What’s Happening?
On 12/12/2024, the Supreme Court of Washington decided the case of Envolve Pharmacy Solutions v. Department of Revenue.[1] The Supreme Court found that the exemption from B&O tax in RCW 82.04.320 applied to Envolve Pharmacy Solutions’ (“Envolve”) receipts because its affiliate, Coordinated Care (“CC”), paid the gross premiums tax on insurance premiums (“receipts”) received in respect to its insurance business. The exemption statute states, in part:
…this chapter does not apply to any person in respect to insurance business upon which a tax based on gross premiums is paid to the state.[2]
Thus, in essence, the Court found that because CC paid a premiums tax on its receipts from its insurance business, Envolve was not required to pay B&O tax on its receipts from engaging in the related business activity.
Court’s Holding
We hold that Envolve qualifies for the exemption. The plain language of RCW 82.04.320 states that if a tax “is paid to the [S]tate”—by any entity, the statute does not limit who must make the payment—on “gross premiums” received “in respect to insurance business,” then no other entity has to pay a B&O tax on those same “gross premiums” “in respect to insurance business.” Coordinated Care paid that tax on the gross premiums at issue here.[3]
History Inside the Department of Revenue
This decision is notable because of the Department of Revenue’s (“DOR”) long and convoluted history with respect to interpreting this exemption, starting with a published determination in 1990.[4] That determination allowed for affiliates of an entity paying the gross premiums tax to be exempt from paying B&O on “functionally related” business activities so long as “…the primary corporate affiliate pays the premiums tax.”[5] The DOR position appeared to limit the exemption to “affiliates” that provided “functionally related” services which were generally administrative.
The period between 1990 and 2019 included what appears to be mixed guidance inside the DOR regarding how the exemption should be administered.[6] However, by 2019, after much hand wringing, the DOR published clarified guidance regarding how it would very narrowly administer the exemption. This guidance is currently still available on the DOR website and titled as “Interim guidance statement regarding the application of the insurance business exemption.”[7]
Opportunity
It appears that, at a minimum, affiliates providing certain related administrative services to another affiliate that pays the “gross premiums” tax is eligible for a refund of B&O tax paid on those same business activities/receipts. Additionally, the holding leaves open the question of whether it is even required that the entity claiming the exemption be an “affiliate” or whether “any entity” qualifies so long as the gross premiums tax is paid on the “insurance business” activities. With respect to the qualifying activities, the Court stated:
All of Envolve’s activities involved quality assurance, benefit management, risk management, claims processing, subscriber and provider reimbursement, and cost control measures mandated by statute or regulation. These are all ‘administrative’ activities and certainly central to the insurance function.[8]
Next Steps
For more information or assistance with filing a refund or prospective planning, please contact Mike Roben, John Katsandres, or Caleb Allen at KOM Consulting. Our team can help you better understand the impact of this case on your business operations and tax reporting obligations.
[1] Envolve v. DOR (No. 101845-2 (see chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://www.courts.wa.gov/opinions/pdf/1018452.pdf)).
[2] RCW 82.04.320(1) (emphasis added).
[3] Envolve v. DOR (No. 101845 at page 2).
[4] Det. No. 88-311A, 9 WTD 293 (1990) which has been withdrawn by the DOR.
[5] Envolve v. DOR (No. 101845 at page 7).
[6] For example, in 2013 the DOR provided a letter ruling to Centene (parent of CC and Envolve) indicating that Envolve could receive the exemption on receipts from certain activities. See Envolve v. DOR No. 101845-2 at page 10-11. Additionally, the DOR tried to deny the exemption to a taxpayer in the early 1990s but lost in the unpublished case of Factory Mutual (1993).
[7] As of January 3, 2025, the guidance is still available. However, it seems likely the DOR will remove it soon.
[8] Envolve v. DOR (No. 101845 at page 24). Further, the DOR also provides a list of qualifying activities in its “interim guidance.” While this guidance would deny the underlying claim in this case, it may be instructive for addressing how the DOR may administer a refund.