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Maine Supreme Court sources revenue from claims adjudication services to pharmacy locations
November 2023
In brief
Express Scripts Inc., and its subsidiaries (collectively, ESI) contracted with health insurers, health maintenance organizations, employers, governmental health programs, and union sponsored benefits plans to provide claims adjudication services. These services involved ESI performing certain verification and confirmation services to retail pharmacies when insured individuals presented insurance identification to pharmacies.
Maine generally sources service revenue to the location where services are “received.” The Maine Supreme Judicial Court recently ruled that revenue from ESI’s claims adjudication services was received at the location of retail pharmacies and was not sourced to the location of ESI’s clients.
The takeaway: Many states source service revenue to where a service is “received.” If that location is not readily determinable, other sourcing treatment may apply. Identifying the location of receipts can be complicated when a taxpayer provides services to a client and potentially to its client’s customers. The question becomes whether the service is “received” by the client or the client’s customers. The Express Scripts decision provides an example of how the high court in Maine interpreted where a service is “received,” and its analysis may be informative for how other states might address the same issue. Here, the Maine Supreme Judicial Court determined based on the factual record provided by ESI that the services at issue ultimately were received by the end-user rather than by ESI’s clients. Because the Court found that the location of receipt was readily determinable, it did not address other sourcing treatment provided by statute.
[Express Scripts Inc. et al. v. State Tax Assessor, Me. Sup. Jud. Ct., No. 2023 ME 68 (11/7/23)]
In detail
Facts
During the 2011 to 2013 tax years, ESI (among other activities) sold claims adjudication and other pharmacy benefit management (PBM) services throughout the United States, including Maine.
ESI’s clients included health insurers, health maintenance organizations, employers, governmental health programs, and union-sponsored benefits plans.
Client members were individuals that were the primary recipients of such services.
An example of claims adjudication services involves when a member presents his or her Express Scripts identification card at a retail pharmacy, the pharmacist communicates with Express Scripts, and Express Scripts (1) confirms the member’s eligibility to the pharmacist, (2) performs a concurrent drug interaction/utilization review, (3) confirms to the retail pharmacy that it would receive payment from Express Scripts pursuant to their agreements, if the claim was accepted; and (4) informs the retail pharmacy of the co-payment amount to be collected from the member.
Sourcing service revenue in Maine
During the years at issue, for purposes of calculating Maine’s sales factor, receipts from the performance of services must be attributed to the state where services are received.
Audit and appeal to the Maine Supreme Judicial Court
Following an audit and appeal to the Maine Board of Tax Appeals, ESI appealed to the Maine Supreme Judicial Court. Before the Court, both ESI and the Maine State Assessor agreed that “services received” was the proper legal standard for souring such service revenue, but differed on where claims adjudication services were received.
ESI argued that claims adjudication services were received at the location of the primary and administrative headquarters of ESI’s clients (characterized in this case as the “market client basis”). According to ESI, because it contracts only with its clients, not with individual members, the ultimate recipient of its services is the client, even if it is the member who initiates the claim at a retail pharmacy. Therefore, according to ESI, services are received at the commercial and administrative headquarters of the client, not the retail pharmacy.
The Assessor asserted that such services were received based on the location of the retail pharmacies where prescriptions were filled for members (characterized as the “market member basis”). According to the Assessor, individual members receive such services when they fill prescriptions at retail pharmacies and Express Scripts provides claims processing services. The retail pharmacy is the location where the service is received, and income generated from the performance of that service should be attributed to that retail pharmacy location.
Observation: Existing law in 36 M.R.S. Sec. 5211(16-A)(A) contains the same sourcing language that “receipts from the performance of services must be attributed to the state where the services are received.”
Service revenue sourced to location of retail pharmacies
The Court agreed with the Assessor. The Court identified “in numerous places that members received the claims processing services that were reflected in the receipts at issue.” For example, ESI’s 10-K stated that its services were provided to members of the affiliated health plans of its clients. Additionally, a sample client agreement noted that services were dispensed to covered individuals.
Accordingly, the Court agreed with the Assessor that ESI’s claims-processing services were received at retail pharmacies and not at its clients’ headquarters because “the record establishes that claims-processing services were received by members at retail pharmacies in Maine, and the receipts at issue were derived from the performance of these claims processing services.”
Observation: Maine sourcing law provides other treatment to the extent that a “services received” location is not readily determinable. As noted by the court, “[b]ecause it is readily determinable that the PBM services are received at the retail pharmacies where members fill their prescriptions,” there was no need to address further cascading rules.
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