As of January 1, 2013, the first sale of a taxable medical device in the United States by a manufacturer, producer, or importer has been subject to a 2.3 percent excise tax as provided for in the Affordable Care Act. For a foreign (non-U.S.) manufacturer selling taxable medical devices directly to end-users in the United States, such as hospitals purchasing surgical kits for use by physicians in their operating theatres, the question is, who is the importer liable for collecting and remitting the tax to the IRS? The foreign company selling to end-users in the United States? The customs broker? The hospital or other end-user? What if the hospital is organized as a nonprofit entity? For purposes of answering this question, we will assume that the foreign manufacturer does not have any U.S.-based employees, does not maintain an office or other fixed place of business in the United States, and that all transactions and sales to U.S. customers are conducted from the manufacturer’s offices located outside of the United States.

It is important to note that the IRS definition of “importer” (see heading “Who Is Liable for the Federal Excise Tax") that applies to the medical device excise tax is different from the FDA’s importer definition. For FDA purposes, an importer is generally the party in the United States with a financial interest in the product or a U.S. agent designated by a foreign manufacturer or supplier through a specific written agreement, filed with the FDA, between the foreign entity and the U.S. agent. On the other hand, under the IRS definition an importer is the person who is the inducing and efficient cause—as principal and not as an agent—of the goods being brought into the United States for purposes of sale or use. If a person bringing a taxable article into the United States does not have a proprietary interest in the article, he is not the importer for purposes of the excise tax. Accordingly, if a foreign manufacturer engages a customs broker to import taxable medical devices into the United States, the customs broker is only the nominal importer and does not have liability for filing quarterly excise tax returns and remitting the tax to the IRS.

In determining who is the importer of an article subject to the excise tax, the IRS and the courts use a substance over form analysis. Whether title to the merchandise passes to a U.S. person at the time of shipment or only after its arrival in the United States is not controlling in this determination. Thus, a foreign corporation that delivers articles to a U.S. buyer, even if delivery and title transfer occurs at the buyer’s U.S. business facilities, without further U.S. business contacts is generally not considered the importer for purposes of the excise tax. Even the fact that the foreign company bears the importation cost (which would be passed on to the U.S. buyer) in itself would not cause the foreign company to be considered the importer.

In the present scenario, when the foreign manufacturer does not have a direct or indirect business presence in the United States, the U.S. end-user is considered to be the importer liable for the medical device excise tax because it is the inducing cause for the medical devices being brought into the United States. The fact that the U.S. end-user is purchasing the devices for its own use does not change the analysis. The applicable IRS regulations provide that an importer is taxed on the use of the imported devices in the same manner as if they had been sold by the importer. The tax attaches at the time the use begins. Moreover, the U.S. end-user is liable for the medical device excise tax even if it is organized as a charitable institution. Nonprofit status does not relieve an entity from the obligation to report and remit the medical device excise tax to the IRS.


Hospitals and physician practices that purchase taxable medical devices directly from foreign manufacturers need to be aware that that they fall under the IRS definition of an “importer” for purposes of the medical device excise tax and that they are required to file IRS Form 720, Quarterly Federal Excise Tax Return, and pay the 2.3 percent excise tax on their use of the devices. This creates the additional administrative burden of having to track such purchases for purposes of reporting the tax, as well as determining the tax base for purposes of computing the tax—with its own set of complicated rules. While direct purchases of medical equipment from foreign manufacturers may in certain cases appear cost-effective, purchasers who are end-users need to take into account the deferred costs of administration, compliance, and the payment of the tax.