The IRS last week issued final regulations and additional guidance regarding the medical device excise tax, which applies to sales of taxable medical devices after December 31, 2012. The excise is imposed on the manufacturer, producer, or importer of a taxable medical device and is equal to 2.3% of the price for which the device is sold. These regulations are largely unchanged from the proposed regulations issued in February 2012. For a summary of the proposed regulations, see here.
The term "taxable medical device" is defined in the statute as "any device (as defined in section 201(h) of the Federal Food, Drug, and Cosmetic Act) intended for humans." The regulations specify that any device that is listed or required to be listed as a device with the Food and Drug Administration under section 501(j) of the FFDCA generally is subject to the tax. The statute creates an exemption from the tax, however, for eyeglasses, contact lenses, hearing aids, and any other device of a type that is generally purchased by the general public at retail for individual use.
The final regulations, like the proposed regulations, focus primarily on the retail exemption from the medical device tax. They provide generally that a device is eligible for the retail exemption if it is regularly available for purchase 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. In response to a number of comments by practitioners, the final regulations expand on the proposed regulations by providing that purchases over the telephone or over the internet may constitute retail sales, as well as sales at physical retail business locations. Like the proposed regulations, the final regulations create a safe harbor list of devices that will be considered to be of a type generally purchased by the general public at retail for individual use. This list includes devices listed on the FDA's online over-the-counter tests database, devices that are described as "OTC" or "over-the-counter" devices in the relevant FDA classification heading or product code name, prosthetic and orthotic devices that do not require implantation or insertion by a medical professional, and various other items.
With respect to products that do not fit within the safe harbor, the regulations provide that all facts and circumstances must be taken into account in determining whether a device qualifies for the retail exemption, and list a number of specific factors that should be considered. The regulations also contain a number of examples of devices that generally qualify for the retail exemption, including non-sterile absorbent tipped applicators, adhesive bandages, snake bite suction kits, denture adhesives, pregnancy test kits, blood glucose monitors, blood glucose test strips, lancets, certain prosthetic devices, mechanical and powered wheelchairs, portable oxygen concentrators, urinary ileostomy bags, and therapeutic AC-powered adjustable home-use beds. On the other hand, the examples conclude that mobile x-ray systems, nonabsorbable silk sutures, nuclear magnetic resonance imaging systems (also known as MRIs), and flotation therapy beds are not of a type that are generally purchased by the public at retail and therefore do not qualify for the exemption.
Concurrent with the issuance of the final regulations, the IRS also issued Notice 2012-77, which provides interim guidance on certain issues the final regulations do not address, including the determination of the sale price for purposes of measuring the tax, the tax treatment of medical software licenses, the taxability of donated medical devices, and the taxability of medical convenience kits. The notice creates a helpful set of rules for determining the constructive sale price based on which of five delineated distribution chain models a particular transaction fits within (e.g., sales directly to end users, sales to unrelated retailers, etc.).
The notice also clarifies the treatment of "convenience kits," which are defined generally as kits consisting of two or more different medical devices, or a combination of medical devices and other items, packaged together for the convenience of the health care professional or end user. The guidance provides that the sale of a taxable medical device that is a component of a domestically produced convenience kit will be subject to tax upon its sale by the manufacturer or importer; however, the sale of the convenience kit by the kit producer will not be subject to the tax. An importer of a convenience kit will be taxed only on the portion of the sale of a convenience kit that is properly allocable to the individual taxable medical devices included in the kit. This is a significant departure from the proposed regulations, which generally provided that the process of producing or assembling a kit that is a taxable medical device constitutes further manufacture and is therefore subject to the tax, even if individual components included in the kit might have been exempt from the tax.
The notice also asks for additional comments on a number of issues addressed by the final regulations and the notice, including the constructive sale price rules. This suggests that additional guidance may be under consideration after the medical device excise tax is implemented at the beginning of next year.