Tuesday 20 February 2018

IRS Issues Regulations on $20 billion Medical Device Tax

Proposed regulations from the IRS on the 2.3% excise tax on medical devices, designed to generate $20 billion as part of the Patient Protection and Affordable Care Act, were announced on Friday.

The health care reform law added Section 4191 to the Tax Code, imposing an excise tax on the sale of certain medical devices by the manufacturer, producer, or importer of the device in an amount equal to 2.3 percent of the sale price. It applies to sales of taxable medical devices after Dec. 31, 2012. The excise tax is meant to raise $20 billion over the next decade to help pay for the costs of health reform.

The IRS’ proposed regulations (REG-113770-10) are aimed at clearing up any confusion about what constitutes a “taxable” medical device. The IRS largely arguing that devices are subject to the tax if they fall within the Food and Drug Administration’s definition of a device and are human-use products.

The regulations issues on Friday follow a request for comments in late 2010. Many commentators observed that the statutory definition of “taxable medical device” still left uncertainty as to which devices are included in the definition.

The IRS noted that the FDA has promulgated classification regulations for approximately 1,700 different generic types of devices. Each classification regulation includes one or more product codes that describe a subcategory of the device type described in the regulation. Currently, manufacturers may, under certain circumstances, list multiple different devices that fall within the same product code under a single listing. Therefore, all devices that are listed under a single product code listing in conjunction with the FDA’s device listing requirement are “taxable medical devices” unless they fall within an exemption under section 4191(b)(2).

The proposed regulations also provide that if a device is not listed with the FDA but the FDA later determines that the device should have been listed as a device, the device will be deemed to have been listed as a device with the FDA as of the date the FDA notifies the manufacturer or importer in writing that corrective action with respect to listing is required.

There are a couple of exceptions worth noting:

  • Section 4191(b)(2) provides that the term “taxable medical device” does not include eyeglasses, contact lenses, hearing aids, and any other medical device determined to be of a type that is generally purchased by the general public at retail for individual use.
  • The Affordable Care Act amended Section 4221(a) to limit tax-free sales of taxable medical devices to sales for use by the purchaser for further manufacture, or for resale by the purchaser to a second purchaser for use by such second purchaser in further manufacture, and for export, or for resale by the purchaser to a second purchaser for export.

The proposed regulations in REG-113770-10 affect manufacturers, importers, and producers of taxable medical devices.

This is a hot button issue that is likely to stir controversy. Until there are formal changes those in the medical device industry should prepare to implement the excise tax. To learn more about the medical device tax visit the IRS FAQ page.

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