Court Opinion

ID: 9898035
Source: CourtListenerOpinion
Date Created: 2023-11-14 19:27:58.845525+00
Date Added: 2024-06-11T09:14:52.113586
License: Public Domain

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                    IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON

       ENVOLVE PHARMACY SOLUTIONS,
       INC.,                                                   No. 83563-7-I

                               Respondent,                     DIVISION ONE

                        v.                                     PUBLISHED OPINION

       STATE OF WASHINGTON,
       DEPARTMENT OF REVENUE,

                               Appellant.

                 MANN, J. — This case is about the insurance business exemption to

       Washington State’s Business and Occupation (B&O) tax, RCW 82.04.320

       (2020). During the 2012 to 2015 tax period at issues in this appeal, the

       insurance business exemption provided, in relevant part:

                 Exemptions—Insurance business. This chapter shall not apply to any
                 person in respect to insurance business upon which a tax based on gross
                 premiums is paid to the state: PROVIDED, [t]hat the provisions of this
                 section shall not exempt any person engaging in the business of
                 representing any insurance company, whether as a general or local agent,
                 or acting as broker for such companies.

       RCW 82.04.320 (2020). 1

                 1 RCW 82.04.320 was amended in 2021.   The amendment does not impact the issues raised on
       appeal.
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       No. 83563-7-I/2

              After an audit, the Department of Revenue (Department) assessed Envolve

       Pharmacy Solutions, Inc. (Envolve) with unpaid B&O taxes and penalties. The

       Department’s assessment was affirmed by the Board of Tax Appeals (Board). Envolve

       petitioned the King County Superior Court for review of the Board’s decision arguing

       that its activities were “functionally related” to insurance business and therefore exempt

       from B&O tax. The superior court agreed and reversed the Board’s decision. The

       Department appeals. We agree with the trial court and conclude that Envolve’s

       activities were at least functionally related to insurance business on which a premiums

       tax had been paid. We affirm.

                                                          I.

                                                          A.

              Envolve 2 is a subsidiary of Centene Corporation, a publicly traded multi-line

       healthcare enterprise. Centene operates two lines of business: managed care and

       specialty services. The managed care segment provides health plan coverage to

       individuals through government subsidized programs, including Medicaid, CHIP, 3 and

       other publicly funded health programs.

              In 2012, Coordinated Care Corporation (Coordinated Care), another subsidiary of

       Centene, contracted with the Washington State Health Care Authority (HCA) to provide

       services for the Basic Health and Healthy Options programs. Coordinated Care is

       licensed with the Washington Office of the Insurance Commissioner as a Health

       Maintenance Organization, and files and pays Washington’s “premiums and

              2 Envolve was originally known as U.S. Scripts, Inc.   It changed its name to Envolve Pharmacy
       Solutions, Inc. in 2016.
               3 Washington Children’s Health Insurance Program.

                                                       -2-
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       No. 83563-7-I/3

       prepayments” tax imposed under RCW 48.14.0201. Coordinated Care pays a

       premiums tax on the monthly premiums paid by enrollees.

             Under the HCA contract, Coordinated Care must maintain a network of

       pharmacies to provide pharmacy services and pharmacy benefits (PBM) services to

       enrollees. PBM services include, but are not limited to, processing and paying claims to

       pharmacies for drugs dispensed to enrollees, maintaining a list of prescription drugs

       covered under the pharmacy benefit, and conducting drug utilization reviews.

       Coordinated Care contracted with Envolve to fulfill its PBM services required by the

       HCA contract. Envolve’s PBM agreement with Coordinated Care requires Envolve to

       manage the availability and payment of enrollees’ pharmacy benefits on behalf of

       Coordinated Care. Coordinated Care relied on Envolve to provide the pharmacy

       benefits to Coordinated Care’s enrollees. The PBM services performed for Coordinated

       Care were Envolve’s only relevant business activity in Washington during the tax

       periods at issue.

