsibility requirement (RCW 48.29.020(3)) to qualify for its certificate. Insurer-agent arrangements thus involve marriages of a sort between the agent's title plant and personnel and the insurer's financial—and therefore risk underwriting— capacity.
Title insurance is unlike any other insurance. Insurers in other lines cannot control the risk beyond being careful in the selection of insureds. However, title companies do control the risk; they attempt to eliminate it by the work they do in determining the state of a title. Title insurance is not so much the assumption of an uncontrollable risk as it is a guaranty that the title company's work is accurate and therefore free of risk. Probably because of this difference, the insurance commissioner treats title insurance agencies
differently from other insurance agencies, paying them little attention after an initial inspection determines that they are equipped and competent to do business.
Abstracting constitutes 90 percent or more of the work necessary to the final product, be it title insurance or simply a title report. If insurance is issued, an agent remits to the insurer 10 to 12 percent of the fee collected from the customer and keeps the rest. This remittance is often referred to as an underwriting fee, rather than as a premium. Historically, about 3 percent of this remittance is paid out for losses. Should a loss occur, the agent, pursuant to its contract with the insurer, is responsible for the full amount up to a ceiling and thereafter shares the loss with the insurer up to another ceiling, above which the insurer pays the loss to the policy limits.
The Department contends that Fidelity is an insurance agent and should be classified under WAC 458-20-164,
because it is not legally qualified to underwrite insurance policies and is licensed only as an agent by the insurance commissioner. Fidelity contends that it should be classified as an abstract, title insurance and escrow business under WAC 458-20-156,
because its business is identical with that of a title insurer's branch office. The trial court agreed
with Fidelity and so do we.
Two misconceptions must be cleared away at the outset. First, the parties have treated this throughout as a contest over which of the two WAC provisions controls; they have cited little to the statutes and even less to the cases. The WAC provisions control nothing. The Department has authority to adopt only procedural rules; it cannot enact or amend the law by making rules. RCW 82.32.300;
Coast Pac. Trading, Inc. v. Department of Rev.,
105 Wn.2d 912, 917, 719 P.2d 541 (1986).
See also Downtown Traffic Planning Comm. v. Royer,
26 Wn. App. 156, 165, 612 P.2d 430 (1980). Second, the Department asserts that the form of a business activity, rather than its substance, controls tax classifications; it bases its assertion on
Sonitrol Northwest, Inc. v. Seattle,
84 Wn.2d 588, 528 P.2d 474 (1974). The Department misreads
Sonitrol,
which only holds that differences in the
functional method of doing
business afford a valid basis for different classifications. Here, there is no difference whatever in the functional method employed by the two types of entity engaged in the title business. The difference, if any, is in form, and form is
not to be exalted over substance in tax classifications.
Time Oil Co. v. State,
79 Wn.2d 143, 146, 483 P.2d 628 (1971).
The real issue is not how the insurance commissioner licenses Fidelity, but how the Legislature intended to classify Fidelity for B & O tax purposes. We hold that Fidelity must be classified as an abstract, title insurance and escrow business.
Most insurers are exempt from B & O tax pursuant to RCW 82.04.320 because they pay a premium tax under RCW 48.14.020, which reads, in relevant part:
Premium taxes. (1) Subject to other provisions of this chapter, each authorized insurer
except title insurers
shall on or before the first day of March of each year pay to the state treasurer through the commissioner's officer a tax on premiums. . . .
(Italics ours.) Notwithstanding the title insurer exception to the premium tax, no other statute imposes a B & O tax on title insurers as a separate class. Instead, RCW 82.04-.050, a lengthy section titled "Sale at retail, retail sale", operates to classify title insurance
businesses,
including title insurers, for B & O tax purposes. It provides in part as follows:
(3) The term "sale at retail" or "retail sale" shall include the sale of or charge made for personal business or professional services including amounts designated as interest, rents, fees, admission, and other service emoluments however designated, received by persons engaging in the following business activities: (a) Amusement and recreation businesses including but not limited to golf, pool, billiards, skating, bowling, ski lifts and tows and others; (b)
abstract, title insurance and escrow businesses;
(c) credit bureau businesses; (d) automobile parking and storage garage businesses.
