New 2.3% Medical Device Excise Tax Goes into Effect January 1, 2013

Earlier this month, the Department of the Treasury and the Internal Revenue Service issued final rules for the new 2.3% excise tax that will be imposed on medical devices as of January 1, 2013 pursuant to the Patient Protection and Affordable Care Act.

For manufacturers, producers, and importers of medical devices, here’s a brief Q&A on the tax:

What is a considered a “taxable medical device”?

A taxable medical device is a device listed with the Food and Drug Administration under section 510(j) of the Federal Food, Drug and Cosmetic Act (“FDCA”), intended for humans, or classified as dual use devices if listed. Section 201(h) of the FDCA defines a medical ‘device’ as “an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article, including a component part, or accessory which [meets specific criteria].” (Akerman)

What constitutes a “sale” and triggers the excise tax?

“Generally, a manufacturer using a taxable article in any way other than in the manufacture of another taxable medical device is liable for the 2.3% tax. In particular, the explanation of the final regulations highlights that provision or use of a taxable medical device as a demonstration product may constitute a use triggering the tax, depending on the facts and circumstances of the arrangement. In addition, a transaction in which a manufacturer furnishes a taxable medical device and receives any promotional or advertising services or other value for the transfer is considered a ‘sale’ subject to the 2.3% tax.” (Perkins Coie)

Are any devices exempt from the tax?

“The tax does not apply to medical devices that are regularly available for purchase by individual consumers, in person, over the telephone or over the Internet through retail businesses, and that are not primarily intended for use by medical professionals or facilities. These devices include eyeglasses, contact lenses, and hearing aids. The regulations adopt a ‘facts and circumstances’ approach to determining whether a medical device falls within the retail exception, and they include a non-exclusive list of factors to determine whether a device is regularly available for purchase by consumers who are not medical professionals.” (Ballard Spahr)

How should manufacturers report and pay the tax?

“The medical device excise tax is reported on Form 720 (Quarterly Federal Excise Tax Return) on a quarterly basis, and most taxpayers subject to the tax will be required to make semi-monthly deposits to the IRS. The first semi-monthly deposit for the medical device excise tax, which covers the first 15 days of January 2013, is due on January 29, 2013.” (King & Spalding)

How is the tax calculated?

“Generally, manufacturers’ excise taxes are based on the sale price to an independent wholesale distributor. This rule applies to medical device manufacturers as well. In other cases, a constructive price is determined. The interim guidance replaces the tax code’s general rules for calculating this constructive price with rules specific to medical device manufacturers who use one of five enumerated distribution channels.” (Ropes & Gray)

What happens if manufacturers fail to pay the tax?

“The Notice states that during the first three calendar quarters of 2013 the IRS will not impose a penalty for failure to make adequate, timely deposits of the excise tax if the taxpayer demonstrates a good faith attempt to comply with the deposit requirements and the failure was not due to willful neglect. The ‘good faith attempt’ standard replaces the ‘reasonable cause’ test that otherwise would apply. Tax law requires that the tax be deposited semi-monthly.” (Patton Boggs)

Can manufacturers expect additional guidance on the excise tax?

“The Notice is only interim guidance, and the IRS is requesting comments for the issues addressed in the Notice before the guidance is finalized. Thus, device companies still have the opportunity to provide insight to the IRS on these particular issues and should submit comments by March 29, 2013.” (Morgan Lewis)

The updates:

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