On December 12, 2024, the Washington Supreme Court granted relief from the state’s business and occupation (B&O) tax to Envolve Pharmacy Solutions, Inc. (“Envolve”), a health insurance benefits administrator affiliated with another company that already pays state premium tax on health insurance premiums. The case is Envolve Pharmacy Solutions, Inc. v. Department of Revenue, No. 101845-2 (Wash., Dec. 12, 2024).
Both Envolve and Coordinated Care were subsidiaries of Centene Corporation. Coordinated Care contracted directly with the state for health insurance services and collected premiums from consumers. Coordinated Care contracted with Envolve to administer those insurance benefits under the state contract. Coordinated Care paid premium tax on the premiums it collected and forwarded a percentage of those premiums to Envolve as payment for its services.
Revised Code of Washington Section 82.04.320 contains an exemption from B&O tax when any entity has already paid a tax on gross premiums received in respect to insurance business. The exemption uses a three-part test based on 1) the relationship between the contracting entities, 2) the character of the service or activity performed, and 3) whether the activity is independently entrepreneurial. The Department of Revenue (DOR) historically allowed this exemption for related entities performing activities “functionally related” to the enterprise’s insurance business.
Envolve had paid the B&O tax on the income stream from Coordinated Care but filed refund claims exempting the income from the B&O tax. Despite receiving guidance indicating Envolve could take advantage of the exemption, the DOR denied Envolve’s refund claim and assessed additional unpaid B&O taxes. It argued that Envolve was performing actual healthcare services, which do not qualify for the exemption, rather than services “functionally related” to insurance business.
The lower courts reversed the DOR’s determination, and the Washington Supreme Court affirmed the reversals. The court explained that the exemption has been broad since 1935, when it was expanded from insurance companies to any company in respect to insurance business upon which a tax based on gross premiums is paid. Envolve’s activities involved quality assurance, benefit management, risk management, claims processing, subscriber/provider reimbursement, and cost control measures. Because all of these were administrative activities central to the insurance function and, in some cases, mandated by state law, they were “functionally related” to insurance business.
The court also determined that Envolve was not providing actual healthcare services, which are defined in RCW Sections 48.44.010(10) and 70.02.010(15) and include activities such as medical, surgical, dental, chiropractic, hospital, and other similar services performed by a healthcare provider. As a result, it was entitled to relief from payment of B&O taxes on those activities functionally related to insurance business.
The court’s ruling and description of what constitutes business that is functionally related to insurance was broad, thus leaving questions as to how far “functionally related” could be applied. Our experts can help you determine if you are paying B&O taxes on income that is functionally related to insurance and assist in filing refund claims and proactively planning to lower your taxes. Please contact the individuals listed below to get started on a plan.
TECHNICAL INFORMATION CONTACTS:
Josie Lowman
Principal
Ryan
212.871.3901
josie.lowman@ryan.com
Tina Brooks
Senior Manager
Ryan
414.441.0316
tina.brooks@ryan.com
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