             All of the PBM services provided by Envolve under the PBM agreement were

       required under the HCA contract between Coordinated Care and the HCA. The PBM

       services Envolve must provide on behalf of Coordinated Care include:

             •   Administering and determining the eligibility of persons enrolled in
                 Coordinated Care’s health plan (“enrollees”);
             •   Coordination of benefits; verification of coverage; and record keeping;
             •   Maintaining a network of pharmacies (“Network Pharmacies”) that
                 agree to provide pharmacy services to enrollees under the terms of
                 Envolve’s claims process;
             •   Auditing and credentialing Network Pharmacies to ensure compliance
                 with the HCA Contract and federal, state, and local laws;
             •   Selecting Network Pharmacies at locations and in sufficient number to
                 ensure reasonable access for enrollees;

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       No. 83563-7-I/4

             •   Processing claims from Network Pharmacies, which includes applying
                 Envolve’s concurrent drug utilization review services;
             •   Managing a prescription drug formulary (list of preferred prescription
                 drugs) and collecting rebates from pharmaceutical supplies on behalf
                 of Coordinated Care; and
             •   Providing a 24-hour a day, 7 day a week toll-free telephone line for
                 inquiries regarding the PBM Services provided by Envolve.

             Envolve is not a licensed pharmacy in Washington. Envolve does not provide

       pharmacy services or mail-order pharmacy services to Coordinated Care. HCA

       enrollees fulfill prescription drug orders at network pharmacies, not through Envolve.

       The network pharmacies then compound or purchase prescription drugs and deliver the

       prescription drugs directly to enrollees. Envolve does not purchase prescription drugs

       from network pharmacies or deliver prescription drugs to enrollees. The network

       pharmacies file a claim for services and prescription drugs provided to enrollees, which

       Envolve then processes and arranges for payment on Coordinated Care’s behalf.

       Envolve’s payment structure is in the PBM agreement and is based on a percentage of

       collected amounts or set fees.

                                                  B.

             Envolve filed Washington excise tax returns beginning with the 3rd quarter 2012

       reporting period. Envolve reported and paid B&O tax under the “service and other”

       reporting category.

             In December 2012, a tax representative for Centene submitted a letter ruling

       request to the Department. The request asked whether Medicaid receipts received by

       Coordinated Care and passed on to its affiliates, including Envolve, were subject to

       B&O tax, or exempt from tax under RCW 82.04.320—the insurance business

       exemption.

                                                -4-
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       No. 83563-7-I/5

              In October 2013, the Department issued a letter ruling explaining that the

       affiliates could qualify for the B&O exemption only if they were providing services that

       were “functionally related” to Coordinated Care’s insurance business. The letter

       explained:

              Because the affiliates do not pay a premiums tax, they can qualify for the
              B&O exemption only if they are providing services that are functionally
              related to Coordinated Care’s insurance business. Functionally related
              services are those activities incidental to accomplishing the insurance
              function. Services performed are considered functionally related if they
              relate exclusively to the insurance business that pays the premium taxes.

              Thus, if an affiliate is providing administrative, legal, or other services
              functionally related to Coordinated Care’s insurance business, the
              amounts the affiliate receives from Coordinated Care for those services
              will be exempt from B&O tax to the extent that Coordinated Care paid the
              premiums tax to Washington State.

              After receiving the letter ruling, Envolve filed amended B&O tax returns,

       requesting a refund of $73,263 for July 1, 2012, through September 30, 2013. Envolve

       claimed that all the services provided to Coordinated Care were functionally related to

       Coordinated Care’s insurance business. Envolve requested a refund of all B&O taxes

       paid because Coordinated Care had paid the premiums tax on those receipts.

              The Department denied the requested refund. Expanding on its October 2013

       letter ruling, the Department explained that some services provided by Envolve were

       functionally related to Coordinated Care’s insurance function, and some services which

       were not.

              Functionally related services are those activities incidental to
              accomplishing the insurance function. Services performed are considered
              functionally related if they relate exclusively to the insurance business that
              pays the premium taxes.

