July 4, 2022

Volume XII, Number 185

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Indiana Tax Court Upholds Pharmacy Benefit Management Costs of Performance Approach

The Indiana Tax Court held that a “pharmacy benefit management company” sold services as opposed to tangible personal property for tax years 2011 through 2013. The company’s receipts were properly sourced as revenue from services under the income-producing activity/costs of performance rule, which in this case meant that all receipts were sourced outside of Indiana.

The Indiana Department of Revenue (Department) argued that the pharmacy benefit management company’s “receipts from its sale of prescription drugs should have been sourced to Indiana as required for sales of tangible personal property under Indiana Code” because the company’s “primary ‘revenue stream’ was attributable to buying, selling, and delivering prescription drugs in transactions which occurred within [Indiana].”

The court disagreed with the Department, finding “[the pharmacy benefit management company’s] income was derived from providing pharmacy benefit management services and not from selling prescription drugs during the years at issue.” The court looked to the company’s Securities and Exchange Commission (SEC) Form 10-K filing, observing “[n]one of the emphasized words [in the Form] describe a sale of goods, but instead, describe services. Indeed, nowhere in the designated portion of [the company’s] Form 10-K does the text state that the [company’s] revenue is from the sale of prescription drugs, focusing on facilitating delivery as its discrete service, not as a function of selling a good” (emphasis in the original). On May 1, 2019, Indiana switched from its historical cost of performance sourcing methodology to market-based sourcing for services, retroactive to January 1, 2019.

Jonathan Hague also contributed to this article.

© 2022 McDermott Will & EmeryNational Law Review, Volume XI, Number 141
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About this Author

Partner

Richard C. Call is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm's Boston office.  He focuses his practice on state and local tax litigation before administrative and judicial bodies, at all levels and in multiple states, with respect to income, franchise, gross receipts, and sales and use taxes.  He also advises clients on the state and local tax consequences of business restructurings, as well as the impact of new state legislation on current business operations.

Richard is a frequent publisher on state and local tax topics.  He has published...

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