OptumRx, Inc. (“OptumRx”), a California-based corporation domiciled in Minnesota and duly authorized to conduct business in Florida, has filed a Complaint against the Florida Department of Revenue (“Department”) challenging a corporate income tax assessment. Filed in the Circuit Court of the Second Judicial Circuit in Leon County, Florida, this case contests the Department’s determination of tax liability for the fiscal years 2016-2018.

The present dispute originates from a Notice of Proposed Assessment (“NOPA”) issued on October 28, 2021. Having remitted the undisputed portion of the assessment, OptumRx seeks judicial intervention to rectify what it contends is an erroneous application of Florida’s corporate income tax apportionment framework, which has led to an inflated tax liability. The crux of OptumRx’s argument lies in the fundamental distinction between market-based sourcing and cost-of-performance methodologies in determining tax liability for service-based businesses. This case presents an opportunity to clarify Florida’s approach to income apportionment in multistate business operations, which remains a contentious issue in corporate tax law.

Principal Legal Contentions OptumRx’s legal arguments center on two pivotal issues:

1. The Correct Sourcing Methodology for Pharmacy Benefit Management (“PBM”) Service Receipts

2. The Inclusion of Pharmaceutical Formulary Rebates in the Sales Factor for Apportionment Purposes

Issue 1: Apportionment of PBM Service Receipts

Florida’s statutory apportionment scheme, codified in Section 220.15, Florida Statutes, mandates that corporations operating within and beyond state boundaries allocate their federal adjusted gross income based on a three-factor apportionment formula. This formula accounts for a taxpayer’s sales factor, property factor, and payroll factor. It serves to fairly distribute tax burdens across jurisdictions in which a business operates, mitigating the risk of double taxation while ensuring the state captures an appropriate share of taxable revenue.

OptumRx is engaged in the provision of PBM services to health plans, which, in turn, furnish prescription drug benefits to enrolled members. These PBM services encompass regulatory compliance, claims adjudication, pharmacy network administration, and financial analytics. OptumRx asserts that the preponderance of its income-generating activities associated with these services transpire outside Florida. Specifically, the company argues that key operational processes—such as claims adjudication and regulatory compliance—are predominantly executed outside Florida, reinforcing the notion that income should be sourced to the jurisdiction where these activities occur rather than the location of the plan members receiving benefits.

Contrary to OptumRx’s position, the Department employed a market-based sourcing paradigm to determine taxability, attributing service-related receipts to Florida based on the location of health plan members. The Department’s methodology posits that taxability should hinge on the situs of service “consumption,” rather than the physical location where income-producing activities take place.

OptumRx refutes this approach, asserting that Florida law adheres to the “cost of performance” (“COP”) method as articulated in Florida Administrative Code Rule 12C-1.0155(2). Under this regulatory framework, receipts are assignable to Florida only when the predominant portion of the taxpayer’s income-generating activities occurs within the state. Given that OptumRx’s PBM services are largely performed outside Florida, it argues that the Department’s assessment is legally unsustainable. This issue is particularly relevant in an era of increasing digitization, where corporate functions are often centralized in locations distinct from the consumer base.

The plaintiff bolsters its argument by invoking recent Florida jurisprudence—Target Enterprises, Inc. v. Department of Revenue (2022) and Billmatrix Corporation v. Department of Revenue (2023)—both of which upheld the COP method in analogous circumstances. These cases underscore the importance of applying a consistent apportionment framework, preventing arbitrary shifts in tax liability that may disadvantage service providers with nationwide operations.

Issue 2: Inclusion of Formulary Rebates in the Sales Factor

OptumRx further challenges the Department’s exclusion of pharmaceutical formulary rebates from its sales factor. These rebates constitute remuneration received from pharmaceutical manufacturers in exchange for strategic formulary placement, administrative reporting, and related services. The exclusion of these rebates from the sales factor, OptumRx argues, leads to a distorted apportionment calculation that does not accurately reflect the company’s economic presence in Florida.

Section 220.15(5), Florida Statutes, broadly defines “sales” to encompass all gross receipts, barring specific exceptions such as interest, dividends, rents, royalties, and securities transactions. Additionally, Florida Administrative Code Rule 12C-1.0155(1) corroborates that gross receipts derived from business transactions should be incorporated into the sales factor. By excluding formulary rebates, the Department has effectively disregarded legitimate revenue streams that contribute to the company’s tax base, creating an artificial inflation of its taxable income within Florida.

Initially, OptumRx omitted these rebates from its corporate tax filings in Florida. However, upon further examination, it sought to incorporate them into the sales factor to mitigate its tax burden. The Department, however, disallowed this adjustment, categorizing the rebates as trade discounts rather than taxable gross receipts. This categorization raises important interpretative questions regarding the treatment of rebates in corporate tax law and whether they constitute reductions in cost of goods sold or independent sources of revenue.

OptumRx contests this characterization, asserting that the rebates are contractual payments received in consideration for distinct business services rather than mere cost adjustments. Their exclusion, it argues, results in an impermissible inflation of its taxable income. The distinction between trade discounts and service revenue is a fundamental issue in this case, with potential implications for similarly structured transactions across other industries.

Relief Sought

OptumRx petitions the court for the following remedies:

1. Correction of the Department’s apportionment methodology to ensure PBM service receipts are sourced based on the predominant locus of income-generating activities, in alignment with Florida’s established cost-of-performance framework.

2. Inclusion of formulary rebates in the sales factor, thereby effectuating a downward revision of Florida corporate tax liability for the 2017 and 2018 tax years, ensuring a more equitable distribution of taxable income.

3. Any ancillary relief deemed just and appropriate by the court, including potential reimbursement for overpaid taxes should OptumRx’s arguments be upheld.

Implications for Florida Corporate Income Tax

The resolution of this case, and others like it, carries significant ramifications for corporate taxpayers operating in Florida. A favorable ruling for OptumRx would reaffirm the primacy of the COP method in sourcing service-based income, potentially constraining Florida’s ability to employ market-based sourcing principles in future assessments. This decision could serve as a pivotal precedent for other multistate corporations navigating similar tax disputes, ensuring greater consistency in Florida’s application of its apportionment rules.

Conversely, a decision upholding the Department’s methodology could engender heightened tax obligations for multistate service providers, reinforcing a shift toward market-based sourcing that may increase corporate tax exposure in Florida. Given the evolving nature of interstate commerce and digital service provision, the outcome of this litigation is likely to influence legislative discussions on the need for statutory clarity regarding income apportionment methodologies.

As this litigation unfolds, it is poised to attract scrutiny from tax practitioners, corporate stakeholders, and policymakers seeking clarity on Florida’s evolving corporate tax apportionment doctrines. The case exemplifies the broader legal tensions inherent in apportionment jurisprudence and underscores the necessity of a coherent, legally consistent framework for determining state corporate tax liabilities in an increasingly globalized economy.