By Sen. Judy Ward (R-30), Sen. Christine Tartaglione (D-2), Rep. Jessica Benham (D-36) and Rep. Valerie Gaydos (R-44)

It’s hard to believe that right now, in the 21^st century, countless Pennsylvanians are losing access to affordable prescription drugs. But that’s exactly what’s happening as more and more community pharmacies are being forced to close their doors due to the little-known role pharmacy benefit managers (PBMs) play in our health care system.

Because of PBMs, our commonwealth’s community pharmacies are faced with Medicaid reimbursement costs that do not cover the expenses incurred to purchase drugs. For some of our pharmacies, this challenge threatens their very survival.

PBMs were created with the best intentions to negotiate pricing with drug companies for prescription drugs through Medicaid to lower costs. But today, three PBMs — CVS Caremark, Express Scripts and Optum Rx — control 80% of the marketplace. With the big three in place, Pennsylvania’s Medicaid spend on the pharmacy benefit has drastically increased, from $1.41 billion in 2013 to $3.7 billion now annually, according to the National Community Pharmacy Association (NCPA).

In February, Mainline Pharmacy announced PBM pricing was forcing the closure of nine of its pharmacies in the greater Pittsburgh region across several counties, including Blair, Cambria and Westmoreland. This happened despite a record year for filling prescriptions because they lost $350,000 in the first six weeks of this year from PBM underpayments. Philadelphia lost several community pharmacies in underserved communities, including the 18^th Street Apothecary and Haussemann’s Pharmacy.

We’re seeing this issue repeated across the commonwealth and the nation. The University of Pittsburgh has created a website (ActForPharmacy.com) that tracks community pharmacy closures and provides a sobering view of the challenges Pennsylvania community pharmacies face in staying open — and of Pennsylvanians who desperately need their prescriptions. 

That’s why we’re sponsoring bipartisan legislation in the state House (House Bill 1993) and Senate (Senate Bill 1000) to stop this vicious cycle and bring transparency to the process. Transparency is critical to solving this problem because no one really knows how much PBMs are making at the expense of Pennsylvania’s dedicated community pharmacies and their patients.

We’re pleased the need for PBM reforms was cited by Gov. Josh Shapiro in his recent state budget address. Our legislation will direct the state Insurance Department to develop a process for hearing and resolving pharmacy complaints against a PBM. It also will require PBMs to report financial information on rebates and payments received from drug manufacturers and how those rebates and payments were distributed by the PBM. In addition, the legislation will limit or ban several practices by PBMs, including patient steering and spread profit schemes. 

 The time to enact comprehensive PBM reform is now. Nationally, the issue is taking center stage. A recent White House roundtable on lowering health care costs and bringing transparency to prescription drug middlemen included Pennsylvania pharmacist Dr. Chichi Ilonzo Momah, CEO and founder of Springfield Pharmacy in Delaware County. Speaking for community pharmacists, Dr. Momah detailed what’s happening to community pharmacists and the negative impact PBMs have on the Pennsylvania patients they serve.

Also at the roundtable was billionaire philanthropist Mark Cuban, a co-host of Shark Tank and owner of the NBA’s Dallas Mavericks. An outspoken critic of PBMs, Cuban has formed Cost Plus Drug Company, which provides complete price transparency from manufacturing to prescription delivery.

Let’s stop the needless closure of any more community pharmacies. Pennsylvania has the ability to better protect our commonwealth’s pharmacies, which are vital to their communities through the jobs they create and Pennsylvania families who depend on them for their prescription medications.

Republican Sen. Judy Ward represents Blair County and Democrat Christine Tartaglione represents parts of Philadelphia. Democratic Rep. Jessica Benham and Republican Rep. Valerie Gaydos represent parts of Allegheny County.

