Medical Device Tax to Take Effect January 1, 2013
One of the provisions of the Affordable Care Act is a 2.3% excise tax on sales of medical devices. This tax will become effective January 1, 2013 and will be imposed upon the manufacturer, producer or importer of the medical devices. The tax will be charged at a rate of 2.3% of the sales price. The IRS has issued proposed regulations (IRC 4191) to identify what medical devices will be subject to tax and which are exempt.
Per the regulations a medical device includes any device defined in section 201(h) of the Federal Food, Drug & Cosmetic Act (21 U.S.C. 301 et seq.) that is intended for humans. This section explains that the term “device” means an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article used for health care purposes. The proposed regulations indicate that a device defined in section 201(h) that is intended for humans means a device that is listed as a device with the FDA under section 510(j) of the FFDCA and 21 CFR Part 807.
The Tax – In General
The trigger for the tax is the passage of title from the manufacturer to the purchaser. The sales price subject to tax includes charges for packaging as well as charges incident to placing the device in a condition to be packed and ready for shipment.
Specifically excluded from the sales price are:
- Manufacturer’s excise tax
- Cost of transportation, delivery, insurance, and installation
- Discounts, rebates, and similar allowances actually granted to the purchaser
- Certain local advertising charges
- Charges for warranty paid at the purchaser’s option
If a rebate is offered, the tax must be levied on the original sales price, unless the rebate has been made prior to the close of the period for which the return is due. If a rebate is subsequently allowed for a device on which tax has already been paid, the manufacture is entitled to a credit or refund.
Tax-free sales include sales for use in further manufacture, export or by purchaser for export by a second purchaser. In order to qualify for the exemption, registration must first be completed with the IRS on Form 637.
In addition, IRC Section 4191 specifically exempts eyeglasses, contact lenses, hearing aids, and any other medical devices which are generally purchased by the general public at retail for individual use.
In order to qualify for the retail exemption the device must:
- Be regularly available for purchase and use by individual consumers who are not medical professionals which is determined by reviewing whether:
- Consumers who are not medical professionals can purchase the device through retail businesses that also sell items other than medical devices, including drug stores, supermarkets and similar vendors;
- Consumers who are not medical professionals can safely and effectively use the device for its intended medical purposes with minimal or no training from a medical professional; and
- The device is classified by the FDA under Subpart D of 21 CFR Part 890 (Physical Medicine Devices).
- Have a design that demonstrates that it is not primarily intended for use in a medical institution or office, or by medical professionals. This can be determined by reviewing whether:
- The device generally must be implanted, inserted, operated, or otherwise administered by a medical professional;
- The cost to acquire, maintain, and/or use the device requires a large initial investment and/or ongoing expenditure that is not affordable for the average consumer;
- The device is a Class III device under the FDA system of classification;
- The device is classified by the FDA under certain parts or subparts of 21 CFR; and
- The device qualifies as durable medical equipment, prosthetics, orthotics, and supplies for which payment is available exclusively on a rental basis.
The regulations also provide a safe harbor provision for qualification under the retail exemption which includes medical devices which are:
- Included in the FDA's online IVD Home Use Lab Tests (Over-the-Counter Tests) database;
- Described as “OTC” or “over-the-counter” devices in the relevant FDA classification regulation heading;
- Described as “OTC” or “over-the-counter” devices in the FDA's product code name, the FDA's device classification name, or the “classification name” field in the FDA's device registration and listing database; or
- Qualify as durable medical equipment, prosthetics, orthotics, and supplies, for which payment is available on a purchase basis under Medicare Part B payment rules.
The regulations also provide that veterinary devices are specifically exempted. “Research Use Only” devices are exempt to the extent that they are not listed with the FDA pursuant to FDA requirements. A device would be listed if it had other purposes than research and/or has been introduced into commercial distribution. In addition, devices subject to “Investigational Device Exemptions” are not subject to the tax.
EisnerAmper Observations & Recommendations
The principal area on which commentators have sought additional guidance is with respect to the retail exemption. Unfortunately, the proposed regulations did not provide the clarity which many interested parties had been seeking. While the safe harbor is fairly straightforward and exempts most over-the-counter items, more scrutiny is required in order to determine whether other types of medical devices qualify for the exemption. Therefore, it is advisable that taxpayers review their product lists prior to year-end in order to ensure they have identified which of their devices are subject to the tax and which may qualify for an exemption. If any products qualify for an exemption, it is important that the proper forms be completed to ensure the exemption is properly claimed and supportable.
For those products on which the tax must be charged, manufacturers should evaluate their pricing structures to determine whether it is appropriate to adjust prices to compensate for the tax. Observers, however, have noted it is unlikely that most companies will be able to pass the cost of the tax on to customers. Some companies have already forecasted a large charge to their expected earnings due to the fact that they anticipate the need to absorb the cost. This is what many critics of the tax had feared. There has been concern that if companies are forced to absorb the cost of the tax it will eventually hinder innovation as there will be less reinvestment into research and development. Job loss within the industry has also been a primary criticism of those that oppose the tax.
Companies with taxable devices should also familiarize themselves or contact their tax advisors regarding IRS Form 720 which is the form on which the excise tax is reported. Lastly, if the company is not already registered to electronically remit tax to the IRS it may be required to do so.