Ruling Request No. 2021-01

Request for Ruling Regarding the Application of Sales Factor Sourcing Rules to Certain Business Corporation Tax Transactions

The Taxpayer requested a ruling as to whether the Taxpayer may source the percentage of revenues derived from services provided to Rhode Island patients in proportion to affiliated retail pharmacy and call center cases. Alternatively, if the Taxpayer cannot properly source these services using cases, it may reasonably approximate the percentage of revenues based on fees the Taxpayer pays to the affiliated retail pharmacies and call centers.

Facts

The facts set forth below are taken from the statement of facts presented in the Ruling Request received by the Tax Division on February 3, 2020 and from supplemental information submitted by the Taxpayer.

The Taxpayer is a corporation organized under the laws of a non-Rhode Island state and is headquartered outside of Rhode Island. The Taxpayer is a fiscal-year entity for federal income tax purposes. In 2019, the Taxpayer was acquired by another entity. The Taxpayer operates in the healthcare technology services industry and is engaged by prescription and health benefit management companies (“Customers”) to perform a variety of services including medication counseling, medication adherence, medication therapy management, disease management, and opioid overutilization. The Taxpayer uses its own proprietary web-based platform (“Platform”) to provide the services, along with program design, configuration, implementation, support, and administration services. The Taxpayer also claims that its Platform “identifies required service and documentation elements while guiding the pharmacist through a standardized, systematic assessment and case workflow.” The above services are collectively referred to as the “Services” herein. The Taxpayer states that its Services are generally performed from its location outside of Rhode Island.

The Taxpayer does not deliver the majority of its Services directly to individual patients but instead maintains a network (“Network”) of approximately 55,000 retail pharmacies in all fifty (50) states that deliver the Services directly to the patients (“Patients”), who are plan members of the Customers, that visit an affiliated network pharmacy (“Retail Pharmacy Cases”). The Taxpayer then pays a fee for each case served by a retail pharmacy. Network members are independent from the Taxpayer.

Patients who cannot be reached directly by the Network pharmacies receive their services from “non-pharmacists and pharmacists” through a telephone call center (“Call Center Cases”). For purposes of the Retail Pharmacy Cases and the Call Center Cases, if the Patient does not decline the Service, the Network member speaks with the Patient about the opportunities presented, and the Network member documents the intervention on the Platform. Upon completion, the Network members are compensated by the Taxpayer for each case served. In all cases, the Taxpayer uses the Platform to provide its Services in a standardized fashion. Finally, the Taxpayer reports that its Services do not require any specialized knowledge or professional certification, license, or degree since both non-pharmacists and pharmacists are used to deliver the Services.

In summary, the Taxpayer receives revenue from its Customers to provide the Services to the individual Patients. The Taxpayer provides the Services through either (a) the Network and the Retail Pharmacy Cases or (b) the call centers and the Call Center Cases. The Taxpayer pays a fee to the Network to assist in providing the Services to the individual Patients.

The Taxpayer states that it does not have any Rhode Island-based payroll and its personnel generally do not enter into Rhode Island to conduct business activities. On occasion, the Taxpayer’s employees have entered Rhode Island to visit a client location or to attend a trade show. According to the Taxpayer, these visits into Rhode Island by the Taxpayer’s employees may have occurred as few as two times over a period of several years. The Taxpayer does not have tangible or real property in Rhode Island. The Taxpayer claims that its activity in Rhode Island is limited to receiving revenue from a Rhode Island customer (“RI Customer”).

RI Customer has engaged the Taxpayer to design a program that enables RI Customer to easily determine which Patients qualify for medication counseling and other related benefit management services. As part of these Services, the Taxpayer creates a case, which is then routed to its Network through the Platform. The members of the Network address the case by contacting the Patient.

The case is generally handled by a retail pharmacy to the extent the Patient visits one of the members in the Network, defined above as the Retail Pharmacy Cases. With respect to Retail Pharmacy Cases, the Services are provided via the Platform to Patients through retail pharmacy personnel when the Patient visits the retail pharmacy. Otherwise, the Taxpayer’s telephonic pharmacists and call centers perform the Services remotely from a location outside of the state, defined above as the Call Center Cases.

RI Customer is independent from the Taxpayer. Per the Taxpayer’s agreement (“Agreement”) with RI Customer, RI Customer “acknowledges that the Program Pharmacies are independent entities not subject to the control of” the Taxpayer. Additionally, RI Customer “acknowledges that retail Program Pharmacies…are not subcontractors or downstream entities of” the Taxpayer. The terms of the Agreement require the Taxpayer to perform Services for RI Customer in exchange for financial compensation based on case creation and related activity. Exhibit D of the Agreement grants a license to RI Customer for the use of the Taxpayer’s Platform during the Agreement’s duration.

