Minnesota applies tax to out-of-state drug receipt

Mail-order pharmacy’s drugs intended for in-state customers


John Stowe
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Dale Busacker
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Drew Slagle
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David Tibbals
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Jamie C. Yesnowitz 
Washington, DC
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Chuck Jones 
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Lori Stolly 
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On Aug. 15, 2018, the Minnesota Supreme Court endorsed the imposition of the Minnesota Legend Drug Tax on a non-resident mail-order pharmacy’s receipt of prescription drugs for ultimate distribution to Minnesota customers, despite such receipt occurring wholly outside the state.1 In reversing a decision of the Minnesota Tax Court,2 the Supreme Court sustained this taxation of an out-of-state activity against challenges brought forth on both federal Due Process and Commerce Clause grounds.

Background Walgreens Specialty Pharmacy, LLC, and four predecessor entities (collectively, “WSP”), operated a retail and mail-order specialty pharmacy business, conducting these operations primarily through its retail locations in Massachusetts, Michigan, New Jersey, Oregon, Pennsylvania, and Texas. WSP had no property or employees of its own in Minnesota, though it had established entity-level nexus with Minnesota through the activities of Walgreen Company, its corporate parent, which deployed sales representatives within Minnesota to promote the services of WSP.

Through its mail-order operation, WSP regularly dispensed prescription drugs to Minnesota customers, as authorized by the Minnesota Board of Pharmacy and, at times, according to contracts it had with Minnesota health insurance providers and plans. Such prescriptions were filled exclusively from WSP’s locations outside Minnesota, by drawing from inventories of prescription drugs ordered by WSP outside Minnesota, delivered to WSP by out-of-state drug wholesalers and manufacturers, and received by WSP at its retail locations outside Minnesota. Upon verification by its staff pharmacists, WSP fulfilled orders of prescription drugs to common carriers at locations outside Minnesota to be ultimately delivered to its customers, some of which were located in Minnesota.

Based on the wholesale cost of prescription drugs it dispensed to Minnesota customers during the period at issue, WSP had originally paid the Minnesota Legend Drug Tax, a 2% tax based on the price paid for prescription drugs. The Legend Drug Tax applied during the period at issue to “[a] person that receives legend drugs for resale or use in Minnesota, other than from a wholesale drug distributor that is subject to [the complementary Minnesota Wholesale Drug Distributor Tax],” whose liability for the tax was incurred “when legend drugs are received or delivered in Minnesota by the person.”3

Upon further review, WSP filed amended tax returns for its 2008-2013 tax periods, requesting a refund of over $14 million in Legend Drug Tax amounts paid. WSP maintained that it received prescription drugs intended for Minnesota customers outside the state, did not itself deliver such prescription drugs in Minnesota, and, therefore, was not subject to the Legend Drug Tax. WSP further argued that Minnesota’s taxation of transactions involving the receipt of drugs outside the state was an impermissible extraterritorial exaction that did not contemplate transactional nexus as required by the Due Process Clause, and that was internally inconsistent for purposes of Commerce Clause analysis. Minnesota’s Commissioner of Revenue denied the refund claims, contending that the Legend Drug Tax applied upon WSP’s in-state delivery of prescription drugs to Minnesota customers through the use of a common carrier. WSP then sought review by the Tax Court.

Tax Court’s decision In considering WSP’s claims, the Minnesota Tax Court conceptualized the imposition of the Legend Drug Tax on a taxpayer’s receipt of prescription drugs intended for resale or use in Minnesota. It cautioned, however, that this scheme, without further limitation, could theoretically apply to “drugs received anywhere in the world . . . . because the activity taxed is the receipt of drugs, not their subsequent disposition.”4 Such application would present a clear extraterritoriality concern.

Yet, according to the Tax Court, the taxing statute then renders this concern moot by triggering a taxpayer’s liability for the Legend Drug Tax only “when legend drugs are received or delivered in Minnesota by the person.”5 As the Tax Court described, “[b]y establishing these geographic conditions precedent to liability, the second sentence . . . limits application of the tax imposed by the first sentence to in-state activities only.”

