On February 27, 2023, the Washington Court of Appeals held that a provider of pharmacy services and pharmacy benefits services (PBM) to its affiliate’s enrollees met the insurance business exemption to the Business and Occupation Tax because its activities were at least functionally related to insurance business. The taxpayer fulfilled the PBM services required by an affiliate’s Washington State Health Care Authority contract, including managing the availability and payment of the enrollees’ pharmacy benefits on behalf of the affiliate.  Washington provides a B&O Tax exemption to “any person in respect to insurance business upon which a tax based on gross premiums is paid to the state.” The Department contended that the taxpayer would be exempt only if it provided services that were “functionally related” to its affiliate’s insurance business. The amounts it received from the affiliate for its services would then be exempt to the extent that the affiliate paid the Washington premiums tax. The court held that “where activities are required to be performed under the insurance contract in exchange for premium payments and a tax is paid on those premium payments the activities are at least functionally related to ‘insurance business’” under the insurance benefit exemption. Because the activities performed by the taxpayer were required under its affiliate’s HCA contract – and if performed by the affiliate would be insurance business activities – the taxpayer’s activities were functionally related to the insurance business and satisfied the exemption.

Envolve Pharm. Sols., Inc. v. Washington Dep’t of Revenue, 524 P.3d 1066 (Wash. Ct. App. 2023).