Tax Law

Pass This On: Washington Court of Appeals Holds Prescription Drug Payments Subject to B&O Tax

On March 26, 2019, the Washington Court of Appeals held that a pharmacy benefit management company’s payments from clients (e.g., health maintenance organizations, health insurers, etc.) for the value of prescription drugs, were subject to the Washington B&O tax. The taxpayer manages the clients’ prescription drug benefit programs and performs activities, including contracting with third-party retail pharmacies to provide prescription drugs to its clients’ members. The taxpayer asserted that the payments were not subject to the B&O tax because they were “pass-through” funds, which merely moved from the clients, through the taxpayer, to the pharmacies. The court concluded that the taxpayer is not a mere pass-through agent. Rather, the taxpayer is solely responsible for payment to the pharmacies for the drugs, assumes the credit risk of its clients’ ability to pay for the drugs and negotiates prices with its clients and the retail pharmacies. Thus, the compensation the taxpayer receives from its clients for the prescription drugs’ value is “an integral part” of its business model. Express Scripts, Inc. v. Washington Dep’t of Revenue, No. 50348-4-II (Wash. Ct. App. Mar. 26, 2019).