On December 7, 2012, the Internal Revenue Service (IRS) published final regulations in the Federal Register implementing a new excise tax on the sale of medical devices. The new 2.3 percent tax took effect on January 1, 2013, and will increase device manufacturers’ cost of doing business. It also could impose a financial burden on small device manufacturers. The IRS issued further guidance in Notice 2012-77 on sale price determinations and other key facets of the tax.
What Clients Need to Know
- IRS defines a “taxable medical device” as a device that is listed with FDA under section 510(j) of the Federal Food, Drug and Cosmetic Act, and 21 CFR § 807. However, if FDA determines that a device that is not listed with FDA should be listed, it will be deemed such with the FDA as of the date the agency notifies the manufacturer or importer in writing that corrective action with respect to listing is required.
- The “retail exemption” to the tax excludes many items the general public purchases for individual use. For example, the new tax does not apply to sales of eyeglasses, contact lenses, hearing aids, or other products generally purchased by the public through retail outlets for individual use.
- Sales of taxable medical devices for further manufacture or export may be made tax free if certain registration and other requirements are met.
The regulations offer a retail exemption “safe harbor.” The IRS identifies device categories and criteria for the retail exemption. Among these are:
- FDA’s online in vitro diagnostics (IVD) Home Use Lab Tests (Over-the-Counter Tests) database.
- Devices FDA describes as over the counter (OTC) in certain official FDA classification or product code headings or descriptors.
- Numerous devices that qualify as durable medical equipment, prosthetics, orthotics or supplies for which payment is available on a purchase basis under the Medicare Part B payment rules.
- Device cost. Items that entail a significant initial investment and recurring expenditures are generally not considered affordable by average consumers.
- Device operation. Exempted products include those that can be used safely and effectively at home with minimal instruction.
- “Sales at retail.” The IRS currently is treating sales to doctors’ offices and clinics as sales at retail, and exempt from the tax.
While the device excise tax allows exemptions, it clearly has the potential to impact manufacturers’ bottom line.