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Jan. 1, 2013 Deadline for Compliance with New Medical Device Excise Tax

Friday, December 07, 2012

December 7, 2012

Jan. 1, 2013 Deadline for Compliance with New Medical Device Excise Tax

Members of the healthcare and medical device industries should take note that as of Jan. 1, 2013, Section 4191 of the Internal Revenue Code will establish an excise tax in the amount of 2.3% of the sale price on sales of any taxable medical device by the manufacturer, producer or importer. The Internal Revenue Service has issued final regulations on this new tax as well as Notice 2012-77, which provides interim guidance on determination of the sale price and other tax-related issues.

Virtually all medical devices intended for human use (including dental instruments, dental equipment and research use-only devices) that are sold after Dec. 31, 2012, as well as such devices that are in inventory on Dec. 31, 2012 but are not sold until after Jan. 1, 2013, are taxable medical devices. The IRS has said that if a device is not currently listed with the FDA but the FDA determines at a later date that it should have been listed, the device will be considered listed as a device with the FDA as of the date the agency provides written notification to the manufacturer or importer that corrective action with respect to listing is required. The excise tax will then apply to such devices.

Eyeglasses, contact lenses and hearing aids are exempt from the new excise tax, along with medical devices that are (a) to be further manufactured, (b) exported or destined for export, (c) sold for non-human use, or (b) intended to be purchased by the general public at retail for individual use (referred to as the retail exemption). The final regulations specify that the retail exemption applies if (a) if the medical device is regularly available for purchase and use by individual consumers who are not medical professionals and (b) the device design demonstrates that it is not primarily intended for use in a medical institution or office or by medical professionals (e.g., it does not have to be implanted, inserted, operated or otherwise administered by a medical professional).

The regulations also include a safe harbor provision that identifies certain categories of taxable medical devices that fall within the retail exemption, including IVD home-use lab tests, over-the-counter devices and certain devices that qualify as durable medical equipment, prosthetics, orthotics or supplies for which payment is available on a purchase basis under Medicare Part B payment regulations. The regulations make clear that a manufacturer or importer is generally liable for the new excise tax when the title to a taxable device passes from the manufacturer to a purchaser. The regulations also underscore that the price for which a taxable device is sold includes the total consideration paid for the device irrespective of the form (i.e., money, services or trade-in). Packaging costs are included but shipping, transportation and other expenses incurred by the manufacturer or importer in placing the device in the hands of the purchaser are excluded. The sale price also excludes any warranties that may be purchased and any rebates that may be offered to the purchaser.

Sandler, Travis & Rosenberg P.A. recommends that affected companies consider and update their evaluation of their tax commitment, assess the availability and application of any exemptions or anticipated business changes impacting the tax, and structure financial and budget estimation systems to ensure timely compliance beginning Jan. 1, 2013. For additional information and guidance on which medical devices are taxable, determination of the intended uses of the products, calculation of the sale price of the products, and assessment of possible exemptions, please contact ST&R to speak with a regulatory professional.  

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