Sources:

Mainline closing: https://www.wtae.com/article/mainline-pharmacy-closing-harrison-city-blairsville/46853558

Mainline Pharmacy to close 9 stores

Map of pharmacy closures: https://www.actforpharmacy.com/pharmacy-closures

Legislation: https://www.legis.state.pa.us/cfdocs/billInfo/billInfo.cfm?sYear=2023&sInd=0&body=S&type=B&bn=1000

Statistics:https://ncpa.org/sites/default/files/2023-02/medicaid-managed-care-reform-2-pager_0.pdf

White House:https://www.whitehouse.gov/briefing-room/statements-releases/2024/03/05/readout-of-white-house-roundtable-on-lowering-healthcare-costs-and-bringing-transparency-to-prescription-drug-middlemen/

Media Contact: Nathan Akers
717-787-2421

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Sales tax on food and beverages can be complicated. While five states do not have a sales tax (Alaska, Delaware, Montana, New Hampshire, and Oregon), the rules in states that do impose a sales tax can vary. Sometimes, all it takes is an add-on or leaving the premises to cause an item to go from nontaxable to taxable (and vice versa). In a recent Pennsylvania sales tax case, the question came down to carbonation.

Facts

On June 1, 2019, Jennifer Montgomery purchased a single 16-ounce bottle of Perrier from Sheetz.

(For the uninitiated, Sheetz is a chain of convenience stores—most of which also sell gas—owned by the Sheetz family. What started as a one-store operation in western Pennsylvania in the 1950s is now a 700+ store enterprise in several states. Importantly, as a resident of eastern Pennsylvania, it’s incumbent upon me to mention that, for decades, a Sheetz vs. Wawa debate has raged in the Keystone State. That question wasn’t resolved in this court action but has been resolved for many in the court of public opinion.)

On June 14, 2019, Montgomery purchased another bottle of Perrier from Sheetz. Sheetz collected and remitted a total of 24 cents in sales tax each time. Afterward, Montgomery filed refund petitions with the Pennsylvania Department of Revenue Board of Appeals (Department) seeking a refund of sales tax based upon her belief that Perrier is natural mineral water and not subject to sales tax in the Commonwealth.

(Montgomery also initiated a class action complaint against Sheetz in the Court of Common Pleas of Allegheny County, alleging the same. The class action was stayed pending the Department’s decision.)

On October 31, 2019, the Department issued a decision and order denying Montgomery’s refund petitions. The Department concluded that Perrier is carbonated water and subject to sales tax.

Montgomery appealed the decision to the Board, which affirmed the denial of the refund petitions on a different basis.

Law & Guidance

Under Pennsylvania tax law, a six percent sales tax is imposed at retail of tangible personal property.

The tax law also excludes “the sale at retail or use of water” (as a public policy note, water is considered a necessity). The exclusion does not apply to soft drinks. Soft drinks are defined as “[a]ll nonalcoholic beverages, whether carbonated or not, such as soda water, ginger ale, coca cola, lime cola, Pepsi cola, Dr. Pepper, fruit juice when plain or carbonated water, flavoring or syrup is added, carbonated water, orangeade, lemonade, root beer or any and all preparations, commonly referred to as ‘soft drinks.’”

The Department also issues informal guidance, such as statements of policy. One of those statements focused on the taxation on the sale and preparation of food and beverages provides that a soft drink is a “nonalcoholic beverage, in either powder or liquid form, whether or not carbonated, such as soda water, ginger ale, colas, root beer, flavored water, artificially carbonated water, orangeade, lemonade, juice drinks containing less than 25% by volume of natural fruit or vegetable juices, and similar drinks. The term does not include fruit and vegetable juices containing at least 25% by volume of natural fruit or vegetable juice. The term does not include coffee, coffee substitutes, tea, cocoa and milk or non-carbonated drinks made from milk derivatives.”

The guidance also makes clear that soft drinks are subject to sales tax.

Montgomery’s Argument

Montgomery argued that Perrier is excluded from sales tax because it is natural mineral water. She claimed that other guidance, including the statement of policy, is unambiguous that water, including natural mineral water, is not subject to sales tax. She argues that “there is no dispute that Perrier is a sparkling natural mineral water.”

