Appeals Court ruling supports MA organization request for refund of B&O taxes paid on premiums

On April 1, 2019, the Washington Court of Appeals Division 1 ruled unanimously in a published opinion that premiums received by Medicare Advantage (“MA”) organizations from or on behalf of their members are not subject to Washington’s business and occupation (“B&O”) tax. Grp. Health Coop. v. Dep’t of Rev., No. 79091-9-1 (Wn. Ct. App. Apr. 1, 2019).

Washington’s B&O tax is imposed broadly on gross receipts but incorporates numerous exemptions, including an exemption for “premiums or prepayments that are taxable under RCW 48.14.0201 [Washington’s premium tax].” RCW 82.04.322. MA premiums are not subject to Washington’s 2% tax, which includes an exemption for Medicare premiums. RCW 48.14.0201. The Washington State Department of Revenue (“DOR”) has imposed B&O tax on MA premiums, reasoning that their exemption from the premium tax renders them ineligible for the exemption under the B&O tax.

Group Health Cooperative and Group Health Options, Inc. (collectively, “Group Health”) applied for a refund of the B&O tax imposed on its MA premium payments, asserting that MA premiums were exempt from the state’s B&O tax, or alternatively that the B&O tax on MA premium payments was preempted by federal law. The complaint was summarily dismissed in trial court. The court of appeals agreed with DOR’s interpretation of state law holding that MA premiums are not exempt from B&O tax, but reversed the lower court on the issue of federal preemption.

A federal law enacted with the Balanced Budget Act of 1997 provides that “no State may impose a premium tax or similar tax with respect to [MA premiums].” 42 U.S.C. § 1395w-24(g). The appeals court agreed with Group Health that this language preempts state law imposing B&O tax because the B&O tax shared key characteristics with, and thus is similar to, a premium tax. First, this is a case of DOR imposing the B&O tax on premiums, just like an explicit premium tax. Second, both the B&O tax and the premium tax are assessed on a gross basis. In holding that federal law preempts DOR from implementing a B&O tax on MA premiums the court stated that Group Health was entitled to a refund of the B&O taxes previously paid.

It is unclear at this time whether the DOR will try to appeal to the Washington Supreme Court, and whether that court will accept the case for review. Regardless, as a result of this decision, any MA organization that has paid B&O tax on their MA premiums in Washington should immediately seek assistance in requesting a refund from the DOR. MA organizations should not wait to see if the matter is further appealed and should act now to preserve any potential refund claim.