Express Scripts Inc. v. Ind. Dep't of State Revenue

170 N.E.3d 273

EXPRESS SCRIPTS INCORPORATED, Petitioner,

v.INDIANA DEPARTMENT OF STATE REVENUE, Respondent.

Cause No. 19T-TA-00018

Tax Court of Indiana.

May 14, 2021

ATTORNEYS FOR PETITIONER: BENJAMIN A. BLAIR, DANIEL R. ROY, FAEGRE DRINKER BIDDLE & REATH LLP, Indianapolis, IN, R. GREGORY ROBERTS, ROBERTS LAW GROUP, PLLC, White Plains, New York

ATTORNEYS FOR RESPONDENT: THEODORE E. ROKITA, ATTORNEY GENERAL OF INDIANA, KELLY S. EARLS, ZACHARY D. PRICE, COURTNEY L. ABSHIRE, DEPUTY ATTORNEYS GENERAL, Indianapolis, IN

WENTWORTH, J.

Express Scripts Incorporated has appealed the Indiana Department of State Revenue's final determination assessing it with additional adjusted gross income tax (AGIT) and interest for the 2011, 2012, and 2013 tax years. The matter is currently before the Court on the Department's motion for partial summary judgment ("Motion"), which presents just one issue for resolution: whether Express Scripts, a pharmacy benefit management company, receives its Indiana income from the retail sale of prescription drugs or from the provision of services. (See Resp't Mem. Supp. Partial Mot. Dismiss [or] Summ. J. ("Resp't Br.") at 4¹ ; Hr'g Tr. at 10-12.). After reviewing all the designated evidence, the Court finds that Express Scripts receives its Indiana income from the latter. As a result, the Court denies the Department's Motion and grants summary judgment to Express Scripts.

FACTS AND PROCEDURAL HISTORY

Many health maintenance organizations, health insurers, third-party administrators, employers, union-sponsored benefit plans and government health programs (collectively, "health insurers") provide health insurance and medical benefits programs to their members or employees, "a standard part of which is a prescription drug or pharmacy benefit[.]" (See App. Pet'r Resp. Resp't Mot. Summ. J., Vol. II ("Pet'r Des'g Evid."), Ex. 2 ¶¶ 3-4.) While some of these health insurers administer the prescription drug/pharmacy benefit themselves, others outsource that function to a pharmacy benefit management company. (See Pet'r Des'g Evid., Ex. 2 ¶¶ 3, 5.)

One of the largest pharmacy benefit management companies in the United States is Delaware corporation Express Scripts. (Pet'r Des'g Evid., Ex. 1 ¶ 4, Ex. 2 ¶ 3.) In administering the prescription drug/pharmacy benefits of its health insurer clients ("Clients"), Express Scripts provides them "(i) wide access to a network of independent third-party retail pharmacies that provide discounted prescription drugs in most therapeutic categories, (ii) formulary design and implementation, (iii) concurrent drug interaction reviews, (iv) concurrent and retrospective drug utilization reviews, (v) claims processing and adjudication, and (vi) call center services[.]" (Pet'r Des'g Evid., Ex. 2 ¶ 9.) Clients pay a "Service Charge" to Express Scripts for the administration and management of their prescription drug/pharmacy benefits. (See Pet'r Des'g Evid., Ex. 2 ¶ 40.)

To provide its Clients’ members or employees ("Members") with "wide access" to discounted prescription drugs, Express Scripts negotiated contracts with over 60,000 local pharmacies (e.g., CVS, Walgreens, RiteAid).² (Pet'r Des'g Evid., Ex. 2 ¶¶ 9, 12.) The contracts specify, among other things, that when filling a Member's prescription, the local pharmacy must charge a negotiated rate that reflects both the "Ingredient Cost" for the dispensed drug and a "Dispensing Fee." (Pet'r Des'g Evid., Ex. 2 ¶ 42.) Thus, in a typical scenario:

1) Member takes a prescription to local pharmacy to have it filled;

2) local pharmacy electronically notifies Express Scripts, which in turn:

a) confirms the Member's eligibility and coverage for benefits;

b) performs a concurrent drug interaction/utilization review, alerting local pharmacy to any possible drug interactions; and

c) informs local pharmacy of any co-payment amount it must collect from the Member.

3) Express Scripts pays local pharmacy the difference between the negotiated rate for the dispensed drug and the Member's co-payment.

(See Pet'r Des'g Evid., Ex. 1 ¶ 12, Ex. 2 ¶¶ 23, 42.)

Express Scripts periodically bills its Clients its Service Charges. (See Pet'r Des'g Evid., Ex. 2 ¶ 42.) While the amount of the Service Charges billed varies from Client to Client, it always represents three components: (i) the Ingredient Costs of the prescription drugs dispensed by the local pharmacies during that period (reduced by the co-payments paid by Members to the local pharmacies); (ii) the local pharmacies’ Dispensing Fees; and (iii) Express Scripts’ administrative fee for that period. (See Pet'r Des'g Evid., Ex. 2 ¶ 41.) (See also Pet'r Des'g Evid., Ex. 3 at 42 ¶ 3.1 (indicating that Clients reimburse Express Scripts for what it paid to the local pharmacies).) As is relevant to this case, Express Scripts generated revenue from its Service Charges and from rebates it received from pharmaceutical manufacturers in return for including their drugs on Express Scripts’ Clients’ prescription drug formularies.^{3 ,4} (See Pet'r Des'g Evid., Ex. 2 ¶¶ 24-25, 35-36, 38, 40.)

