A Federal Court Overturns Lower Court and Allows New York to Require Drug Companies to Pay Tax to Cover the Costs of the Opioid Epidemic.

By Brian Skinner, Esq.

This week a federal appeals court granted New York permission to implement an opioid tax on the manufacturers and distributors of prescription painkillers in a ruling that will enable the state to collect hundreds of millions of dollars.

In 2018, New York approved the Opioid Stewardship Act which required all pharmaceutical manufacturers and wholesalers who sell or distribute prescription opioids in the state to collectively pay $100 million a year. The amount to be paid per company would be determined by the market share of sales.

Associations representing pharmaceutical drug companies sued the state and a federal district judge struck down the law, ruling that the law violated the U.S. Constitution’s prohibition on state regulation of interstate commerce.

The 2nd U.S. Circuit Court of Appeals overturned that ruling Monday, finding that the state legislature “is entitled to require an industry to pay a tax to support public programs designed to address a widespread problem caused by the industry.”

The Opioid Stewardship Act required drug companies to pay $100 million annually for six years, with the money earmarked for programs that would help combat the opioid epidemic, including drug treatments, recovery, prevention and education services. Lawmakers amended the law in 2019, creating a different tax system for prescription opioids, so the court ruling indicates the payments would only apply to opioid sales made through Dec. 31, 2018.

The opioid epidemic cost New York $200 million in 2017 alone, according to the litigation.

An estimated 130 people die every day in the United States from opioid-related overdoses, according to the Centers for Disease Control and Prevention. And thousands of cities, counties and states have sued drug companies in an effort to recoup losses from battling the opioid epidemic.

While some have reached multi-million-dollar settlements with drug companies, negotiations are ongoing in a sprawling multi-district litigation, and  consolidated lawsuits have been filed by more than 2,000 local governments.

As litigation against drug companies drags on, states have begun to pursue other avenues—like opioid taxes—to collect money to help pay for drug abuse treatment. To deter opioid use and defray some of the costs resulting from the abuse of both prescription and illicit opioids, state legislatures have been considering laws that impose a tax or substantial fee on opioid manufacturers and distributors.

To date New York, Delaware, Minnesota, and Rhode Island have enacted these measures, and over 15 states have considered similar legislation during the last three years. The enacted measures (and a number of the proposals) take different approaches to the nature and structure of the tax, which means that the compliance demands, and approaches required of taxpayers are also likely to differ. The purpose of this article is to review the laws in these three states and to offer some observations on the compliance requirements facing taxpayers.

The approaches taken by the states in the enacted measures and proposals from 2017- 2019 include excise taxes, value-based taxes, gross receipts taxes, and substantial license fees. In Delaware, a per-pill tax on prescription opioids that was adopted in 2019 had generated almost $1 million as of March. Minnesota lawmakers passed legislation last year that levied an annual $250,000 registration fee on drug manufacturers that sold or distributed more than 2 million opioid pills. The first registration fees were due in March. Rhode Island also approved an Opioid Stewardship Fund that assesses a $5 million yearly fee to manufacturers and distributors who sell opioid products in the state.

Several states have introduced legislation. Among the measures considered but not enacted are:

• Iowa: Gross receipts tax of 5% on Schedule II controlled substances sold at wholesale to a practitioner.
• Kentucky: Excise tax of $1 per dose on wholesale opioid distributors and mail- order pharmacies for each dose distributed or dispensed in the state.
• Pennsylvania: Tax on the first sale of an opioid in the state at a rate of 10% of the purchase price charged to the initial buyer.
• Tennessee: Excise tax of 10 cents per prescribed opioid pill dispensed in the state.
• Vermont: An annual levy of $3.1 million to be apportioned among manufacturers based on the proportion of total morphine milligram equivalents (MME) dispensed in the state as determined by the state.

