On May 14, 2021, the Indiana Tax Court upheld a pharmacy benefit management company’s sourcing of its receipts under Indiana’s costs of performance rules applicable to receipts from services. The court rejected the Indiana Department of Revenue’s position that the receipts should instead be sourced according to the rules for sales of tangible personal property. The taxpayer was engaged in the business of administering the prescription drug and pharmacy benefits of health insurers. As part of this service, the taxpayer negotiated contracts with over 60,000 pharmacies, specifying negotiated rates to be charged when filling the subscriptions of its insurer client’s members. When a member had their prescription filled at the pharmacy, the member would pay the pharmacy their copayment, and the taxpayer would pay the pharmacy the difference between the negotiated rate and the member’s copayment. The taxpayer would then get paid by billing its insurer clients a service charge comprised of both (i) the amount paid to the pharmacies for the prescription drugs dispensed and (ii) the taxpayer’s administrative fee.
On motion for summary judgment, the Department argued that the taxpayer’s receipts should be sourced according to the rules applicable to sales of tangible personal property, because the taxpayer was not a mere conduit through which payment for prescription drugs passed but instead it exercised a right, interest and title in the prescription drugs sold to its members and that the taxpayer had admitted it sold prescription drugs. The tax court rejected the Department’s position as unsupported under the record. Based on the taxpayer’s designated affidavits and contracts stating that its clients engage it and pay for the provision of services and that it does not purchase any drugs for resale or ever acquire possession or title of any drugs sold to its insurer client’s members, the tax court found that the taxpayer properly apportioned its income as a service provider and granted summary judgment in favor of the taxpayer.