                                                 -5-
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       No. 83563-7-I/6

             Administrative services are generally considered functionally related.
             Thus, an affiliate doing administrative services (i.e., HR, claims processing
             and adjusting) will be exempt from paying B&O taxes on the amounts that
             it receives from [Coordinated Care], to the extent that [Coordinated Care]
             paid premiums tax to Washington.

             The function of insurance is to help pay for and cover the costs of health
             care services. Thus, the provision of health care services is not incidental
             to accomplishing this function. Providing health care services is
             independent from providing health insurance.

             [Envolve] provides some administrative services (claims processing,
             adjudicating, etc.) to [Coordinated Care] as a pharmacy benefit manager.
             Any amounts received for these services are exempt from B&O tax.
             These services include: claims processing, determining eligibility of
             recipients, coverage verification, prior authorization, maintaining the list of
             covered drugs, providing a customer service phone line to answer
             questions about the foregoing services and other similar services.
             However, to the extent [Envolve] provides additional services (such as
             maintaining a network of pharmacies, providing mail order pharmacy
             services, selecting network pharmacies, etc.) the amount it receives for
             these services must be included in gross income.

       (Emphasis added.) The refund request denial did not explain how or why the

       Department considered some of Envolve’s activities functionally equivalent and

       some not.

             Following the denial of Envolve’s refund request, the Department audited

       Envolve for the period January 2010 through June 2015. The audits led to two

       assessments totaling over $3.5 million. The audits asserted tax on amounts Envolve

       had received from Coordinated Care and paid to third-party pharmacies. The audits

       noted that Envolve might be able to exclude some of the payments it received under the

       “functionally related” criteria, but needed to prove which funds were for which purposes:

             Therefore, [Envolve] may be able to exclude some amounts it retains as
             an administrative services fee for the administrative services it performs.
             To the extent that [Coordinated Care] is paying the fee for services that
             are functionally related to its insurance business, [Envolve] can exclude

                                                 -6-
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       No. 83563-7-I/7

             the amounts under the B&O exemption for premiums so long as
             [Coordinated Care] pays premiums tax to Washington State for those
             amounts. However, it is the burden of [Envolve] to show which amounts
             are received for providing functionally related services and which are
             received for other services. Additionally, [Envolve] may not exclude any of
             the fees it receives or retains from providing pharmacy benefit
             management services to unrelated third parties.

             Envolve responded by providing documentation related to administrative services

       it provided to Coordinated Care. The Department then revised the assessments,

       explaining:

             [Envolve] was able to provide documentation and information relating to
             employees that provide administrative services (claims processing,
             adjudicating, etc.) to Coordinated Care as a pharmacy benefit manager.
             The amounts received for those services are exempt from B&O tax.
             Pursuant to the audit, [Envolve] provided documentation to substantiate
             employee counts in the administrative services function as well as total
             employee counts. A ratio was then calculated (administrative employees
             divided by total employees) and applied against the total administrative
             services fee to compute the amount subject to Service and Other B&O
             tax. However, the payments to the pharmacies (for ingredient costs and
             dispensing fees) are not excludable from B&O tax under WAC 458-20-111
             as discussed above and those amounts which were erroneously deducted
             to arrive at the tax base on the excise tax returns have been assessed in
             full.

             After the revision, the audits assessed $3,203,762 in unpaid B&O tax, plus

       interest, and 5 percent assessment penalty.

             Envolve sought administrative review of the denial of its refund claim and the

       assessments of underreported B&O tax with the Department’s Administrative Review

       and Hearings Division (ARHD). The ARHD upheld the assessments. ARHD agreed

       with the Department that Envolve was engaged in some activities that were functionally

       related to insurance and some that were not:

             [I]t appears that [Envolve] is engaged in certain “general administrative
             services” like “accounting personnel and data processing” that are

                                                -7-
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       No. 83563-7-I/8

               functionally related to Affiliate MCO’s insurance business. . . . In particular,
               Taxpayer’s administration of eligibility management services, claim
               processing, claims adjudication, benefit coordination, coverage
               verification, and recordkeeping services are all “general administrative
               services” that are similar to the “functionally related” services in Det. 88-
               311A, 2 WTD 293.

