Express Scripts Inc. v. State Tax Assessor

• Citation: 2023 ME 68
• Docket Number: BCD-22-331
• Decision Date: 07 November 2023
• Parties: EXPRESS SCRIPTS INC. et al. v. STATE TAX ASSESSOR
• Court: Supreme Judicial Court of Maine (US)

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2023 ME 68

EXPRESS SCRIPTS INC. et al. v. STATE TAX ASSESSOR

No. BCD-22-331

Supreme Court of Maine

November 7, 2023

Argued: September 12, 2023

Jonathan A. Block, Esq., Pierce Atwood LLP, Portland, and R Gregory Roberts, Esq. (orally), Roberts Law Group, PLLC White Plains, New York, for appellant Express Scripts Inc. et al.

Aaron M. Frey, Attorney General, Thomas A. Knowlton, Dept. Atty. Gen. (orally), and Lawrence S. Delaney, Asst. Atty. Gen., Office of the Attorney General, Augusta, for appellee State Tax Assessor

Panel: STANFILL, C.J., and MEAD, JABAR, HORTON, LAWRENCE, and DOUGLAS, JJ.

JABAR J.

[¶ 1] Express Scripts Inc. (ESI) and its unitary Maine affiliates (collectively, Express Scripts) appeal from an order entered in the Business and Consumer Docket (Duddy, J.) granting summary judgment approving the State Tax Assessor's method of calculating Express Scripts' Maine tax liability. The Assessor cross-appeals from the trial court's (Murphy, J.) order sealing certain aspects of the parties' filings pursuant to Maine Rule of Civil Procedure 56, and the trial court's (Duddy, J.) subsequent order denying the Assessor's motion to unseal. We affirm the judgment and the challenged orders.

I. BACKGROUND

[¶ 2] During 2011, 2012, and 2013 (the Audit Period), ESI was a corporation organized under Delaware law with its headquarters and executive offices in St. Louis, Missouri. On April 2, 2012, Express Scripts Holding Company, the parent company of ESI, acquired the stock of Medco Health Solutions, Inc., and its affiliates. ESI and its affiliated entities were engaged together in a unitary business that involved business activity both within and outside Maine.^[1]

[¶ 3] During the Audit Period, Express Scripts sold prescription drugs by mail order delivery and provided infusion services throughout the United States, including Maine. Additionally, Express Scripts sold claims adjudication and other pharmacy benefit management (PBM) services throughout the United States, including in Maine.^[2] During the Audit Period, Express Scripts generated revenue primarily from the delivery of prescription drugs through its contracted network of retail pharmacies, from home delivery of prescription drugs, from specialty pharmacy services, and from services in its non-PBM business segment. Revenues from the delivery of prescription drugs to Express Scripts' members represented 99.4% of revenues in 2011; 99.0% of revenues in 2012; and 98.8% of revenues in 2013.

[¶ 4] Express Scripts' "clients" during the Audit Period included health insurers, health maintenance organizations, employers, governmental health programs, and union-sponsored benefits plans. The clients' "members" were the primary recipients of Express Scripts' services. If a client was a health insurer, the term "members" referred to the insured individuals; if a client was an employer, then the term "members" referred to the employees covered by the employer's health plan. The parties agree that, except for pricing, Express Scripts' agreements with its clients are substantially the same in all material respects. Pursuant to written agreements with retail pharmacies that were in effect during the Audit Period, Express Scripts negotiated the prices at which retail pharmacies would provide prescription drugs to individual members and managed national and regional networks that were responsive to client preferences related to cost containment, convenience of access for members, and network performance.

[¶ 5] When a member presented his or her Express Scripts identification card at a retail pharmacy, Express Scripts communicated in real time with the pharmacy to process prescription drug claims at the point of sale. The pharmacist sent the member's prescription information to Express Scripts through its computer system, and Express Scripts processed the claim and responded back to the pharmacist in real time. This process is referred to as the "adjudication of claims." The claims-adjudication process included Express Scripts' (A) confirming the member's eligibility to the pharmacist; (B) performing a concurrent drug interaction/utilization review; (C) confirming to the retail pharmacy that it would receive payment from Express Scripts pursuant to their agreements, if the claim was accepted; and (D) informing the retail pharmacy of the co-payment amount to be collected from the member.