She also claimed that the Department’s informal guidance clarifies that all non-flavored mineral water is exempt from tax and does not distinguish between carbonated and non-carbonated mineral water. She claims that it is well settled that the exclusionary provision must be construed against the Commonwealth and in favor of the taxpayer. That would mean, she argued, that Perrier is sparkling natural mineral water, not carbonated water, and is excluded from sales tax.

Montgomery also argued that Perrier does not qualify for sales tax as a soft drink because it is not artificially carbonated. Noting that the definition in the statement of policy includes “artificially carbonated water,” Montgomery urged the Court to conclude that Perrier contains natural carbonation and is exempt from tax.

Commonwealth’s Arguments

The Commonwealth argued that Perrier is not exempt from tax as water, but is carbonated water. That means, they said, that it falls squarely within the definition of soft drink and is subject to sales tax.

The term “carbonate” means “to combine or infuse with carbon dioxide.” The Commonwealth maintained that Perrier is carbonated water because it is manufactured by combining a specific amount of filtered or scrubbed carbonic gas with still water in an industrial plant setting. The Commonwealth further argued that the process used to carbonate Perrier is the same process used to carbonate Coca-Cola
Coca-Cola
and Pepsi, making it a soft drink.

Finally, the Commonwealth alleged that because Montgomery didn’t have statutory support for her argument, she improperly relied on the statement of policy and other sources—none of which, they claim, supports a finding that Perrier is exempt from tax. The statutory language makes no qualifications for naturally or artificially carbonated water. Instead, the tax laws simply provide that carbonated water, whether naturally or artificially carbonated, is subject to sales tax. That means, the Commonwealth says, even if the Court concludes that Perrier is “naturally carbonated water,” it is still not exempt under the plain language of the law.

Discussion

Judge Wolf says the arguments “bubble down to one question”—whether Perrier is water and exempt from sales tax.

The Court agrees that the tax law unambiguously exempts the sale at retail of water from sales tax. However, the Court disagreed that Perrier qualifies as water.

The Court then offered a science—and geography lesson—of its own, finding:

• Perrier is sourced from non-flavored mineral water.
• Perrier comes from underground natural springs near the village of Vergeze in Provence, France.
• The water in the natural springs from which Perrier is collected is naturally carbonated.
• Perrier’s carbonic gas and water are independently harvested from different depths within the same geologic formation.
• The carbonic gas and water in Perrier, collected from natural springs, are combined at the bottling plant.
• Before the combination, the water in Perrier is chilled, all of the air is removed (a process called deaeration,) and any carbonation is stripped out.
• Before carbonation, filters or scrubbers remove natural elements and impurities in the carbonic gas and ensure a consistent carbonation level.
• Similarly, before the combination, impurities are removed from the water.
• The water then goes through one of two processes—either a carbonated tank or an in-line carbonation process—where carbonic gas is added to the water and the carbonation levels are adjusted to reach the desired amount for the product.
• The processes used are the same as those for making soft drinks like Coca-Cola and Pepsi. There is no alternative process for carbonating beverages.
• Following these processes, the product is bottled for sale.

The Court found that when a consumer purchases a bottle of Perrier, the non-flavored mineral water has carbonation.

A finding that mineral water with carbonation is not carbonated water “flies directly in the face of the plain language of the Code,” which treats water and carbonated water differently for sales tax purposes. Perrier, they ruled, is carbonated water as a matter of law and is subject to sales tax as a soft drink.

The Court also rejects Montgomery’s argument that only artificially carbonated water may be taxed as a soft drink. The definition of soft drink in the Code does not contain any natural or artificial qualifications, so Judge Wolf wrote that the argument “does not hold water in the face of the clear and unambiguous statutory language.”

Conclusion

This sort of analysis is often necessary to parse complicated sales tax laws. The taxability (or not) can often turn on something as simple as it did here: bubbles.

In this case, the Court concluded that Perrier is carbonated water and subject to sales taxation as a soft drink. So, drink up, Pennsylvania—just be prepared to pay tax if you’re craving a Perrier.

(Don’t you feel smarter already?)

The case is Jennifer Montgomery v. Commonwealth of Pennsylvania (No. 336 F.R. 2020).