Preliminary Note: In 2010 the Medical Device Excise Tax law was enacted. The IRS issued two weeks ago a forty page preamble and eighteen pages of regulations with respect to its scope and implementation. 26 C.F.R. Part 48. The IRS also issued a ten page guidance document. This compilation is based on the IRS preamble, regulations and guidance document issued by the on December 5, 2012. The new excise tax law also incorporates standard excise tax definitions such as those which pertain to a determination of the ‘price’ upon which the tax is computed.
Readers are advised to read the new regulations carefully and certain portions of the existing law on excise taxes (e.g., section 4216(a) which defines the price upon which the tax is levied. Readers are advised not simply rely on this summary. Some portion of the commentary is based upon feedback from the IRS attorneys and Congressional staff working on the issues surrounding this tax.
Additionally, the IRS has acknowledged that there are implementation challenges. At least two issues are unresolved pertaining to computation of the tax for software and as the tax applies to a constructive sales price. There are safe harbor portions of the regulations which, if followed, with ordinary business care may constitute grounds for abatement of the penalties associated with the nonpayment of the tax.*
When does the medical device excise tax come into effect?
January 1, 2013
Where can I find the medical device excise tax regulations and guidance document?
The preamble and medical device excise tax regulations may be found here. The IRS guidance document may be found here. The IRS Cumulative Bulletin and by request from the Superintendent of Documents, P.O. Box 979050, St. Louis, MO 63197-9000.
To which medical devices do the medical device excise taxes apply?
As a practical matter, if the device is listed with the FDA then the medical device is taxable. The tax applies to refurbished and remanufactured medical devices.* (See the short discussion entitled “Refurbished and Remanufactured Medical Devices on p. 31 of the IRS preamble to the Medical Device Excise Tax).
A retail exemption exists such that eyeglasses, contact lenses, hearing aids and any other 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.1 Note: Until the IRS and the Treasury Department issue further guidance, the IRS will treat the sale of a taxable article to a medical institution or office as a “sale at retail.”
During a telephone conference on December 20, 2012 with Natalie Payne and Stephanie Bland of the Office of the Associate Chief Counsel (Passthroughs and Special Industries Office of the Internal Revenue Service). confirmed to IAMERS General Counsel their view that the medical device excise tax does not apply to the sale of used medical equipment as the tax is to be due on the first sale of medical equipment. Attorneys Payne and Bland also confirmed their view that the medical device excise tax does not apply to the sale of used medical equipment parts as the excise tax would be due on the first sale of medical equipment.
Who is liable for the tax?
Section 48.4191-1 (a) imposes a tax on the sale or lease of any taxable medical device by the manufacturer, producer or importer of the device.
Note: the IRS definition does not use the definition of manufacturer found in FDA regulations and guidances.
Under section 48.02(a)(4) a manufacturer includes :”any person who produces a taxable article from scrap, salvage, or junk materials or from new or raw material, by processing, manipulating or changing the form of an article or by combining two or more articles. The term also includes a “producer” and an “importer”.
An “importer” of a taxable article is any person who brings such an article into the United States from a source outside the United States, or who withdraws such an article from a customs bonded warehouse for sale or use in the United States.**
How much is the tax?
2.3% of the “price” for which the device is sold. In determining the price, you should include any charge for coverings and containers of whatever nature and any charge incident to placing the article in condition packed ready for shipment (but not the tax itself).***
With respect to leases, the regulations provide that section 4191 applies in the computation of the taxes.
How do you pay the tax?
The IRS will expect that a manufacturer, producer or importer making the sale files a quarterly excise tax using Form 720 and makes quarterly deposits.
Are software upgrades taxable?
Under the final regulations, a taxable medical device is a device that is listed as a device with the FDA under section 510(j) of the FFDCA and 21 CFR part 807. The regulations provide “software and software updates that are not required to be separately listed with the FDA do not fall within the definition of a taxable medical device, and sales of such software and software updates are not subject to the tax.”
See section entitled ‘Software Upgrades’ on page 9 of the Preamble to the Regulations.
For a more expanded FAQ, issued by the IRS, click here.________________________________________________________________________________ *See the discussions entitled “Penalties for failure to file and failure to pay tax (p.36-37) of the preamble to the regulations. **If the nominal importer of a taxable article is not its beneficial owner (for example, the nominal importer is a customs broker engaged by the beneficial owner), the beneficial owner is the “importer” of the article for purposes of chapter 32 and is liable. Under certain circumstances, as where a person manufactures or produces a taxable article for another person who furnishes materials under an agreement whereby the person who furnished the materials retains title thereto and to the finished article, the person for whom the taxable article is manufactured or produced, and not the person who actually manufactures or produces it, will be considered the manufacturer. ***For a more expanded definition of the term price, see sections 4216 and sections 48.4216(a)-1 through 48.4216(e)-3. (a) Containers, packing and transportation charges. The transportation, delivery, insurance, installation, or other charges seems to be presently excluded but the Treasury has the right to apply the same. IAMERS is seeking clarification on calculation of the price.