               However, [Envolve] is also engaged in a number of activities that do not
               appear to be “functionally related” to Affiliate MCO’s “insurance business,”
               in that they are not “activities incidental to accomplishing the insurance
               function.” The activities that are not “functionally related” include:
               maintaining a network of pharmacy contacts; credentialing of network
               pharmacies; selecting network pharmacies; drug utilization review
               services; quality improvement; managing the prescription drug formulary;
               collecting rebates from pharmaceutical manufacturers; and maintaining
               information data systems.

               Envolve appealed the ARHD decision to the Board. Envolve argued that the

       amounts it received were functionally related to Coordinated Care’s insurance business

       under both the 2013 Letter Ruling and the Department’s published Revenue

       Determination 88-311A, 9 Wash. Tax. Dec. 293 (1990). 4

               After cross motions for summary judgment, the Board agreed with the

       Department and concluded that Envolve failed to establish that it was entitled to avoid

       B&O tax on all its PBM services income. The Board found that Envolve was entitled to

       rely on the Department’s precedent and that any activities that were “functionally

       related” to insurance qualified as “insurance business” activities exempt from B&O tax

               4 RCW 82.32.170 allows taxpayers to petition for determining whether a refund request was

       properly denied. WAC 458.20.100 sets out the Department’s rules for informal administrative reviews,
       including determinations. Under the rule, “[t]he department will make such determination and resolve
       matters as may appear to the department to be just and lawful under its statutory authority.” WAC 458-
       20-100. The Department may publish a determination when: (1) the decision is a well-reasoned
       application of the law to a specific set of facts, (2) the decision addresses only the law and facts
       necessary to resolve the case, (3) the decision is needed to provide guidance on a previously
       unaddressed area of the law, articulate the Department’s current policy, apply the law to a significantly
       different set of facts, overrule a published determination, or provide a better or more current articulation
       on how the law should be interpreted, and (4) the decision can be effectively sanitized, or the taxpayer
       will grant a waiver of the secrecy clause.

                                                          -8-
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       No. 83563-7-I/9

       under RCW 82.04.320. But the Board found that Envolve provides “pharmacy

       services,” which the Board asserted are ”healthcare services” outside the definition of

       insurance and not covered by the functionally related test. Envolve unsuccessfully

       moved for reconsideration.

             Envolve petitioned for judicial review of the Board’s final order with the King

       County Superior Court. The superior court reversed the Board’s order, holding that the

       Department’s prior administration of the statute was consistent with the statutory

       language, and that Envolve’s activities were insurance business activities exempt under

       RCW 82.04.320. The court also held that Envolve was entitled to rely on the

       Department’s letter ruling under RCW 82.32A.020. The trial court’s order required the

       Department to refund the B&O tax Envolve paid on its PBM services income.

             The Department appeals.

                                                   II.

                                                   A.

             The Administrative Procedure Act (APA), ch. 34.05 RCW, governs judicial review

       of the Board’s decision. RCW 82.03.180; RCW 34.05.510. PeaceHealth St. Joseph

       Med. Ctr. v. Dep’t of Revenue, 9 Wn. App. 2d 775, 779, 449 P.3d 676 (2019), aff’d, 196

       Wn.2d 1, 468 P.3d 1056 (2020). This court sits in the same position as the superior

       court, directly reviewing the Board’s decision. Dep’t of Revenue v. Bi-Mor, Inc., 171

       Wn. App. 197, 202, 286 P.3d 417 (2012). The burden of demonstrating the invalidity of

       agency action is on the party challenging the agency order—in this case Envolve. RCW

       34.05.570(1)(a).

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       No. 83563-7-I/10

              We may reverse the Board’s decision if, among other reasons, the agency

       erroneously interpreted or applied the law, the agency’s order is not supported by

       substantial evidence, the order is outside the agency’s statutory authority, or the order is

       arbitrary and capricious. RCW 34.05.570(3). We review issues of law de novo under

       the APA error of law standard which allows us to substitute our view of the law for that

       of the Board. Bi-Mor, 171 Wn. App. at 202.