(Italics ours.) This section, obviously the statutory basis for WAC 458-20-156, reflects the Legislature's recognition of the uniqueness of the title business, distinguishes title insurance from other forms of insurance, and lumps it in one class with other segments of the title business. The actual rate classification is accomplished by RCW 82.04-
.250, applying to all retailers.
Without more, it seems obvious that Fidelity should be classified under RCW 82.04.050(3), as its enterprise appears to fit perfectly into this special retailing classification. However, RCW 82.04.260(14) provides, in part:
(14) Upon every person engaging within this state
as an insurance agent, insurance broker, or insurance solicitor
licensed under chapter 48.17 RCW; as to such persons, the amount of
the tax with respect to such licensed activities
shall be equal to the gross income of such business multiplied by the rate of one percent.
(Italics ours.) This section, which affords the statutory basis for WAC 458-20-164, is the only arguable authority for the Department's position. That position, however, is flawed for two reasons. First, RCW 82.04.260(14) cannot be considered in isolation, but must be read together with all statutes bearing on the issue. Second, the Department has overlooked a fundamental principle applicable to all B & O tax classifications.
As to the statutes, we note initially that both in promulgating WAC sections and in the classification at issue, the Department has failed to recognize that a given business may involve more than one classifiable activity. Neither of the WAC sections previously referred to provides for the allocation of different B & O tax rates to different segments of a business, and we find no other WAC section that does, although the Legislature has made it clear that this must be done. RCW 82.04.260(14), referred to above, plainly states that the tax rate for insurance agents is to be applied only to gross income from an agent's, broker's or solicitor's activities
as such—i.e.,
in practical application, to commissions, as a percentage of premiums, for selling insurance policies. This legislative policy requiring application of a given rate only to a specific activity is made generally applicable by RCW 82.04.440(1).
Nevertheless, the Department asserts that the entirety of Fidelity's gross income is taxable at the insurance agent rate, although only a small portion of its income is paid over to the insurer as "premium", no portion of its income is measured as a percentage of "premium", and its salesmanship is devoted to producing business in the completion of which it does virtually all of the work.
A careful reading of other relevant statutes shows that the Legislature was well aware of the distinctive nature of the title business and intended to treat it accordingly. RCW 48.14.020, referred to above, imposes a premium tax on
insurers,
not on
insurance companies,
and then exempts
title insurers,
not
title insurance companies.
However, RCW 82.04.050(3) does not then classify
title insurers
as retailers, but so classifies
abstract, title insurance and escrow businesses,
a phrase precisely descriptive of both kinds of entity engaged in the unique endeavor known as the title business. Finally, when RCW 82.04.260(14), the insurance agent classification statute, is read in conjunction with the definitions in RCW 48.17, it becomes apparent that the Legislature did not intend that title insurance agents be classified as insurance agents for B & O tax purposes.
RCW 48.17.010 defines "agent" as
. . . any person appointed by an insurer to solicit applications for insurance on its behalf. If authorized so to do, an agent may effectuate insurance contracts. An agent may collect premiums on insurances so applied for or effectuated.[
]
This definition does not fit what Fidelity does. Fidelity generates business for its own account. It places the relatively small insurance component with an insurer qualified,
by reason of compliance with financial requirements, to underwrite the slight risk that Fidelity has not properly done its work.
The Department has also overlooked the cases establishing the fundamental principle that the imposition of B & 0 tax liability must be as equitable as possible.
Reynolds Metals Co. v. State,
65 Wn.2d 882, 400 P.2d 310,
appeal dismissed,
382 U.S. 160 (1965);
Crown Zellerbach Corp. v. State,
45 Wn.2d 749, 278 P.2d 305 (1954). This principle is not served by a classification that imposes a tax on Fidelity more than twice that imposed on an identical business and that would classify as insurance agent "commission" income a monetary amount that is some 900 percent of the insurance "premium".
Fidelity contends that its classification by the Department, if valid under Washington statutes and rules, would constitute an unconstitutional denial of equal protection of the laws. We do not reach this contention as we are satisfied that the Department's classification is neither valid under Washington statutes nor consistent with Washington law requiring the equitable application of the B & O tax.
Affirmed.
Reed, C.J., and Alexander, J., concur.
Review denied by Supreme Court March 1,1988.