[¶ 6] Express Scripts filed its original 2011 Maine corporate income tax return in October 2012 and reported an overall Maine sales factor of 0.008036.^[3] In calculating the sales factor on the original 2011 Maine corporate income tax return, Express Scripts apportioned receipts from the performance of its PBM services on a market member basis.^[4]

[¶ 7] ESI, Medco, and their affiliates filed their 2012 Maine corporate income tax return in October 2013 and reported an overall Maine sales factor of 0.002021. In calculating the sales factor applicable to its portion of the unitary business, Medco apportioned receipts from the performance of its PBM services on a market member basis, but ESI changed the method it used to apportion receipts to calculate its sales factor, apportioning receipts from ESI's performance of PBM services on a market client basis.^[5] ESI made this change even though its business operations and the applicable Maine statutes and rules had not changed; and ESI did not notify Maine Revenue Service (MRS) that it had changed its method even though it was obligated by regulation to do so. See 18-125 C.M.R. ch. 801, § .05 (effective Mar. 19, 2011).^[6]

[¶ 8] ESI, Medco, and affiliates filed their 2013 Maine corporate income tax return in October 2014, reported an overall Maine sales factor of 0.001495, and apportioned to Maine 0.00001433 of ESI's $1,089,214,812 in reported separate taxable income for 2013. In calculating the sales factor for 2013, ESI and Medco both apportioned receipts from the performance of PBM services on a market client basis, rather than on a market member basis.

[¶ 9] Starting in 2015, MRS conducted an audit of Express Scripts' Maine corporate income tax returns for 2011-2013. On or about April 28, 2015, Express Scripts and affiliates filed an amended 2011 Maine return seeking a refund of $962,281. On September 17, 2015, MRS denied Express Scripts' 2011 refund claim. After the audit, on October 1, 2015, MRS issued a notice of assessment, asserting that Express Scripts owed $1,897,260.54 in back taxes, comprising $1,646,352 in tax and $250,908.54 in interest. The principal audit adjustment by MRS for the Audit Period resulted from MRS's determination that the receipts from Express Scripts' performance of PBM services should be apportioned on a market member basis.

[¶ 10] Express Scripts timely requested reconsideration of the denial of its refund claim for 2011 and reconsideration of the assessment, pursuant to 36 M.R.S. § 151(1) (2023). On January 22, 2018, MRS issued a reconsideration decision upholding both its denial of the refund claim for 2011 and the assessment for the Audit Period, but adjusting the back tax assessment, asserting that Express Scripts owed $810,292 in tax and $86,081.22 in interest, for a total assessment of $896,373.22. Additional interest of $163,806.71 accrued from the date of assessment through February 15, 2018, bringing the total balance due to $1,060,179.93. Express Scripts timely filed a statement of appeal with the Maine Board of Tax Appeals. On August 9, 2019, the Board issued a decision upholding the reconsideration decision.

[¶ 11] On October 1, 2019, Express Scripts filed a petition for review and de novo determination in the Superior Court (Kennebec County). See 5 M.R.S. §§ 11001(1), 11002 (2023); 36 M.R.S. § 151(2)(E)-(G); M.R. Civ. P. 80C. In its petition, Express Scripts requested relief under six counts:

• In Count 1, Express Scripts argued that pursuant to 36 M.R.S. § 5211(16-A)(A) (2023), receipts from the performance of its PBM services should be apportioned to Maine based on a market client basis because the services were received at its clients' commercial and administrative headquarters, not at the location of the retail pharmacies where members filled prescriptions.

• In Count 2, Express Scripts argued in the alternative that pursuant to 36 M.R.S. § 5211(16-A)(A), if the location where its services were received is not readily determinable, those receipts should be attributed to its clients' commercial and administrative headquarters because those were the locations from which its clients ordered the services.

• In Count 3, Express Scripts argued that, if it is determined that the statutory apportionment provisions require the sourcing of receipts from the performance of PBM services to the location of the retail pharmacies where members filled prescriptions, Express Scripts is entitled to an alternative apportionment pursuant to 36 M.R.S. § 5211(17)(D) that fairly represents the extent of its business activities in Maine.

• In Count 4, Express Scripts raised an alternative claim that, if it is determined that receipts from the performance of its PBM services should be apportioned to Maine on a market member basis pursuant to 36 M.R.S. § 5211(16-A)(A), that apportionment methodology results in attribution of income to Maine that is out of all appropriate portion to Express Scripts' activities in the state in violation of the Due Process and Commerce Clauses of the United States Constitution.

• In Count 5, Express Scripts argued that the Assessor failed to determine Express Scripts' correct tax liability pursuant to 36 M.R.S. § 141 (2023).

• Finally, in Count 6, Express Scripts argued that any interest that has accrued against Express Scripts for failure to pay tax as a result

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