On Monday, September 14, the United States Court of Appeals for the Second Circuit reversed the December 2018 opinion from the United States District Court for the Southern District of New York that invalidated the New York Opioid Stewardship Act (OSA). In Association for Accessible Medicines v. James, the Second Circuit reinstates the New York OSA previously been invalidated by the District Court, with the exception of one key provision.
The New York State Legislature enacted the OSA in September 2018 to raise $600 million over six years to address the ongoing costs to the state of New York in addressing the opioid crisis. As detailed below, the annual $100 million “opioid stewardship payment” is assessed collectively on all registered opioid manufacturers and distributors that sell or distribute opioids in the state, each of which is responsible for paying a portion of the $100 million based on its market share of opioid sales in New York. As originally enacted, the OSA included a “pass-through prohibition” that barred registrant from passing the costs of their opioid stewardship payments on to purchasers, including the ultimate consumer. Registrants that violated the pass-through prohibition were subject to a monetary penalty of up to $1 million per violation.
Various aspects of the OSA, including the pass-through prohibition, were challenged in three lawsuits brought by industry trade associations and an opioid manufacturer. The plaintiffs argued that the pass-through prohibition violated the dormant Commerce Clause, which prohibits state laws from discriminating against interstate commerce, or favoring in-state commerce over out-of-state commerce. New York moved to dismiss each case on jurisdictional grounds under the Tax Injunction Act (TIA), arguing that the opioid stewardship payment is a tax and is not subject to District Court review. Under the TIA, “the district courts shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under State law where a plain, speedy and efficient remedy may be had in the courts of such State.” 28 U.S.C. § 1341. In a consolidated Opinion and Order issued December 19, 2018, the District Court held that neither the opioid stewardship payment, nor the pass-through prohibition is a “tax” under the TIA, and that the latter violated the dormant Commerce Clause. Because the opioid stewardship payment requirement could not survive without the pass-through prohibition, the District Court held that the OSA was invalid in its entirety.
After the District Court’s decision, the New York State Legislature enacted a new payment mandate, the opioid excise tax, that did not include a pass-through prohibition and the pass-through provision was not included in the State’s appeal. On appeal, the Second Circuit determined that the opioid stewardship payment required under the OSA is a tax within the meaning of the TIA and is thus not within the subject matter jurisdiction of the District Court. The Second Circuit reversed the District Court’s judgment invalidating the OSA, with the exception of the pass-through prohibition not included in the appeal.
Under the current version of the OSA, each manufacturer and distributor registered in New York is required to submit an annual report detailing all opioids sold or distributed in the state. The report must include gross revenue of all opioid sales, the number of containers and the strength and metric quantity of controlled substance in each container, and the total number of morphine milligram equivalents (MME) sold or distributed. Annual reports must be submitted on April 1 of each year based on the actual opioid sales and distributions of the prior calendar year. The reports are used to determine the “ratable share” of the opioid stewardship payment owed by each manufacturer and distributor. A registrant’s ratable share is calculated by dividing the total MMEs sold by the registrant in New York by the total amount of MMEs sold by all registrants. For example, if a Registrant A sold a total of 100,000 MMEs in New York in one year and all registrants sold a total of 10,000,000 MMEs, Registrant A’s ratable share of the opioid stewardship payment is 1% or $1 million.
New York is required to notify registrants of their ratable share by October 15, based on opioids sold or distributed for the prior calendar year. Given that the District Court had previously struck down the OSA as unconstitutional, it is our understanding that registrants would not have submitted an annual report on April 1, 2020 for 2019 opioid sales. However, registrants likely should anticipate submitting an annual report by April 1, 2021 covering 2020 opioid sales in New York State. The state will then notify registrants of their ratable share for 2020 sales by October 15, 2021. Registrants will be required to pay their ratable share of 2020 opioid sales quarterly beginning January 1, 2022. Failure to comply with the OSA may result in a civil penalty up to $1,000 per day. Additionally, if the registrant fails to pay its ratable share, the state may also assess a penalty of 10-300% of the registrant’s ratable share.
Note that the OSA stewardship payment is wholly separate from the aforementioned excise tax on the sale of opioids, which is part of the state’s tax law and not the controlled substance law. On April 12, 2019, after the District Court struck down the OSA as unconstitutional, Governor Cuomo signed a budget bill that included the opioid excise tax. The excise tax, which went into effect July 1, 2019, is imposed on the first sale of an opioid unit in New York State by a registrant. Generally, the “first sale” is the transfer of title from a registrant to a purchaser for consideration. “First sale” does not include the dispensing of an opioid prescription to the end user, or the transfer of title of an opioid unit from a manufacturer in New York to a purchaser outside New York when the opioid will be used or consumed outside the state. It is presumed that every sale of an opioid by a registrant within or into New York is the first sale unless it is established otherwise. The New York Department of Health publishes a list of drugs that are subject to the opioid excise tax, as well as an MME calculation guidance. The excise tax is also assessed based on the MME, but there are separate tax rates depending on the product’s wholesale acquisition cost (WAC):
- $0.0025/MME for opioids with a WAC of less than $0.50 per unit
- $0.015/MME for opioids with a WAC of $0.50 or more per unit
All first sales must be reported on a quarterly opioid excise tax return and paid no later than the 20th day of the month following the quarter in which the opioid was sold. Registrants must file a return even if they had no sales during the quarter. The first required filing was due January 21, 2020 and covered an extended period beginning July 1, 2019, and ending December 31, 2019. The filing for the current July 1 – September 30 period is due October 20, 2020.
As it currently stands, it is our understanding that both the OSA (minus the pass-through provision) and the opioid excise tax remain in effect. It is unclear whether New York will reconsider the opioid excise tax in light of the reinstatement of the OSA. Hopefully further clarification from the state will be forthcoming.