The Indiana Tax Court has ruled for a pharmaceutical-services giant and against the Indiana Department of State Revenue, finding that the company receives its Indiana income from the provision of services and not from selling prescription drugs.
Express Scripts Inc., a major pharmacy benefit management company, appealed the Indiana Department of State Revenue’s final determination assessing it with additional adjusted gross income tax and interest for the 2011, 2012 and 2013 tax years.
The dispute revolves around Indiana adjusted gross income tax returns it filed for those years. Express Scripts apportioned its income in accordance with Indiana’s statutory provisions applicable to service providers and, in doing so, “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.”
A subsequent audit of Express Scripts by the department resulted in a determination 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.”
As such, 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).
Express Scripts protested the proposed assessments, but the department ultimately issued a Letter of Findings that upheld them in their entirety. After Express Scripts launched a tax appeal, the department brought a motion for partial summary judgment, noting that a judgment in its favor would still not address the calculation of Express Scripts’ income from its retail sales in Indiana.
Bringing a single issue before the Indiana Tax Court, the department argued whether Express Scripts receives its Indiana income from selling prescription drugs or from providing services.
In a Friday opinion, the Indiana Tax Court found in favor of Express Scripts, granting it summary judgment and concluding that the pharmacy company receives its Indiana income from the provision of services.
First, the Tax Court noted that the Department failed to explain why Express Scripts’ “stated desire to contract with local pharmacies to provide certain services” establishes that it is selling prescription drugs. It likewise failed to explain why a certain section of the contract, which merely states that the local pharmacy “will work with [Express Scripts] in good faith to carry out any and all of its obligations hereunder and shall … comply with all terms and conditions of the . . . Agreement,” demonstrated that Express Scripts was selling prescription drugs.
“These explanations are necessary because without them, the Department’s inference – i.e., that Express Scripts is selling prescription drugs – is not clear to the Court and therefore not reasonable,” Judge Martha Blood Wentworth wrote for the Tax Court.
Additionally, the tax court found unreasonable the department’s inference that Express Scripts’ 2011 Form 10-K filed with the U.S. Securities and Exchange Commission is a declarative admission that it receives its income from selling prescription drugs. Neither did it find that Express Scripts, Inc. v. Department of Revenue, 437 P.3d 747 (Wash. Ct. App. 2019), review denied, supported the department’s position that Express Scripts has taken the stance in other jurisdictions that it sold prescription drugs.
Lastly, on the issue of Express Scripts’ calculation and recording of deductions for “cost of goods sold,” the tax court concluded that the department “offered bare conclusions and non sequiturs as connective tissue, concluding, without explaining, that reporting COGS for federal income tax purposes ‘establishes that [Express Scripts] is buying the prescription drugs for resale.’”
“Accordingly, without any accompanying explanation, the Department’s inference that reporting COGS on federal tax returns mandates Express Scripts’ Indiana apportionment conclusions is no more than speculation or conjecture, and therefore is unreasonable and insufficient to meet its prima facie summary judgment burden,” it wrote. “The Department has not made a prima facie showing that there is no genuine issue of material fact that would shift the evidentiary burden to Express Scripts to demonstrate an issue for trial. Consequently, the Department is not entitled to judgment as a matter of law. See T.R. 56(C).”
Thus, the tax court concluded that to the extent Express Scripts’ Indiana returns for the years at issue reported its Indiana tax base in accordance with Indiana Code § 6-3-2-2(f), Express Scripts is entitled to judgment as a matter of law.
It therefore denied the department’s motion and granted summary judgment to Express Scripts in Express Scripts Incorporated v. Department Of State Revenue, 19T-TA-00018.