Oregon’s Commercial Activity Tax Decreases Access to Healthcare, Hurts Pharmacies and Communities
Joshua Free, PharmD, MBA
Chairman, The Oregon Pharmacy Coalition
1/12/2021
The Oregon Pharmacy Coalition encourages you to contact your elected officials about this issue. Prescription drugs from your pharmacy shouldn’t be subject to this tax, and drug companies shouldn’t be able to pass on their share to pharmacies. Find your legislator by clicking here, and you can use our handy template letter by clicking here.
Imagine trying to survive when you’re being taxed on the air you breathe. That’s what’s happening to Oregon businesses under the Corporate Activity Tax (CAT), and it’s hurting access to healthcare in rural areas especially. Oregon’s CAT exacerbates financial challenges for pharmacies and remains in place with very few exemptions despite the state’s current revenue surplus of $1.9 billion, triggering the tax surplus kicker.
For businesses subject to the Oregon CAT, they must first have commercial activity greater than $750,000—not-profit, but top line revenue. Originally the threshold was $1,000,000, but this was lowered in 2020, subjecting many more small businesses to this tax. The actual tax rate is $250.00 plus 0.57% of their “taxable commercial activity,” with allowance for subtracting 35% of certain costs. For a typical retail pharmacy, this could pay the wages of a pharmacy technician.
For Oregon’s pharmacies, who are now getting crushed under the weight of the COVID pandemic without ability to attract let alone afford more staff, this has become a burden too great to bear. To be fair, there are many other economic challenges in pharmacy that need addressed—a long standing issue with Pharmacy Benefit Managers is chief among them. Prescription wait times can be days in some areas, which in any normal market would trigger competitors to move in. Not so in pharmacy, as the already challenging economics are made even worse under Oregon’s CAT. No businessperson looks at this market and sees opportunity, leading to pharmacy deserts across the country.
Consider the underlying premise of this tax. Ordinarily, businesses pay a tax on their profits, but not so for the CAT as it taxes gross revenue. So in this case, a business making little or even no profit at all is still subject to the 0.57% tax on their top line. A successful independent retail pharmacy easily has gross receipts in the millions, but near 80% of this is eaten up in cost of goods sold (drug costs). Add in labor, operating expenses, and other taxes (profit in Oregon is subject to the corporate excise tax of 6.6%-7.6%) and there’s not much left. The tax could easily pay for pharmacy technician help that pharmacies desperately need. Or perhaps the ability to pay techs better so they don’t lose them.
Most businesses simply pass the tax along to their consumers, but pharmacies have 90-95% of their revenue controlled by Pharmacy Benefit Manager contracts. Getting the PBM to tack on an extra half-percent simply isn’t going to happen. Worse, the PBM is subject to the CAT tax, and likely passes their obligation along to their customers. Pharmaceutical companies and wholesalers are also taxed, and many of them have passed this along to their customer—the pharmacy. This leaves pharmacies bearing the brunt of taxes that have stacked up as the product moves through the supply chain, ultimately landing with the front-line healthcare provider who can’t pass it along and ends up paying all of it.
Think about this—a drug manufacturer subject to CAT passes it along to the wholesaler, who builds this into their drug cost, then adds a surcharge on the pharmacy invoice to cover what they will owe. So the pharmacy is now getting hit twice. Then the pharmacy pays CAT on their revenue. The same product has been CAT-ed 3x, all paid by the pharmacy.
For some, it’s just been too much. There are many reasons for BiMart’s departure from the retail pharmacy business, but the CAT was certainly one of them. The opportunity to shed a business line that generated lots of CAT-able revenue but little to no profit is understandable. Unfortunately, that’s left consumers with even fewer choices in filling their prescriptions.
It’s time for our legislators to act. Pharmacies need relief in Oregon, and exemption from the CAT makes sense on all levels. The Oregon Pharmacy Coalition urges you to contact your elected officials in the Oregon house and senate.