The Patient Protection and Affordable Care Act and the Health Care and Educational Reconciliation Act of 2010 will impose a new tax on medical devices. The new tax goes into effect January 1, 2013.
For sales made after December 31, 2012 manufacturers, producers and importers of medical devices must pay a 2.3% tax on the sales price of a taxable medical device. The tax is imposed at the legal entity level and is not reported on a consolidated basis. The applicable sales and tax must be reported quarterly on Form 720 Quarterly Excise Tax. The first one that will include the new tax is due April 30, 2013.
Taxable Medical Devices
Medical devices are defined under Section 201(h) of the Federal Food, Drug and Cosmetic Act (FFDCA) and include a broad range of devices for human use:
- “Intended for use in the diagnosis of disease or other conditions or in the cure, mitigation, treatment or prevention of disease, or
- Recognized by the official National Formulary or the United States Pharmacopeia, or
- Intended to affect the structure or any function of the body and that doesn’t achieve its primary purposes through chemical action within or on the body and isn’t dependent upon being metabolized for the achievement of its primary intended purpose.”
More specifically, a device includes an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent or similar or related article and any component part or accessory.
Since the FDA generally requires owners and operators of places of business that are located in the United States or in foreign countries that export to the United States to register and annually update the devices they manufacture, prepare, propagate, compound, assemble, process, repackage or relabel for human use, the IRS expects most businesses to know whether or not their products are subject to the excise tax.
The legislation exempted sales of medical devices (determined by the IRS) that are of a type generally purchased by the general public at retail for individual use. Specifically exempted are:
- Contact lenses and
- Hearing Aids.
Other exempt items include bandages, applicators, pregnancy test kits, diabetes testing supplies, denture adhesives and snake bite kits.
According to the Committee Report, the IRS is to promulgate a list of exempt items. In the recently released proposed regulations, the Service proposed a facts and circumstances test based on the following factors:
- Can consumers purchase the device through a retail business such as a drug store or supermarket?
- Can consumers who are not medical professionals safely and effectively use the device for its intended medical purpose with minimal or no training?
- Is the device generally purchased by the general public?
- Is the device generally implanted, inserted, operated or otherwise administered by a medical professional?
- Does the cost to acquire/maintain or use the device require a large initial investment that is not affordable to the average consumer?
- Does the device require frequent and substantial servicing?
- Is the device classified as durable medical equipment, prosthetics, orthotics and supplies (DMEPOS) for which payment is available exclusively on a rental basis under Medicare Part B payment rules?
These proposed regulations also provide a safe harbor to determine whether or not a product meets the retail exemption. These products include:
Other devices are excluded under the proposed regulations. They include:
- Devices that are not yet approved for marketing and are exempt from the FDA’s listing requirement under an Investigational Device Exemption (IDE) are not taxable medical devices.
- Medical devices to be used solely in research, teaching or analysis and not introduced into commercial distribution and are exempt from FDA registration and listing requirements are not taxable medical devices.
Sales and leases of taxable medical devices are taxable events. If a manufacturer uses the article for any use other than in the manufacture of another taxable article, as for example a demonstration product, the tax attaches to that use. If the product is given away free of charge as a promotional item, the excise tax is still due.
For a sale, the event is measured when the title passes from the manufacturer to the purchaser and the tax attaches even if the sale is on credit and whether or not the purchase price is actually paid. For installment sales the tax attaches to each partial payment.
If the manufacturer both sells and leases the same item, the tax attaches to each lease payment until the total amount of the tax payments equals the amount of tax that would have attached on a sale. If the manufacturer is only in the business of leasing the product, the tax attaches to each lease payment.
The Sales Price
The tax is imposed on the price for which the device is sold and includes packaging and containers but excludes the cost of transportation, delivery, insurance and installation. It also excludes the excise tax itself whether or not it is separately stated. Rebates, discounts and allowances as well as charges for warranties paid at the purchaser’s option are excluded from tax.
Tax-Free Sales for Further Manufacture and Export
The excise tax is not imposed on medical devices purchased for export or for use in further manufacture. This exemption may also apply if the first purchaser, purchases the product for sale to an exporter or to a subsequent manufacturer. To qualify for the exemption, the first purchaser and in some cases the second purchaser must be registered with the IRS by filing Form 637, Application for Registration (For Certain Excise Tax Activities).
Under U.S. Treasury Department guidelines, we hereby inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used by you for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service, or for the purpose of promoting, marketing or recommending to another party any transaction or matter addressed within this tax advice. Further, RubinBrown LLP imposes no limitation on any recipient of this tax advice on the disclosure of the tax treatment or tax strategies or tax structuring described herein.
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