In West Virginia, during the 2020 regular legislative session, Senate Democrats introduced two bills designed to both deter opioid use and defray the costs of the state’s response to the opioid drug crisis. Senate Bill 622 (Prezioso, Baldwin, Beach, Ihlenfeld, Jeffries, Lindsay, Plymale, Romano, and Stollings) would impose a tax on wholesale opioid distributors and mail-order pharmacies at the rate of one cent per dose distributed or dispensed to persons located in this state to fund an Addiction and Neonatal Addiction Care Fund, an Opioid Drug Taskforce Fund, a Drug Courts Fund, and an Opioid Education Fund.

Senate Bill 763 (Prezioso, Baldwin, Beach, Ihlenfeld, Jeffries, Lindsay, Romano, Stollings, and Facemire) would require the submission of opioid medication distribution information and authorizing an opioid manufacturer medication registration fee of $55,000 and an opioid medication product registration fee annual registration fee of $250,000. The fees would be paid to the Opioid Use Disorder Prevention and Treatment Fund to be used for evidence-based behavioral health treatment or medically assisted treatment for inmates with opioid addiction or other substance abuse disorders; opioid use disorder prevention services; and opioid use disorder treatment services.

As noted in Governor’s Council on Substance Abuse Prevention and Treatment’s West Virginia 2020-2022 Substance Use Response Plan, no state has been as profoundly affected by the substance use epidemic as West Virginia. From 2014 to 2017, the drug overdose death rate in West Virginia increased from a rate of 35.5 per 100,000 to 57.8 per 100,000, far exceeding any other state in the nation. In 2018, West Virginia providers wrote 69.3 opioid prescriptions for every 100 persons, compared to the average U.S. rate of 51.4 prescriptions. This was among the top ten rates in the U.S. that year; however, it was also the lowest rate in the state since data became available in 2006. West Virginia saw drug overdose deaths involving opioids totaled 702 (a rate of 42.4) in 2018—a decline compared to the 833 deaths (a rate of 49.6) in 2017.

The substance use epidemic is also an economic problem costing the state an estimated $8.8 billion a year, at least one-eighth of the state’s total economy. Cost is based on spending on health care and substance use treatment, criminal justice costs, societal burden of fatal overdoses, and lost worker productivity. This translates into a per captia economic burden of $4,793 per resident. The economic impact of productivity loss for non-fatal substance use disorders has a reported cost of $316 million dollars and 1,206 jobs to the state, while the economic impact of productivity loss due to overdose fatalities carries an additional cost of $322 million and 5,905 jobs. The impact is also seen in a 12% economic drag on the state’s Gross Domestic Product (GDP), more than double that of the next highest state of Maryland where substance use disorder related costs consumed 5.4% of its GDP. Overall, this crisis has caused a void in West Virginia’s economy of nearly $1 billion.

Those who oppose these new taxes and fees argue that they will not reduce the supply of prescription opioids on the market. Instead, the group argues the taxes will just inflate healthcare costs. Tax policy experts not only doubt whether opioid taxes would discourage the use of prescription opioids but will impose unwarranted costs on those who legitimately need the drugs. Furthermore, as opioid prescribing has slowed down in response to greater scrutiny of the industry, many of those abusing opioids have turned to illegal drugs such as fentanyl or heroin. As a result, prescription opioid taxes may have no effect on illegal drug users, but instead could increase the cost of prescription painkillers for people who have a legitimate medical need for them.

West Virginia continues to deal with both the personal and economic costs associated with the abuse of prescription opioid drugs. Just this August, the attorney general sued Walmart and drugstore chain CVS on Tuesday, asserting that they failed to monitor and report suspicious orders of prescription painkillers to their retail pharmacies in a state ravaged by the opioid epidemic. Because extensive resources will be necessary to adequately address this crisis for decades to come, it is likely that the West Virginia legislature will again consider legislation to cover the costs associated with the abuse of prescription and illicit opioids.

Brian is the former counsel to the West Virginia House of Delegates Judiciary Committee and counsel to the West Virginia Senate Minority Caucus. He was also general counsel to the West Virginia State Health Officer and Commissioner for the Bureau for Public Health. He has almost two-decades of experience as a strategic advisor and chief legal counsel to both executive and legislative branch public officials.