In a recent decision, the Ohio Board of Tax Appeals (“BTA”) found in favor of the taxpayer, a pharmaceutical manufacturer, holding that Ohio’s Commercial Activity Tax (“CAT”) base should include only amounts actually received by the manufacturer in connection with its sale of prescription drugs rather than the list price, emphasizing substance over form and economic realities. Perrigo Sales Corporation v. Patricia Harris, Tax Commissioner of Ohio, Case No. 2024-485 (Oct. 9, 2025).
The Facts: Perrigo Sales Corporation (“Perrigo”) manufactures and sells pharmaceuticals and other healthcare products. For prescription drugs, Perrigo contracts directly with retailers like CVS or Walgreens to supply drugs at an agreed-upon price. The drugs are distributed to the retailers through wholesale distributors who honor those contracts. When Perrigo ships the drugs to the distributors, it initially invoices them at a wholesale acquisition cost (“WAC”), but neither party expects the WAC to reflect the actual price to be paid to Perrigo. When distributors sell to the retailers at the contract price, the distributor submits a chargeback to Perrigo for the difference between the WAC invoice and the negotiated retail contract price. The chargeback is typically processed within 48 hours, and Perrigo ultimately receives only the net amount from the wholesaler, i.e., the WAC less the chargeback. Perrigo’s accounting and tax reporting recognize revenue on the net basis, with accruals for anticipated chargebacks that are approximately 99 percent accurate.
In audits covering multiple periods, the Tax Commissioner assessed CAT against Perrigo using the WAC invoice amounts, treating chargebacks as expenses rather than price adjustments. Perrigo challenged the assessments, arguing that it never realized the WAC and that chargebacks reduced the actual sales price paid.
At the hearing before the BTA, Perrigo’s former Senior Director of Global Tax Controversy
testified that Perrigo never realizes the WAC, wholesalers remit only the net price after chargebacks, and the chargebacks are not separate payments or expenses, but offsets deducted from the wholesaler’s payment. He explained that Perrigo records revenue under GAAP based on the net amount received and that the company’s federal tax returns and financial statements also reflect such treatment.
The Decision: The BTA began its analysis by explaining that the CAT is a privilege of doing business tax measured by gross receipts. “Gross receipts” are defined as “the total amount realized by a person, without deduction for the cost of goods sold or other expenses incurred, that contributes to the production of gross income of the person.” R.C. 5751.01(F)(1). The BTA found that the chargebacks are not deductible expenses but rather price adjustments that reduce the original invoice amount. “Since Perrigo never actually receives the WAC, there is nothing to deduct.” The BTA credited Perrigo’s evidence that it never received the WAC invoiced to the distributors.
The BTA further discounted the Commissioner’s emphasis on the timing of the chargeback (after the original invoice was issued) as elevating form over substance. Instead, the BTA looked to the economic reality that Perrigo only ever received the adjusted sales price and not the full WAC. The BTA found that “[b]ecause the WAC is, in substance, an accounting placeholder, the chargeback reduction is not an expense but rather the accounting mechanism to establish the actual purchase price, i.e., the gross amount realized.”
The Takeaway: At its core, the case poses what seems to be a common‑sense question: can amounts be “receipts” when they are not received? As shown in the Perrigo decision, courts generally prioritize substance over form, focusing on economic realities rather than accounting placeholders. Moreover, clear evidence and consistent treatment across GAAP financial reporting and tax filings may be outcome‑determinative in cases. Companies should ensure contracts, systems, and records clearly and accurately reflect business realities.
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