The Maine Supreme Judicial Court recently upheld1 the sourcing of benefits management services to the retail pharmacy location, calling it under the market-member method. This follows a trend where states are looking to source services to the “customer’s customer”.
Express Scripts Inc. and affiliates are engaged in providing prescription drugs, pharmacy benefits management (PBM) services, and claims adjudication in all states. During the period under audit in Maine, Express Scripts, headquartered in Missouri, generated revenue primarily (98–99%) through the delivery of prescription drugs utilizing a contracted network of retail pharmacies. Express Scripts’ clients include health insurers, employers, and union-sponsored benefit plans. The clients’ “members” are the primary recipients of Express Scripts’ services. The term “members” refers to the insured individuals and employees covered by health plans. When these members present an Express Scripts identification card at pharmacies, Express Scripts adjudicates the claim and responds to the pharmacy to confirm eligibility, accept the claim, and provide co-payment information.
In filing its 2011 Maine corporate income tax return, Express Scripts apportioned receipts from the performance of its PBM services on a market-member basis, based on the dispensation of drugs by the pharmacies. In filing the 2012 and 2013 corporate income tax returns, Express Scripts apportioned receipts from its PBM services on a market-client basis, based on the location of commercial and administrative headquarters of clients. This change in apportionment method was made without any changes in business operations or changes in Maine statutes. Subsequently, in 2015, Express Scripts filed a claim for refund of 2011 taxes, based on a change in apportionment method to the market-client basis.
Upon audit of the 2011 through 2013 tax years, the Maine Revenue Services (MRS) denied the 2011 refund claim and issued assessments for all years, using a market-member basis. After the Maine Board of Tax Appeals upheld the assessment, Express Scripts filed suit in Superior Court, arguing an alternative claim that the apportionment method used by the MRS results in an apportionment exceeding the activity in the state. In upholding the lower Court decision, the Appellate Court found that the correct method to source the receipts generated by the PBM services was the market-member method, based on the retail pharmacy where the service was received.
Based on this case law, it appears that Maine will follow the “customer’s customer” approach for sourcing service income. However, like many states using this approach, it has not been codified or contained in regulations. This lack of guidance leaves a taxpayer to evaluate the proper approach based on their own facts and circumstances.
Please reach out to the Ryan professionals listed below to assist your company in evaluating your circumstances when apportioning service revenue to states in which your customer’s customer is present.
1 Express Scripts Inc. v. State Tax Assessor, Me., No. BCD-22-331, November 7, 2023.
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