              The meaning of a statute is a question of law that we review de novo. Durant v.

       State Farm Mut. Auto. Ins. Co., 191 Wn.2d 1, 8, 419 P.3d 400 (2018). Our

       “fundamental objective in determining what a statute means is to ascertain and carry out

       the legislature’s intent.” Durant, 191 Wn.2d at 8. “If the statute’s meaning is plain on its

       face, then courts must give effect to its plain meaning as an expression of what the

       legislature intended.” Durant, 191 Wn.2d at 8. To discern a statute’s plain meaning, we

       consider the text of the provision in question, considering the statutory scheme as a

       whole. Dep’t of Ecology v. Campbell & Gwinn, L.L.C., 146 Wn.2d 1, 11, 43 P.3d 4

       (2002). “We may use a dictionary to discern the plain meaning of an undefined

       statutory term.” Nissen v. Pierce County, 183 Wn.2d 863, 881, 357 P.3d 45 (2015).

                                                       B.

              Envolve argues that the Board erred by concluding that it did not qualify for an

       exemption from B&O tax under the insurance business exemption, RCW 82.04.320. 5

       We agree.

               5 The Department appears to argue on appeal that because Coordinated Care is an HMO it does

       not pay a “premiums” tax under RCW 48.14.020, but pays a premiums and prepayment tax under RCW
       48.14.0201. While the Department is technically correct that Coordinated Care is an HMO and pays a
       premiums and prepayment tax under RCW 48.14.0201, it is a distinction without importance. RCW
       82.04.320 creates an exemption from B&O tax where a tax based on gross premiums has been paid.

                                                     -10-
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       No. 83563-7-I/11

              The B&O tax is imposed “for the act or privilege of engaging in business

       activities” and is measured by the “value of products, gross proceeds of sales, or gross

       income of the business, as the case may be.” RCW 82.04.220(1). The tax is intended

       to reach “virtually all business activities carried on within the state” and “applies unless a

       specific exemption exists.” Avnet, Inc. v. Dep’t of Revenue, 187 Wn.2d 44, 66, 384

       P.3d 571 (2016); Dot Foods, Inc. v. Dep’t of Revenue, 185 Wn.2d 239, 245, 372 P.3d

       747 (2016). One such exemption is the “insurance business” exemption in RCW

       82.04.320. The exemption provides that “any person in respect to insurance business

       upon which a tax based on gross premiums is paid to the state” is exempt from paying

       the B&O tax.

              The Department first argues that RCW 82.04.320 does not apply as a matter of

       law because Envolve itself did not pay the premiums tax. This view, however,

       contradicts the plain language of the statute. The exemption in RCW 82.04.320 applies

       to “any person in respect to insurance business upon which a tax based on gross

       premiums is paid to the state.” (Emphasis added.) The statute does not require that

       the entity claiming the exemption must be the same entity that paid the premiums tax.

       Instead, the question is whether Envolve was performing “insurance business” on which

       a premiums tax was paid.

              The term “insurance business” is not defined in the state tax code. See ch. 48.01

       RCW; ch. 48.05 RCW. The Department argues, and the Board appeared to agree, that

       Envolve provided “heathcare services” and not insurance benefits. This is based on the

       The Department does not contest that Coordinated Care paid such a premium tax. The argument also
       appears new on appeal. The Department’s audits, the ARHD determination, and the Board’s decision, all
       addressed RCW 82.04.320 and RCW 48.14.020.

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       No. 83563-7-I/12

       Department’s contention that insurance business is limited to only administrative duties

       such as issuing contracts and collecting premiums. Envolve, on the other hand, argues

       that insurance business should be read broadly enough to include the business of

       carrying out the PBM services required under the HCA contract. 6 We agree with

       Envolve.

               A fair reading of “insurance business” in RCW 82.04.320 includes more than the

       administrative tasks of issuing contracts and collecting premiums. It includes the

       activities necessary or incidental to fulfilling the requirements of the insurance contract.

