IRS Publishes Guidance on Medical Device Tax

The Internal Revenue Service of the United States (IRS) has published its final guidance regarding the medical device excise tax due to come into effect on Jan. 1 under the Patient Protection and Affordable Care Act. The IRS composed the guidance after consultation with technical experts at the U.S. Food and Drug Administration (FDA) as well as reviewing public comment on the issues.

The document comprises 58 pages explaining such things as the definition of a taxable medical device and tax payment options for companies.

Generally, under the final regulations, a taxable medical device is a device that is listed as a device with the FDA. If a device is not listed with the agency, but the FDA determines it should have been, said device will be treated as if it were as of the date the FDA notifies the manufacturer or importer that corrective action with respect to its listing is required. Conversely, if a manufacturer lists a device with the FDA, but the device was not required to be listed, a credit or refund may be available for tax paid on sales of the device once the device has been de-listed.

The guidance includes a “retail exemption,” which exempts devices typically purchased by the general public at retail for individual use such as eyeglasses, contact lenses, and hearing aids. There are also some devices that are listed with the FDA that qualify for the IRS’s retail exemption “safe harbor.” These include devices in the agency’s in-vitro diagnostics home use lab test database, devices that the FDA considers over-the-counter. Some prosthetics and orthotics are included in this exemption as well.

According to the IRS, sales of taxable medical devices for further manufacture or export may be made tax free if certain registration and other requirements are met.

Perhaps making the tax more of an inevitable reality than ever, device companies now have a solid payment schedule set forth by the tax agency. The first quarterly return for the medical device excise tax is due April 30, 2013, for the months of January, February,and March, and can be filed on paper or electronically. Manufacturers and importers of taxable medical devices are generally required to make semi-monthly deposits of tax. The first semi-monthly deposit for the medical device excise tax, which covers the first 15 days of January, is due Jan. 29, 2012. In general, manufacturers and importers must use electronic funds transfer to make excise tax deposits through the electronic federal tax payment system (EFTPS).

Medtech advocacy organization the Advanced Medical Technology Association (AdvaMed) is sticking to its guns on its stance that tax should be repealed yet: “AdvaMed is carefully reviewing the regulations released today by the IRS,” said the organization’s president and CEO Stephen Ubl. “But regardless, Congress should act to address this $30 billion tax before it takes effect on January 1. There is strong bipartisan support for action. While Washington talks about a fiscal cliff, this tax could push us off an innovation cliff, costing as many as 43,000 jobs and hurting the ability of medical technology companies to find tomorrow’s treatments and cures. It should be repealed.”

Ubl went on to mention the layoffs and research cut backs companies have been making, ostensibly in anticipation of the tax. “The tax also is scaring away investors and it threatens U.S. leadership in medical technology, where America is a net exporter to the tune of $5.4 billion a year,” he added.

“This final rule does nothing to prevent the loss of jobs and innovation that has already occurred as a result of the medical device tax, and will unfortunately continue if we do not repeal this bad policy,” agreed Mark Leahey, president and CEO of the Medical Device Manufacturers Association (MDMA).