On December 7, 2012, the IRS published final regulations that provide guidance on the 2.3% excise tax imposed on any sale occurring after December 31, 2012, of any “taxable medical device” by the manufacturer, producer or importer of such device (such tax enacted as part of the Affordable Care Act (ACA)). A “taxable medical device” is any device (as defined in section 201(h) of the Federal Food, Drug, and Cosmetic Act (FFDCA)) that is intended for humans, excluding eyeglasses, contact lenses, hearing aids, and any other medical device of a type that is generally purchased by the general public at retail for individual use. The final regulations set forth the IRS’s interpretation of key elements of the excise tax, including the retail exemption, as discussed after the jump.
The final regulations provide that a device defined in section 201(h) of the Federal Food, Drug, and Cosmetic Act that is intended for humans means a device that is listed as a medical device with the Food and Drug Administration (FDA) under section 510(j) of the FFDCA and 21 CFR part 807, pursuant to FDA requirements (or devices that should have been so listed). This definition generally follows the approach taken in the proposed regulations. Furthermore, the final regulations generally provide that a device is considered to be of a type generally purchased by the general public at retail for individual use if: (i) the device is regularly available for purchase and use by individual consumers who are not medical professionals, and (ii) the device’s design demonstrates that it is not primarily intended for use in a medical institution or office, or by medical professionals. The regulations provide a set of non-exclusive factors for use in evaluating whether a taxable medical device qualifies for the retail exemption, as well as a safe harbor provision identifying certain categories of taxable medical devices determined to fall within the retail exemption. The final safe harbor includes: (1) devices that are identified in the FDA’s IVD Home Use Lab Tests (over-the-counter, or OTC, tests) database; (2) devices described as OTC devices in the relevant FDA classification regulation heading; (3) devices that are described as OTC devices in the FDA’s product code name, device classification name, or the classification name field in the FDA’s device registration and listing database; and (4) certain devices that qualify as durable medical equipment (DME), prosthetics, orthotics and supplies (DMEPOS) for which payment is available on a purchase basis under Medicare Part B payment rules in accordance with the fee schedule published by the Centers for Medicare & Medicaid Services (CMS). Devices that qualify as DMEPOS include: (a) prosthetic and orthotic devices as defined in 42 CFR 414.202, that do not require implantation or insertion by a medical professional; (b) parenteral and enteral nutrients, equipment, and supplies as defined in 42 CFR 411.351 and described in 42 CFR 414.102(b);(c) customized items, as described in 42 CFR 414.224; (d) therapeutic shoes as described in 42 CFR 414.228(c); or (e) supplies necessary for the effective use of DME, as described in section 110.3 of chapter 15 of the Medicare Benefit Policy Manual.
The preamble to the regulations also addresses the application of the excise tax to certain specific circumstances, including dual use devices, humanitarian use devices, veterinary devices, and dental instruments. Existing rules governing manufacturer excise taxes, including exemptions for use by the purchaser for further manufacture, or for resale by the purchaser to a second purchaser for use by the second purchaser for further manufacture, and for export, generally will apply to this excise tax, subject to certain exceptions. The preamble to the regulations discusses how these general rules will be applied to medical devices, including guidance on the meaning of manufacturer, importer and sale price. The IRS also addresses in the preamble a number of other issues raised by public comments, including interaction with the ACA’s branded prescription drug (BPD) fee. The IRS notes that there is no statutory basis for providing an exclusion from the device tax for a combination product with both a device and drug component, even if the combination product is taken into account for purposes of computing the BPD fee. Other specific areas addressed include classification of “convenience kits,” associated devices and components of devices, and medical software. The IRS has posed a frequently-asked questions document and other guidance on its web page.