       Indeed, since at least 1990, the Department has applied a “functionally related” test to

       interpret the extent of “insurance business”:

              For purposes of RCW 82.04.320, the insurance business includes not only
              those activities specifically regulated under Title 48 RCW, but those which
              are functionally related as well. . . . Revenue generating activities which
              are considered functionally related to a taxpayer’s insurance business are
              those activities incidental to accomplishing the insurance function.

       Revenue Determination No. 88-311A, 9 Wash. Tax. Dec. 293, 297-98 (1990). The

       Department’s 2013 letter ruling to Centene was consistent with Revenue Determination

       No. 88-311A.

              We agree with the trial court that the “functionally related” test adopted in

       Revenue Determination No. 88-311A is a reasonable interpretation of the term

       “insurance business” within RCW 82.04.320, and consistent with the plain language of

               6 The Department also argues that Envolve is not an “authorized insurer,” under RCW

       48.05.030(1) and if it were, it would have to pay a premiums tax under RCW 48.15.020. The
       Department’s argument misses the point—while Envolve may not be an “insurer,” Coordinated Care is,
       and Coordinated Care pays a premium tax based on fulling the duties under the HCA contract, including
       PBM services. Envolve, by contract, is carrying out Coordinated Care’s obligations under the HCA
       contract.

                                                      -12-
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       No. 83563-7-I/13

       the statute. 7 Consistent with Revenue Determination No. 88-311A, we hold that where

       activities are required to be performed under the insurance contract in exchange for

       premium payments, and a tax is paid on those premium payments, the activities are at

       least functionally related to “insurance business” under RCW 82.04.320. 8

               There is no dispute that under the HCA contract, Coordinated Care must

       maintain a network of pharmacies to provide PBM services and benefits to enrollees.

       There is also no dispute that if Coordinated Care performed the PBM services required

       under the HCA contract, it would be exempt from B&O tax under RCW 82.04.320. And

       finally, there is no dispute that Coordinated Care contracted with Envolve to fulfill the

       PBM services required by the HCA contract. Requiring Envolve to pay a B&O tax for

       performing services required under the HCA contract, where Coordinated Care already

       paid a premium tax, would result double taxation—contrary to the intent of the

       exemption. Grp. Health Coop. v. Dep’t of Revenue, 8 Wn. App. 2d 210, 214-19, 438

       P.3d 158 (2019).

                Envolve performs PBM services—services required under the Coordinated

       Care’s HCA contract. Envolve was required to maintain a network of pharmacies,

                7 The Department withdrew Revenue Determination No. 88-311A in 2019 stating it was wrongly

       decided. The Department now takes the position that, to be eligible for the exemption, the taxpayer itself
       must be subject to the insurance premiums tax. But neither party is arguing that the functionally related
       test in Revenue Determination No. 88-311A does not apply here. And the Board concluded that Envolve
       had the right to have its tax liability determined using that standard for the tax periods at issue.
       Washington’s Taxpayer Bill of Rights grants taxpayers the “right to rely on specific, official written advice
       and written tax reporting instructions from the department of revenue to that taxpayer, and to have
       interest, penalties, and in some instances, tax deficiency assessments waived where the taxpayer has so
       relied to their proven detriment.” RCW 82.32A.020(2). The Board correctly held that Envolve was
       entitled to rely on the letter ruling. The only question is thus whether the Board properly applied the
       functionally related test to those tax periods at issue.
                8 See also RCW 48.01.060 (3)-(4) (defining “insurance transaction” to include the “execution of an

       insurance contract” and “[t]ransaction of matters subsequent to execution of the contract and arising out
       of it.”

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       No. 83563-7-I/14

       process claims from network pharmacies, audit pharmacies to ensure compliance with

       the HCA contract, and administer and determine eligibility of persons enrolled in

       Coordinated Care’s health plan. Because these activities are required under the HCA

       contract and, if performed by Coordinated Care, would be considered insurance

       business activities, it is unreasonable to claim these actions are not at least functionally

       related to the insurance business.

                                                    C.

