Washington supreme court decision clarifies laws on premiums tax

The Washington Supreme Court ruled on Envolve Pharmacy Solutions, Inc. v. Department of Revenue on Dec. 12, 2024. This decision impacts insurance providers by clarifying that if an insurance provider pays Washington’s premiums tax, amounts received by a related entity that are derived from insurance premiums are exempt from business and occupation (B&O) tax. Additionally, the related entity must provide administrative services that are functionally related to the insurance provider’s insurance business.

Learn more about the court case below.

The case

Envolve Pharmacy Solutions (Envolve) provided administrative services for Coordinated Care, a related entity through common ownership. These administrative services included:

• Maintaining a network of providers of health services
• Processing claims of providers
• Reimbursing healthcare providers for claims
• Maintaining a drug utilization review program

Coordinated Care paid Washington premiums tax on premiums it received from its health insurance customers, and then out of those receipts, paid amounts to Envolve in exchange for administrative services.

Flow of service

Revised Code of Washington (RCW) 82.04.320 provides an exemption from B&O tax for “any person in respect to insurance business upon which a tax based on gross premiums is paid to the state.”

Ruling

The Court found that the phrase “any person in respect to insurance business” in the statute means an entity must perform activities that relate to insurance business to qualify for the exemption, and that Envolve fits into that category despite Envolve not directly paying the premiums tax.

The Court found that functionally related means “incidental to accomplishing the insurance function,” and that the test focuses on the following criteria:

• The relationship between the contracting entities
• The character of the service or activity performed
• Whether the activity is independently entrepreneurial

Next steps

We recommend a careful review of agreements to confirm the potential impact of Envolve and whether the B&O tax exemption found in RCW 82.04.320 applies to some or all of the intercompany receipts between an insurance provider and its related administrative services entity.