Highlights of the Medical Device Tax
As a result of the Supreme Court ruling upholding the Patient Protection and Affordable Care Act, manufacturers and importers of medical devices may be required to pay an excise tax on the sale of its FDA-listed products. And with just months remaining until the January 2013 deadline when this new tax takes effect – will your company be prepared?
To help you prepare, BayBio is collaborating with KPMG on a September 5 event Ushering in the Medical Device Excise Tax. In addition, KPMG provided us with content highlighting the medical device tax.
The Health Care and Education Reconciliation Act of 2010 added section 4191 to the Internal Revenue Code, which imposes an excise tax on the sale of certain medical devices by their manufacturer or importer. The tax takes effect on January 1, 2013.
Because the definition of medical device is so broad, many manufacturers and importers have asked how to determine if a particular device is taxable. The proposed regulations issued by Treasury and the IRS on February 3, 2012, answer this question by referring to Food and Drug Administration (“FDA”) rules. Under the proposed regulations, “device defined in section 201(h) intended for humans” means a device that is listed as a device with the FDA under section 510(j) of the Federal Food, Drug, and Cosmetic Act and 21 C.F.R. Part 807, pursuant to FDA requirements. Accordingly, whether a device is a “taxable medical device” would be determined by how it is treated by the FDA. The test would be whether it is listed as a device with the FDA under part 807.
Section 4191 provides an exception to the term “medical device” for eyeglasses, contact lenses, and hearing aids. An exception is also provided for any medical device determined by the Treasury Secretary to be of a type that is generally purchased by the general public at retail for individual use (the “retail exemption”).
Under the proposed regulations, a medical device meets the retail exemption if it is regularly available for purchase and use by individual consumers who are not medical professionals, and if the design of the device demonstrates that it is not primarily intended for use in a medical institution or office or by a medical professional. Whether a device qualifies for the retail exemption is evaluated based on all the relevant facts and circumstances. The proposed regulations provide a set of non-exclusive factors to be considered.
The proposed regulations also provide a safe harbor provision that identifies certain categories of taxable medical devices that Treasury and the IRS have determined fall within the retail exemption.
The safe harbor categories are devices that:
- Are included in the FDA’s online IVD Home Use Lab Tests (Over-the-Counter Tests) database
- Are described as “OTC” or “over the counter” devices in the relevant FDA classification regulation heading
- Are 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
- Qualify as durable medical equipment, prosthetics, orthotics, and supplies, as described in the proposed regulations, for which payment is available on a purchase basis under Medicare Part B payment rules
The Health Care and Education Reconciliation Act of 2010 also amended section 4221 to provide for tax-free sales of taxable medical devices for “use in further manufacture” and for “export” if registration and paperwork requirements are met. In addition, under the act, section 6416 provides for credit or refund of the excise tax if the medical device was not sold tax-free for use in further manufacture or for export, and also in the case of certain price readjustments.