              The Department relies on Rena-Ware Distribs., Inc. v. State, 77 Wn.2d 514, 518,

       463 P.2d 622 (1970), Armstrong v. State, 61 Wn.2d 116, 377 P.2d 409 (1962), and

       Express Scripts, Inc. v. Dep’t of Revenue, 8 Wn. App.2d 167, 437 P.3d 747 (2019), in

       support of its argument. Each case is either not applicable or distinguishable.

              The Department relies on Rena-Ware, for the proposition that affiliated

       businesses, although owned by a common parent, remain separate entities for tax

       purposes. 77 Wn.2d at 518. Thus, the Department contends, Envolve cannot justify

       claiming an exemption because one of its sister companies can rightfully claim an

       exemption. But contrary to the Department’s representation, Envolve is not claiming the

       insurance business exemption because its corporate affiliate is exempt. Instead,

       Envolve claims that it is exempt under RCW 82.04.320 because its activities providing

       PBM services to Coordinated Care are at least functionally related to “insurance

       business upon which a tax based on gross premiums.” Envolve’s contract with

       Coordinated Care is not dependent on its corporate affiliation with Coordinated Care.

              The Department relies on Armstrong, for the proposition that the purpose of the

       insurance business exemption in RCW 82.04.320 is to prevent imposing a premium tax

                                                 -14-
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       No. 83563-7-I/15

       and B&O tax on the same premium income, not to permit a person that pays no

       premium tax to avoid the B&O tax. Armstrong addressed the proviso in RCW 82.04.320

       excepting those representing insurance companies, including agents and brokers, from

       the insurance business exception. The appellant challenged the proviso arguing that

       allowing the exemption for insurance company branch offices, but not independent

       agents or brokers violated equal protection. 9 Armstrong, 61 Wn.2d at 117-18. As the

       court explained, its duty was to “sustain the classification adopted by the Legislature if

       there are substantial differences between the occupations separately classified.”

       Armstrong, 61 Wn.2d at 120. The court concluded that because independent agents

       were sufficiently different from insurance companies, the differential tax treatment was

       justified.

               This case does not concern the proviso—it concerns the exemption. The

       Armstrong court did not address, or hold, that applying the insurance business

       exemption to amounts received by a contractor performing activities required under the

       terms of the insurance contract would conflict with the intent of the exemption.

       Armstrong does not apply.

               The Department relies on Express Scripts to argue that because Envolve is a

       PBM manager, it is subject to the B&O tax on its in-state service activities. Express

       Scripts concerned an out-of-state PBM manager (ESI) that had a variety of clients

               9 In 1962, RCW 82.04.320 provided:

               Exemptions—Insurance business. This chapter shall not apply to any person in respect
               to insurance business upon which a tax based on gross premiums is paid to the state:
               Provided, That the provisions of this section shall not exempt any person engaging in the
               business of representing any insurance company, whether as general or local agent, or
               acting as a broker for such companies.

       Armstrong, 61 Wn.2d at 117, n.2.

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       No. 83563-7-I/16

       including HMOs, health insurers, third-party administrators, employers, and government

       health care plans. At issue was whether ESI was subject to B&O tax for payments it

       received from clients for the value of prescription drugs. ESI argued that the payments

       from clients for the value of the prescription drugs or ingredients were “pass-through”

       funds moving from its clients, through ESI, to the pharmacies. Express Scripts, 8 Wn.

       App. 2d at 171-172. Division Two of this court disagreed, concluding that “ESI does not

       act as a mere ‘pass-through’ agent for its clients. Rather, the compensation ESI

       receives from its clients for the value of the prescription drugs is an integral part of ESI’s

       business model for its PBM services.” Express Scripts, 8 Wn. App. 2d at 174. While

       the court concluded that ESI owed B&O taxes for its PBM services, the court did not

       address, or discuss, the insurance business exemption in RCW 82.04.320. Express

       Scripts does not support the Department’s position.

              Envolve’s PBM activities under its contract with Coordinated Care are at least

       functionally related to “insurance business upon which a tax based on gross premiums

       [was] paid to the state.” RCW 82.04.320. We affirm the superior court’s order reversing

       the Board’s decision.

              Affirmed.

       WE CONCUR:

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