Last week, the IRS and the Treasury Department published final regulations regarding the medical device excise tax under § 4191 of the Internal Revenue Code (IRC). IRC § 4191, which was enacted by the Health Care and Education Reconciliation Act of 2010 in conjunction with the Patient Protection and Affordable Care Act, imposes an excise tax of 2.3% on the sale of certain medical devices. The medical device excise tax applies to manufacturers and importers and generally does not apply to individual consumers.
The IRS and the Treasury Department developed the final regulations in consultation with technical experts at the FDA and CMS, and after reviewing numerous public comments received regarding proposed regulations published last February. The final regulations are applicable to sales of taxable medical devices after December 31, 2012.
Internal Revenue Code § 4191(b)(1) generally provides that a “taxable medical device” is any device, as defined in § 201(h) of the Federal Food, Drug & Cosmetic Act (FFDCA) that is intended for humans. Noting in the preamble that the FDA requires a device defined in § 201(h) of the FFDCA that is intended for humans to be listed as a device with the FDA under § 510(j) of the FFDCA and 21 CFR Part 807 (with limited exceptions), the final regulations track this FDA requirement by defining a taxable medical device as a device that is listed as a device with the FDA under § 510(j).
In responding to comments requesting various exceptions to this general approach, the IRS and Treasury Department in the preamble consistently refused such requests and continued to adhere to the FFDCA § 510(j) listing as the key factor in determining whether a device satisfies the definition of a “taxable medical device.” For example, devices that have both human and veterinary uses but that are listed with the FDA under § 510(j) are taxable medical devices under IRC § 4191, even with respect to sales into the veterinary market. Similarly, even a “dual use” device that is listed under § 510(j) but that is sometimes used for non-medical purposes will, nonetheless, be a taxable medical device for purposes of IRC § 4191. In addition, because a humanitarian use device for which the FDA has approved a Humanitarian Device Exemption (HDE) is listed under § 510(j), the preamble to the final regulations states that such a device also is a taxable medical device. Under the same reasoning, the preamble states that software and software updates that are not listed as devices with the FDA under § 510(j) do not fall within the definition of a taxable medical device.
IRC § 4191(b)(2) provides an exception for certain “retail” items. In particular, the term “taxable medical device” does not include any device of a type that is generally purchased by the general public at retail for individual use, such as eyeglasses, contact lenses, and hearing aids. Under the final regulations, a device will be considered to be of a type generally purchased by the general public at retail for individual use 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 by a medical professional.
The final regulations adopt a facts and circumstances approach to determining whether a particular device falls within the retail exception. The approach requires a balancing of factors set forth in Treas. Reg. § 48.4191-2(b)(2). No one factor is determinative, and a device may qualify for the retail exception even if it meets one or more negative factors set forth in the final regulations. The final regulations also include seven additional examples that illustrate the process for determining whether a device falls within the retail exception.
The final regulations do not address certain issues that the IRS and the Treasury Department continue to study. These issues include the determination of price under IRC § 4216(b); the tax treatment of medical software licenses; the taxability of donated medical devices; and the taxability of medical convenience kits. In order to provide rules for manufacturers on an interim basis, however, the IRS and the Treasury Department have issued Notice 2012-77.