Nevertheless, the Tax Court identified separate concerns presented by the second sentence of the statute. It did so by first recognizing that because the first sentence “taxes solely the activity of receiving goods . . . it imposes a tax far narrower [than] a typical use tax.”6 That being the case, the Tax Court then warned against conflating the Legend Drug Tax with a use tax capturing the activities of distribution or delivery, noting that “delivery itself—within Minnesota or elsewhere—is not an activity taxed by the first sentence, as is receipt.”7 In other words, the Tax Court would not read the application-limiting second sentence and its reference to delivery as broadening the reach of the tax-applying first sentence.

Nor would the Tax Court empower the second sentence to automatically attach a Legend Drug Tax liability upon in-state delivery. Here, it recognized that “interpreting delivery within Minnesota as triggering imposition of the Legend Drug Tax on a nonresident pharmacy’s out-of-state receipt of drugs would require the conclusion that the Legislature intended to impose an extraterritorial tax.”8 Instead, the Tax Court characterized the second sentence’s reference to delivery as merely a remnant of earlier iterations of the Legend Drug Tax.

In applying these intricately intertwined first and second sentences of the statute to WSP’s claims, the Tax Court ruled that WSP could not be subjected to the Legend Drug Tax with regard to an out-of-state receipt of prescription drugs. Because the activity on which the Legend Drug Tax was imposed would occur in these circumstances wholly outside Minnesota, the relevant “geographic conditions precedent” to liability would not be met. The Tax Court thus ruled in favor of WSP without addressing its Due Process and Commerce Clause arguments. The Commissioner then appealed to the Minnesota Supreme Court.

Supreme Court’s ‘harmonious’ interpretation On appeal, the Minnesota Supreme Court agreed with the Tax Court’s assessment that the taxing statute was unambiguous, but it took a different approach in examining the plain language of the statute. While the Tax Court analyzed the first and second sentences separately, the Supreme Court based its interpretation by reading the statute “as a harmonious whole,” countering that “the plain language of the statute at issue here encompasses out-of-state pharmacies that deliver legend drugs to Minnesota-based customers for use in Minnesota.”

According to the Supreme Court, the first sentence of the statute serves a purpose beyond merely identifying receipt of prescription drugs as the activity taxed: subjecting persons receiving prescription drugs to the Legend Drug Tax in the first place. Reading the first sentence of the statute together with the second sentence, it departed from the Tax Court’s view of the imposition of the tax, emphasizing the status of one receiving prescription drugs rather than the activity of receipt. Taken as a whole, the Supreme Court identified two elements for establishing liability within the taxing statute, reasoning that “the Legend Drug Tax applies: (1) to a person who receives legend drugs for resale or use in Minnesota (2) when that person receives or delivers those drugs in Minnesota.”

The Supreme Court departed from the Tax Court’s interpretation of the first and second sentences by using its own interpretive framework. It disagreed with the Tax Court’s concern about the potential extraterritorial application of the first sentence and its “failing to give effect to the specific geographic limitation in that sentence ‘for resale or use in Minnesota.’”9 It questioned the Tax Court’s disregard for the second sentence’s reference to delivery and its “converting the legislative alternatives to a single element, receipt.” Finally, it claimed that the Tax Court had “read the second sentence . . . in light of the first, but . . . not . . . the first sentence in light of the second.”

Given the view that the two operative sentences in the statute should be read harmoniously rather than in isolation, the Supreme Court applied the statute to WSP’s claims. In its view, the first element of the statute was unquestionably met, by WSP’s receipt of prescription drugs for eventual disposition to Minnesota customers, no matter where the ultimate receipt of the drugs occurred.

As for the second element, recognizing that WSP had not itself received prescription drugs within Minnesota, the Supreme Court evaluated whether WSP’s use of common carriers to transfer prescription drugs to Minnesota customers was to be considered delivery in Minnesota by WSP. Referring to statutory and dictionary definitions of “deliver” and considering WSP’s interest in completing its sales, the Supreme Court determined that “[e]ven though the legend drugs were delivered by common carrier, rather than by WSP’s own employees or using WSP’s own vehicles, those drugs were still delivered ‘by’ WSP to Minnesota.” With the two elements of the taxing statute having been met, the Supreme Court concluded that WSP was indeed subject to the Legend Drug Tax with regard to the out-of-state receipt of prescription drugs intended for Minnesota customers and that its refund claims should be denied.

