On October 9, 2025, the Ohio Board of Tax Appeals (BTA) ruled in Perrigo Sales Corporation v. Harris, BTA Case No. 2024-485, that the taxpayer was entitled to reduce its Ohio Commercial Activity Tax (CAT) receipts by chargebacks paid to wholesalers, reversing a final determination of the Department of Taxation (Department).

Background

The taxpayer is a manufacturer of pharmaceuticals and other healthcare products. In the case of drug sales, the taxpayer directly contracts with retailers to supply drugs at agreed-upon prices. The taxpayer ships its prescription products to wholesale distributors that honor the contract prices between the taxpayer and the retailers.

When the taxpayer ships pharmaceuticals to the distributors, it issues an invoice at a wholesale acquisition cost (WAC). However, because of the contracts between the taxpayer and the retailers, neither party expects the WAC to reflect the actual cost of the drugs. The parties anticipate a chargeback will reduce the purchase price as between the taxpayer and the distributor. When the distributor sells the drugs to the retailers, it submits a chargeback adjustment request to the taxpayer based on the difference between the WAC and the contracted purchase price. Once the chargeback request is processed by the taxpayer, the distributor remits the net amount to the taxpayer. The taxpayer treats the net amount as the actual sales price for accounting and federal income tax purposes.

The Department audited the taxpayer and assessed CAT based on the WAC without taking into account the chargeback adjustments. According to the Department, the chargebacks were not a cash discount that could reduce CAT receipts because they were not volume-based discounts or discounts for timely payment. The Department instead equated the chargebacks to manufacturer's coupons, for which no CAT exclusions are provided for reimbursements paid to retailers that accept coupons from its customer. The Department also concluded that the chargebacks were not a return or allowance, which applies in cases where there is an undoing or renegotiation of the original transaction based on a defect.

Chargebacks are a permissible reduction to CAT gross receipts

On appeal, the BTA reversed the Department's decision, focusing its analysis on the fact that the taxpayer did not realize the full WAC, but rather the net amount after the chargeback adjustments. According to the BTA, the chargebacks were not separate payments but were offsets in a "unified transaction." The BTA reasoned that by emphasizing the timing of the chargebacks, the Department was elevating form over substance. The BTA also concluded that the expectation of the chargeback was "established and contemplated by the contract between [the taxpayer] and the distributor." Finally, the BTA concluded that the chargeback was not an expense but the accounting mechanism to establish the actual purchase price and gross receipts realized.

Implications

It is unknown whether the Department will appeal the BTA's decision, however, the CAT treatment of chargebacks has received significant attention for some time now.

The BTA's analysis focused on the amount ultimately realized by the taxpayer and not on amounts contractually offset before payment is made. The BTA also found persuasive the taxpayer's accounting and federal income tax treatment of the chargebacks.¹

The BTA's decision has potential implications beyond chargebacks, as the Department's rule provides that purchase price reductions may also reduce CAT receipts. Businesses should consider their price reductions to determine if there is justification to reduce CAT receipts.

Taxpayers that have been assessed on this issue should consider their facts and determine whether they should file a refund claim. There is a four-year statute of limitations for CAT refunds based on payment date.