In exchange for the Services detailed above, the Taxpayer received monetary compensation for fiscal years 2016, 2017, and 2018. The Network members served a number of cases and received fees for delivering Services to Rhode Island Patients, both for Retail Pharmacy Cases and Call Center Cases.

Ruling requested

The Taxpayer requests a ruling that the Taxpayer should source Service revenue received from RI Customer in proportion to the percentage of Retail Pharmacy Cases and Call Center Cases in Rhode Island pursuant to Regulation 280-RICR-20-25-9 defining where the recipient of the service receives the benefit of the service.

Alternatively, if a rule of reasonable approximation may apply, the Taxpayer requests a ruling that revenue from the Retail Pharmacy Cases and the Call Center Cases should be sourced based upon the state-by-state distribution of fees paid to Network retail pharmacies or call centers, depending on the revenue stream, because the distribution of fees reflects the place where the Patient receives the Services.

Pertinent Local Statutory and Regulatory Law

Since January 1, 2015, R.I. Gen. Laws § 44-11-2 has imposed a tax equal to seven percent (7%) of net income on each corporation. R.I. Gen. Laws § 44-11-1(c)(4) defines a corporation as “every corporation, joint-stock company, or association, wherever incorporated…deriving any income from sources within this state or engaging in any activities or transactions within this state for the purpose of profit or gain, whether or not an office or place of business is maintained in this state, or whether or not the income, activities, or transactions are connected with intrastate, interstate, or foreign commerce…”, with the exception of certain entities that do not apply here.

As of January 1, 2015, for any taxpayer “organized under subchapter C of the Internal Revenue Code deriving income from sources both within and outside of this state, or engaging in any activities or transactions both within and outside of this state for the purpose of profit or gain, its net income shall be apportioned to this state by means of an allocation fraction to be computed as a simple arithmetical of…the taxpayer's total receipts from sales or other sources during the taxable year which [are] attributable to the taxpayer's activities or transactions within this state during the taxable year…” R.I. Gen. Laws § 44-11-14(b). These receipts include “[g]ross income from the performance of services where the recipient of the service receives all of the benefit of the service in this state” (§ 44-11-14(b)(1)(ii)) and “[g]ross income from all other receipts within the state” (§ 44-11-14(b)(1)(vi)). “If the recipient of the service receives some of the benefit of the service in this state, gross income which shall be included in the numerator of the apportionment factor in proportion to the extent the recipient receives benefit of the service in this state…” § 44-11-14(b)(1)(ii).

To determine the net income for a C corporation that is not part of a combined group, “the total reported net income of the C corporation is multiplied by the C corporation’s apportionment percentage…the corporation’s sales factor.” 280-RICR-20-25-9.8(C). “The apportionment percentage is determined as a fraction, the numerator of which is the total Rhode Island sales of the C corporation, determined as set forth in R.I. Gen. Laws § 44-11-14(b) and § 9.8(I) of [the regulation], and the denominator of which is the total sales everywhere of the C corporation.” Id.

“Rhode Island sales of services are determined according to the principle of market-based sourcing and include gross receipts from the performance of services including commissions, fees, management charges, and similar items. The receipts from a sale of a service are in Rhode Island if and to the extent that the recipient of the service receives the benefit of the service in Rhode Island.” 280-RICR-20-25-9.8(I)(10). “If the recipient receives less than the full benefit of the service in this State, then receipts from the associated transaction shall be included in the numerator of the apportionment factor in proportion to the extent that the recipient receives the benefit in this State.” 280-RICR-20-25-9.8(F).

The types of services contemplated by 280-RICR-20-25-9.8(I)(10) include (1) in-person services (§ 9.8(I)(10)(a))¹, (2) professional services (§ 9.8(K)(5))², and (3) services provided to or on behalf of a customer (§ 9.8(I)(12))³. Delivery of services may be made (1) to or on behalf of a customer by physical means (§ 9.8(I)(14)⁴, (2) to a customer by electronic transmission (§ 9.8(K)(3)(a)(1))⁵, or (3) electronically through or on behalf of an individual or business customer (§ 9.8(K)(4)(b))⁶. As an alternative sourcing rule, 280-RICR-20-25-9.8(K) provides: “Where the taxpayer cannot determine the state or states where the service is actually delivered, but has sufficient information regarding the place of delivery from which it can reasonably approximate the state or states where the service is delivered, it shall reasonably approximate such state or states.” See also 280-RICR-20-25-9.8(K)(4)(c)⁷.

Discussion

I. Retail Pharmacy Services

The Taxpayer argues that its Services provided for the Retail Pharmacy Cases should not be considered in-person or professional services but rather “services delivered electronically through or on behalf of an individual or business customer” under 280-RICR-20-25-9.8(K)(4). The Taxpayer reiterates that its Services are contracted for by RI Customer and delivered by the Platform to Patients through retail pharmacy personnel when a Patient visits the retail pharmacy. The Taxpayer’s services are not performed at a location owned by the Taxpayer, RI Customer, or a Patient but rather a separate retail pharmacy. Therefore, the Taxpayer argues that the portion of its Services revenue related to Retail Pharmacy Cases should be sourced for sales factor purposes based on the state-by-state distribution of cases served because the benefit of the Service is received in the state from which a case arises.

