On February 3, 2012, the Internal Revenue Services (IRS) issued a proposed rule implementing the medical device tax enacted in from the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively, the ACA).1 The law requires the imposition of an excise tax on the sale of a “taxable medical device” by the manufacturer, producer, or importer of the device equal to 2.3% of the sale price, effective for sales of the device as of January 1, 2013. The statute provides exemptions from the tax for eyeglasses, contact lenses, hearing aids, and devices determined by the Secretary to be of a type generally purchased by the public at retail for individual use.
The proposed rule offers guidance on certain aspects of the statute. Comments on the proposed rule must be submitted by May 7, 2012. In the proposed rule, the IRS announced that it will hold a public hearing on the device tax on May 16, 2012 at the Internal Revenue Building in Washington, D.C., starting at 10 a.m. Anyone wishing to present oral comments at that hearing must submit comments and an outline of the topics to be discussed (and the time to be devoted to each topic) to the IRS by May 7, 2012. Below is a summary of some of the key aspects of the proposed rule.
- Taxable medical device
The excise tax applies to a “taxable medical device” and the rule addresses what devices fit within this phrase. The statute defines a “taxable medical device” as any device, as defined under section 201(h) of the Federal Food, Drug & Cosmetic Act (FFDCA), that is intended for humans. The IRS proposes to define “taxable medical device” to include any device intended for humans that is listed as a device by the Food and Drug Administration (FDA) under the statute (FFDCA § 510(j)) and implementing regulations (21 C.F.R. Part 807), unless an exemption applies.
Under the proposed rule, devices that are not subject to the FDA’s listing requirement would not fall within the proposed definition of “taxable medical device." As a result, the IRS states that a device with an Investigational Device Exemption (IDE) would not be a taxable medical device. Similarly, with regard to a “research use only” device, whether it is taxable medical device or not depends on whether it must be listed with the FDA.
- Retail exemption
As noted earlier, the statute specifies that certain devices are exempted from the tax and includes a retail exemption (for devices that are of a type that are generally purchased by the public at retail for individual use). Under the proposed rule, a device would fit within the retail exemption if (i) the device is regularly available for purchase and use by consumers who are not medical professionals; and (ii) the design of the device demonstrates that it is not primarily intended for the use in a medical institution or office, or by a medical professional. The proposed rule identifies the following factors as relevant to determining whether the device is regularly available for purchase by consumers:
- whether consumers who are not medical professionals can buy the device through retail businesses;
- whether consumers who are not medical professionals can safely and effectively use the device for its intended purpose; and
- whether the device is classified by the FDA as a Physical Medicine Device.
Similarly, the proposed rule identifies the following factors as relevant to determining whether the design demonstrates that the device is intended for use in a medical facility or office, or by a medical professional:
- whether the device is implanted, inserted, operated, or administered by a medical professional;
- whether the cost to acquire or use the device is not affordable for the average consumer;
- whether the device is a Class III device;
- whether the device is classified under certain FDA regulations; and
- whether the device is payable on a rental basis under Medicare Part B as an item of durable medical equipment, prosthetic, orthotic or supply (DMEPOS).
The proposed rule also includes a “safe harbor” for certain categories of devices that would fall within the retail exemption:
- devices in the FDA’s IVD Home Use Lab Tests database;
- devices described as over-the-counter (OTC) in the relevant FDA classification regulation heading;
- devices described as OTC in the product name, the FDA’s device classification name, or the classification name field of the FDA’s device registration and listing database; and
- certain identified DMEPOS items payable under Medicare Part B on a purchase basis.
- Sale price
The 2.3% tax is levied on the sale price of the taxable medical device. In the proposed rule, the IRS indicates that the sale price includes the total consideration paid (whether in the form of money, services, or other things), coverings or containers, and charges to put the device in condition to ship. The sale price does not include the excise tax (whether or not identified as a separate charge); shipping costs; discounts, rebates, and similar allowances actually granted to the purchaser; local advertising charges; and charges for warranty paid at the purchaser’s option. When a taxable medical device is returned under a warranty and replaced with a new device at no charge or a reduced price, the new device is taxed based on the actual amount, if any, paid to the manufacturer for the new device.
- Other issues
The proposed rule also addresses other issues that had been brought to the IRS’s attention. Below are just some of those issues:
- Kits — If taxable and nontaxable devices are sold as a unit, the tax applies only to the portion of the unit allocable to the taxable article. If the kit is a separate taxable medical device, the entire sale price of the kit is subject to the tax.
- Leases — A lease of a taxable medical device is considered a sale for purposes of the tax.
- Demonstration products — A device used by a manufacturer for demonstration purposes is a taxable use of the device. A device provided at no cost to another entity for promotional purposes is a taxable sale.
- Drug/device combination products — While acknowledging a concern about the double taxation of such products (under the branded prescription drug annual fee and this device tax), the proposed rule does not specify how these products are to be treated. The IRS indicates that it believes few, if any, products would be double taxed, and seeks comments on when that might occur and how double taxation could be avoided.
If you have questions regarding the medical device tax or the proposed rule, or you would like assistance in preparing and submitting comments on the proposed rule or for the public hearing, please contact any of the attorneys listed with this alert, or the Hogan Lovells lawyer with whom you normally work.
1. 77 Fed. Reg. 6018 (Feb. 7, 2012).
