IRS Publishes Final Regulations re Medical Device Excise Tax
The medical device excise tax was enacted as part of the Health Care and Education Reconciliation Act of 2010 in connection with the Patient Protection and Affordable Care Act. The law imposed a tax on the sale of any taxable medical device by the manufacturer, producer or importer of the device.
To what devices does the tax apply?
Under the final regulations, the FDA listing system is used to determine what constitutes a taxable product for purposes of the device tax. A taxable device is one listed under section 510(j) of the Federal Food, Drug, and Cosmetic Act and 21 CFR part 807. Biologics listed under 21 CFR part 607 are not taxable devices. Combination products, such as syringes pre-filled with a pharmaceutical drug are taxable only if the overall combination product is a listed device. On an interim basis, U.S.-manufactured “kits” in which one or more finished medical devices are packaged together into kits for the convenience of the health care provider in the performance of a medical procedure are not subject to the device tax at the kit level; only the listed components in the kit are taxable. The sale of refurbished or remanufactured devices can also constitute the sale of a taxable device.
The tax applies to both sales and leases of devices by the manufacturer. The IRS takes the position that the tax applies to post-2012 payments on existing leases.
To what devices does the tax not apply?
Devices that are typically purchased by the general public for individual use at retail are exempt from the device tax. The final regulations apply a "facts and circumstances" approach to determining whether a particular device qualifies for the retail exemption from the device, and provide examples of how the retail exemption will operate. Software updates and upgrades, most replacement parts, and separately-purchased service contracts.
Notably, exports of otherwise taxable devices or sales of taxable devices to others for use as components in further manufacturing an overall taxable device are exempt from the device tax, but to qualify for the exemption manufacturers must be properly registered with the IRS by filing IRS Form 637.
Who constitutes a “manufacturer” or “importer’?
The final regulations apply the “facts and circumstances” standard of the current law excise tax regulations to determine who is the “manufacturer” or “importer” for purposes of bearing the device tax.
How is the tax determined, paid, and reported to IRS?
The IRS guidance provides formulas for computing the taxable sales price of the device depending on the type of distribution chain used by the device manufacturer. The tax must be deposited with IRS on a semi-monthly basis, with an excise tax return on IRS Form 720 due on a quarterly basis. The IRS has waived the penalties for failure to deposit the correct tax amount for the first 3 calendar quarters of 2013.
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