Final Medical Device Regulations and Interim Guidance Provided
On December 5, the IRS released Notice 2012-77 which contains interim guidance with respect to the medical device excise tax which takes effect on January 1, 2013. Information regarding the tax was provided in a previous EisnerAmper Alert dated October 4, 2012.
Constructive Sales Price
The new Notice clarifies certain areas and provides specific methodologies by which taxpayers can apply the regulations to compute the tax. One area addressed is the constructive sales price. The tax code provides that the price for which a manufacturer sells a taxable article to an independent wholesale distributor will be the applicable price for purposes of imposing the tax. Many taxpayers may not sell directly to independent wholesale distributors, and therefore may have difficulty applying this rule and determining the actual sales price. The Notice provides interim rules which establish methodologies for computing the price for various types of distribution chains. The interim guidance for computing the price should be followed until further guidance is released.
The first distribution chain for which guidance is provided is for manufacturers that make all sales at retail and have no regular sales to independent wholesale distributions. In such case, the constructive sales price is deemed to be 75% of the actual sales price after taking into account certain adjustments provided within the code. The tax code prescribes that adjustments require the inclusion of any charge for coverings and containers of whatever nature, any charge incident to placing the article in a condition that is ready for shipment, and that transportation, delivery, insurance, and installation charges be excluded from the price. In addition, the medical device tax itself shall be excluded from the overall sales price whether or not it is a separately stated charge. The interim guidance also provides that sales to hospitals or doctors for office use will be considered to be direct retail sales for purposes of determining the price.
A second example of a distribution chain provided in the Notice is that of sales to unrelated retailers (i.e., sales for resale). In such case the constructive sales price will be deemed to be 90% of the lowest price for which the articles are sold to unrelated retailers. Additional examples of distribution chains provided for in the interim guidance include sales to related retailers, sales to related resellers that lease and sell at retail, and sales to related resellers that only lease at retail.
The IRS and Treasury also received numerous comments regarding the treatment of convenience kits as set forth in the temporary regulations. The previous guidance suggested that if a convenience kit was considered a separate taxable medical device, then the components of the kit would be exempt under the further manufacture rules, and that the kit itself would be a taxable device. Based on the comments received, the IRS intends to review this area and provide additional guidance. The interim guidance affords domestically produced convenience kits exemption from the tax. Sales of taxable medical devices that go into the convenience kit will, however, be taxable in the interim. Furthermore, separate rules do apply to imported convenience kits. When a manufacturer sells a convenience kit that is comprised of both domestically purchased (and therefore taxable at the source) and imported (and therefore nontaxable at the source) components it must perform an allocation to determine how much of the sales price of the kit is subject to the tax. The importer may determine the allocation using any reasonable method. An example provided in the Notice suggests that if the cost of the taxable medical devices represents half the total cost to the importer, the tax would then apply to half of the sales price of the kit.
Additional Areas of Guidance
Other areas which commenters had requested additional guidance include the licensing of software that is a taxable medical device and the treatment of donations of taxable medical devices. The Notice provides that, until further guidance is set forth, the license of the taxable medical device will be considered a lease to which the tax will apply.
The Notice provides that donations to eligible charitable organizations as set forth in the tax code will not be taxable; however, if the donee subsequently sells the device, the organization will be required to pay the tax on the sale.
The last provision of the Notice eases the administrative burden for taxpayers who are working on implementing procedures in order to comply with the new tax requirements. The tax code provides that, for each semimonthly period, deposits must be made of not less than 95% of the tax liability incurred during such period unless a safe harbor rule applies. The IRS has provided that it will not impose penalties for failure to make timely deposits of the appropriate amount provided that the taxpayer demonstrates a good faith attempt to comply and that the failure was not due to willful neglect.
Taxpayers who will be required to start paying and remitting this tax in 2013 should be aware of the requirement to first register with the IRS by completing Form 637 This form must be reviewed and approved by the IRS before a company registered for any activity. It should be noted that the registration requirement does not apply solely to companies that are required to pay the tax, but that it may also apply in cases where a company is making exempt sales. Per the frequently asked questions set forth by the IRS, in order to make a tax-free sale for further manufacture or for export, both parties to the sale must also be registered with the IRS. In addition, if a taxpayer is required to pay the tax it must be registered under the Electronic Federal Tax Payment System (EFTPS) in order to electronically remit the payments.