Court Strikes Down New York Opioid Surcharge on Manufacturers and Distributers

On December 19, 2018, the US District Court for the Southern District of New York ruled in favor of McDermott’s client, the Healthcare Distribution Alliance (HDA), the trade association for pharmaceutical distributors. In Healthcare Distribution Alliance v. Zucker, the court granted summary judgment and enjoined enforcement of the New York Opioid Stewardship Act, which imposed a $600 million surcharge on manufacturers and distributors of opioid pharmaceutical products. The first $100 million installment was due on January 1, 2019.

McDermott prevailed on its argument that the Tax Injunction Act (TIA) did not bar federal jurisdiction over HDA’s challenge to the surcharge. While the surcharge raised $600 million in revenue, the court held that for the TIA’s purposes, it was a regulatory fee, not a tax, in part because its proceeds were dedicated to specific opioid-related funds and segregated from general state revenues, and in part because the New York legislature did not label the surcharge a “tax.” The court also agreed with McDermott that a provision of the Act prohibiting the surcharge from being passed downstream to purchasers violated the dormant Commerce Clause. The court further agreed with McDermott—and in so doing disagreed with generic manufacturers that challenged the pass-through prohibition but not the surcharge—that the pass-through prohibition was not severable from the remainder of the Act, including the surcharge.

Practice Note: This case has several important reminders for businesses subject to onerous state and local exactions and ancillary requirements.

First, it demonstrates that the TIA does not bar federal court jurisdiction over challenges to all state exactions. Exactions made pursuant to the state’s police power are not protected by the TIA, even if they generate substantial revenue.

Second, even if a state imposes a tax, the TIA does not always bar federal jurisdiction over challenges to regulations that accompany a tax. In Direct Marketing Association v. Brohl, the Supreme Court made this point clear with respect to Colorado’s reporting requirements on out-of-state state sellers. The HDA court applied this principle to New York’s cost-pass-through prohibition. Although the court concluded that New York’s surcharge was not a tax, it also held that even if the surcharge were a tax, the court nonetheless had jurisdiction over HDA’s challenge to the cost-pass-through prohibition.

Finally, if an exaction is a tax but a related provision of the same statute is not, that provision’s failure can lead to the tax’s failure, even in federal court. Generally speaking, a provision is severable from the remainder of a statute only if the legislature would have enacted the law without the provision. In HDA, the court concluded that the surcharge was not severable from the cost-pass-through prohibition. As a result, the surcharge was stricken, too.

McDermott Will & Emery

Diann Smith
Diann Smith focuses her practice on state and local taxation and unclaimed property advocacy. Diann advises clients at any stage of an issue, including planning, compliance, controversy, financial statement issues and legislative activity. Her goal is to find the most effective method to achieve a client's objective regardless of when or how an issue arises. Diann emphasizes the importance of defining a client's objective - whether it is finality of a frequently audited issue, quick resolution of a stand-alone tax liability, or avoiding competitive disadvantages in the application of a tax. The defined objective then governs the choice of the path to a solution. Read Diann Smith's full bio.

Eric Hageman
  Eric Hageman represents commercial clients in state and federal court, focusing on appeals and major motions. He has drafted briefs in the US Supreme Court and several federal district and appellate courts. Read Eric Hageman's full bio.

Stephen P. Kranz
Stephen (Steve) P. Kranz is a tax lawyer who solves tax problems differently. Over the course of his extensive career, Steve has acquired specific skills and developed a unique approach that helps clients develop and implement holistic solutions to all varieties of tax problems. He combines strategic thinking with effective skills for the courtroom, the statehouse and the conference room. Read Stephen Kranz's full bio.




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