The Supreme Court briefly addressed WSP’s challenge on the grounds of Due Process considerations. Citing Quill Corp. v. North Dakota,10 it asserted that the U.S. Supreme Court “held that there were sufficient contacts with a taxing state when a mail-order company purposefully directed its activities at a state’s residents.” In the Supreme Court’s view, WSP’s sales and deliveries of prescription drugs to Minnesota customers by use of a common carrier, availing Minnesota customers of its website, and using a Walgreen Company representative in Minnesota were contacts sufficient to sustain lawful taxation under the Due Process Clause.

Finally, the Supreme Court similarly rejected WSP’s Commerce Clause arguments. WSP had claimed that the Commissioner’s interpretation of the Legend Drug Tax discriminated against interstate commerce because the tax was internally inconsistent. WSP argued that if another state were to enact an identical statute, the Commissioner’s interpretation in this case would impermissibly allow double taxation: the other state’s taxation of prescription drugs received by WSP in the other state, and Minnesota’s taxation of the same prescription drugs if delivered to Minnesota customers. The Supreme Court, however, emphasized that the activities subject to tax by each state were mutually exclusive. By viewing the tax as imposed on a person receiving prescription drugs intended for in-state customers, it concluded that “[t]he Legend Drug Tax, as we interpret it, does not violate the Commerce Clause.”

Commentary While the Tax Court had focused on the fact that the Legend Drug Tax was imposed on the act of receipt of the drugs by the pharmacy, the Supreme Court also considered the fact that the legend drugs were ultimately delivered to customers in Minnesota and used this as a basis for the imposition of the tax. WSP had admitted that it had entity nexus with Minnesota, but asserted that since Minnesota lacked transactional nexus with the receipt of the drugs, the state could not impose this tax. The Supreme Court did not address the transactional nexus issue upon which the Tax Court had based its decision.

Interestingly, the law specifically exempts purchases by an individual for personal consumption from the Legend Drug Tax. Here, however, WSP was subjected to the Legend Drug Tax on sales of legend drugs which it made to individuals. In addition, it appears that WSP purchased its legend drugs from wholesale drug distributors subject to the Minnesota wholesale drug distributor tax, implying that WSP should be exempt from paying the Legend Drug Tax to prevent double taxation. The Department asserted that this exemption did not apply to WSP because the legend drugs were received outside Minnesota by WSP, and so the sale of these legend drugs by the wholesale drug distributors to WSP was not subject to Minnesota’s tax.


1 Walgreens Specialty Pharmacy, LLC v. Commissioner of Revenue, Minnesota Supreme Court, No. A17-1991, Aug. 15, 2018.
2 Walgreens Specialty Pharmacy, LLC v. Commissioner of Revenue, Minnesota Tax Court, No. 8902-R, Oct. 16, 2017.
3 MINN. STAT. § 295.52, subd. 4(a). In its entirety, the provision reads: “A person that receives legend drugs for resale or use in Minnesota, other than from a wholesale drug distributor that is subject to tax under subdivision 3, is subject to a tax equal to the price paid for the legend drugs multiplied by the tax percentage specified in this section [referenced in this Alert as the “first sentence” of the statute]. Liability for the tax is incurred when legend drugs are received or delivered in Minnesota by the person [referenced in this Alert as the “second sentence” of the statute].” During the period at issue, the Legend Drug Tax did not apply “to purchases by an individual for personal consumption.” MINN. STAT. § 295.52, subd. 4(b).
4 Emphasis in original.
5 MINN. STAT. § 295.52, subd. 4(a) (emphasis added by Minnesota Tax Court).
6 Emphasis in original.
7 Id.
8 Id.
9 Emphasis added by Minnesota Supreme Court.
10 504 U.S. 298 (1992).

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