David Brunori, Partner

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Minnesota Ruling Subjecting Out-of-State Pharmacies to Tax Could Have Broader Impact

Tax Law Alert David Brunori, Dawn R. Gabel

In a case that may influence legislatures and revenue departments around the country, the Minnesota Supreme Court has ruled that out-of-state pharmacies are subject to the state’s drug tax when they do no more than sell prescription drugs to Minnesota residents and deliver the drugs by common carrier. In Walgreens Specialty Pharmacy LLC v. Commissioner of Revenue, the court held that Minnesota’s 2 percent gross receipts tax on sales of prescription drugs could be imposed on out of state pharmacies selling to Minnesota residents. Minnesota levies a tax on “legend” drugs, which under federal law must be dispensed by prescription.

Walgreens Specialty Pharmacy LLC did not have any facilities in Minnesota, but was licensed to dispense drugs to customers in the state as an out-of-state pharmacy and delivered the drugs to customers in Minnesota by common carrier. Walgreens argued that the law as applied was unconstitutional because Walgreens Specialty Pharmacy LLC did not have a physical presence in the state. The court rejected the Due Process Clause argument holding that Walgreens “purposely directed its activities at Minnesota residents.” The court rejected several other arguments challenging the tax.

Obviously, anyone selling prescription drugs in Minnesota should be aware of this case. But other states have or are considering laws similar to Minnesota’s gross receipts tax on prescription drugs. As more prescriptions are filled out of state and delivered via common carriers across the country, the Minnesota Supreme Court’s decision will assuredly influence other legislatures and state revenue departments.