Having conducted business in Indiana during the years at issue, Express Scripts filed Indiana adjusted gross income tax returns for those years. (See Pet'r Des'g Evid., Ex. 1 ¶¶ 2, 13.) Express Scripts apportioned its income in accordance with Indiana's statutory provisions applicable to service providers. (Pet'r Des'g Evid., Ex. 1 ¶ 14 (referring generally to Indiana Code § 6-3-2-2(f) ).) In doing so, Express Scripts "determined that none of its revenue ... should be sourced to Indiana because the greater proportion of its income producing activities were incurred in a state other than Indiana." (Pet'r Des'g Evid., Ex. 1 ¶ 15.)

The Department subsequently audited Express Scripts and, in March of 2016, issued both an audit report and Proposed Assessments. (Pet'r Des'g Evid., Ex. 7 ¶¶ 11, 13, Ex. B.) The Department determined that Express Scripts was not a service provider because "[its] primary ‘revenue stream’ was attributable to buying, selling, and delivering prescription drugs in transactions which occurred within the state." (Pet'r Des'g Evid., Ex. 7 ¶ 15, Ex. A at 3-4.) Consequently, the Department determined that Express Scripts’ receipts from its sale of prescription drugs should have been sourced to Indiana as required for sales of tangible personal property under Indiana Code § 6-3-2-2(e). (See generally Pet'r Des'g Evid., Ex. 7 ¶ 15, Ex. A at 4-12.)

Express Scripts timely protested the Proposed Assessments. After conducting an administrative hearing on the protest on September 6, 2016, the Department referred the matter back to its Audit Division. (Pet'r Des'g Evid., Ex. 7 ¶¶ 17-18.) On March 4, 2019, the Department issued a Letter of Findings that upheld the Proposed Assessments in their entirety. (Pet'r Des'g Evid., Ex. 7 ¶ 34, Ex. A at 12.)

On May 23, 2019, Express Scripts intiated an original tax appeal. On February 17, 2020, the Department filed its Motion.⁵ The Court conducted a hearing on the Motion on April 30, 2020. Additional facts will be supplied when necessary.

LAW

During the years at issue, all corporations were subject to an Indiana tax "on [the] part of the[ir] adjusted gross income derived from sources within Indiana[.]" IND. CODE § 6-3-2-1(b) (2011) (amended 2013). The computation of this liability "beg[an] with federal taxable income, to which [the] taxpayer ma[de] expressly enumerated adjustments under Indiana Code § 6-3-1-3.5(b) [.]" Indiana Dep't of State Revenue v. Caterpillar, Inc., 15 N.E.3d 579, 581 (Ind. 2014). The corporate taxpayer doing business in more than one state then needed to determine what portion of its adjusted gross income was derived from sources within Indiana. See I.C. § 6-3-2-1(b). This determination required the corporation to apply the applicable allocation and apportionment rules set forth in Indiana Code § 6-3-2-2(a) - (k), referred to as the "Standard Sourcing Rules." See IND. CODE § 6-3-2-2(a) - (k) (2011) (amended 2015). See also Indiana Dep't of State Revenue v. Rent-A-Ctr. E., Inc., 963 N.E.2d 463, 465 (Ind. 2012).

Under the Standard Sourcing Rules in effect during the years at issue, a corporation's business income was apportioned between Indiana and other states by using a "sales factor," while its nonbusiness income was allocated to Indiana or another state. See I.C. § 6-3-2-2(a), (b)(5). The sales factor was "a fraction, the numerator of which [was] the total sales of the taxpayer in this state during the taxable year, and the denominator of which [was] the total sales of the taxpayer everywhere during the taxable year." I.C. § 6-3-2-2(e). Regardless of certain conditions of sale, sales of tangible personal property were Indiana sales included in the numerator of the sales factor if "the property [was] delivered or shipped to a purchaser that [was] within Indiana, other than the United States government[.]" I.C. § 6-3-2-2(e)(1). In contrast, receipts from the sales of services were deemed Indiana sales and included in the sales factor's numerator only if:

(1) the income-producing activity [was] performed in this state; or

(2) the income-producing activity [was] performed both within and without this state and a greater proportion of the income-producing activity [was] performed in this state than in any other state, based on costs of performance.

I.C. § 6-3-2-2(f).

This statutory framework apportions corporate income differently based on whether the income is received from the sale of tangible personal property or from the provision of services. Therefore, the dispositive issue in this case is whether, during the years at issue, Express Scripts’ Indiana source income was from selling prescription drugs (i.e., tangible personal property) or from providing services.

STANDARD OF REVIEW

Summary judgment is appropriate only when the designated evidence demonstrates that no genuine issue of material fact exists and the moving party is entitled to judgment as a matter of law. Ind. Trial ...