Since the creation of a case is directly linked to the Patient’s visit to a retail pharmacy to receive one or more Services, the location of the Retail Pharmacy Cases may be used to determine where the Services were delivered. This sourcing comports with 280-RICR-20-25-9.8(K)(4)(b) to the extent that the end users or third-party recipients are in Rhode Island and therefore received the benefit of the Service there. To the extent the Taxpayer cannot determine where a Service is actually delivered, 280-RICR-20-25-9.8(K) allows it to reasonably approximate such state or states based upon information such as where the Taxpayer pays its fees to the Network retail pharmacies. he Taxpayer must report the revenue it received from RI Customer to the extent it reflects Services provided in Rhode Island.

II. Call Center Services

The Taxpayer makes the same arguments for the Call Center Services. For the same reasons set forth above for the Retail Pharmacy Services, the location of the Call Center Cases may be used to determine where the Services were delivered in accordance with RICR-20-25-9.8(K)(4)(b). Alternatively, to the extent the Taxpayer cannot determine where a service is actually delivered, 280-RICR-20-25-9.8(K) allows the Taxpayer to reasonably approximate market sourcing based on where the Taxpayer pays its fees to the call centers. The Taxpayer must report the revenue it received from RI Customer to the extent it reflects services provided in Rhode Island.

Ruling

Based on the facts provided, the Taxpayer may specifically source Services revenue received from RI Customer in proportion to the percentage of Retail Pharmacy Cases and Call Center Cases in Rhode Island pursuant to 280-RICR-20-25-9.8 where the recipient of the Services receives the benefit of the Services in Rhode Island. If the Taxpayer is unable to source the Services revenue based on cases, then it may reasonably approximate the amount of Services revenue based on where the Taxpayer paid its fees to the Network retail pharmacies and call centers.

This ruling is limited to the facts stated herein and may be relied upon by the Taxpayer and shall be valid unless (1) expressly revoked, (2) the applicable statutory provisions of law are amended in a manner that requires a different result, (3) the underlying facts described herein materially change, or (4) a decision on point has been issued by the Rhode Island or Federal courts.

¹“[I]n person services are services that are physically provided in person by the service provider, where the customer or the customer’s real or tangible property upon which the services are performed is in the same location as the service provider at the time the services are performed. This rule includes situations where the services are provided on behalf of the service provider by a third-party contractor.” 280-RICR-20-25-9.8(I)(10)(a). (Emphasis added.)

²“[P]rofessional services are services that require specialized knowledge and in some cases require a professional certification, license or degree.” 280-RICR-20-25-9.8(K)(5).

³“Where the service provided by the service provider is not an in-person service within the meaning of § 9.8(I)(10)(a) of this Part or a professional service within the meaning of § 9.8(K)(5) of this Part, and the service is delivered to or on behalf of the customer, or delivered electronically through the customer, the benefit of the service is received in Rhode Island if and to the extent that the service is delivered in Rhode Island.” 280-RICR-20-25-9.8(I)(12).

⁴“Services delivered to a customer or on behalf of a customer through a physical means include, for example, product delivery services where property is delivered to the customer or to a third party on behalf of the customer; the delivery of brochures, fliers or other direct mail services; the delivery of advertising or advertising-related services to the customer’s intended audience in the form of a physical medium; and the sale of custom software (e.g., where software is developed for a specific customer in a case where the transaction is properly treated as a service transaction for purposes of corporate taxation) where the taxpayer installs the custom software at the customer’s site.” 280-RICR-20-25-9.8(I)(14).

⁵“In the case of the delivery of a service to an individual customer by electronic transmission, the service is delivered in Rhode Island if and to the extent that the service provider’s customer receives the service in Rhode Island.” 280-RICR-20-25-9.8(K)(3)(a)(1). (Emphasis added.)

⁶“In the case of the delivery of a service by electronic transmission, where the service is delivered electronically to end users or other third-party recipients through or on behalf of the customer, the benefit of the service is received in Rhode Island if and to the extent that the end users or other third-party recipients are in Rhode Island.” 280-RICR-20-25-9.8(K)(4)(b).

⁷“If the taxpayer cannot determine the state or states where the services are actually received by the end users or other third-party recipients either through or on behalf of the customer, but has sufficient information regarding the place of reception from which it can reasonably approximate the state or states where the benefit of services are received, it shall reasonably approximate such state or states.” 280-RICR-20-25-9.8(K)(4)(c).

Neena S. Savage
Tax Administrator
February 4, 2021