IRS Clarifies 2.3% Medical Device Tax and Requests Comments for Additional Exclusions

February 7, 2012
First in Series
This article is a brief bullet point summary and first in a series from McGuireWoods on the proposed Medical Device Tax. For a detailed exposition of the regulation, click here.

The IRS on Friday, Feb. 3, 2012 issued a proposed regulation to implement the medical device tax which was included as part of the Affordable Care Act. The comment period is open until May 7, 2012. A key issue concerning the tax is which devices would be considered under the tax’s “retail exemption” or “safe harbor.” The IRS published detailed clarification on what devices and transactions will be taxed and asked for industry to submit further suggestions on additional factors, examples and devices to be either included or excluded from the final tax.

I. Two Key Takeaways :

A. Detailed Inclusions/Exclusions Provided

The IRS has now, in its second draft regulation, clarified criteria for tax exclusion, with 40-plus pages of descriptive commentary on the specifics of what it will and will not consider taxable, including:

  • Veterinary devices
  • Dual use devices
  • Research Use Only devices
  • Investigation devices
  • Taxable events
  • Leasing
  • Calculation of sale price to tax
  • Sales by persons other than manufacturer
  • Secondary sales
  • Sales for further manufacture or export
  • Kits
  • Device components and associated devices
  • Combination products
  • Contracts
  • Medical software, IT systems, mHealth and mobile medical apps

Please contact McGuireWoods for a detailed summary of exclusions and inclusions relevant to your operations.

B. Additional Opportunity to Petition IRS to Exclude Certain Devices/Transactions

The IRS is requesting comments on additional factors, examples and safe harbors for devices to add to its lists. Manufacturers, producers and importers are urged to take this opportunity to have particular devices and transactions excluded from taxable sales.

II. Medical Device Tax Cheat Sheet :

Tax Rate : 2.3 percent of sales price

Who Pays : Manufacturer, producer or importer

Effective Date : Jan. 1, 2013

Devices Covered : All devices regulated by FDA for use in humans

Exempted Devices :

  1. Eyeglasses
  2. Contact lenses
  3. Hearing aids
  4. OTC tests
  5. OTC devices
  6. Medicare Part B payment available devices:
    • Durable medical equipment and necessary supplies
    • Prosthetics and orthotic devices
    • Parenteral and enteral nutrients, equipment and necessary supplies
    • Customized items
    • Therapeutic shoes
  7. Any other devices generally purchased by the general public at retail for individual use, meaning:
    • Regularly available for purchase and use by individual nonmedical professional consumers, generally suggesting:
      • Consumers can purchase the device through retail businesses that also sell items other than medical device
        • e.g., drugstores, supermarkets
      • Consumers can use the device safely and effectively for its intended medical purpose, with little or no training
      • The device is classified by FDA as a Physical Medicine Device
    • Not primarily for use in a medical institution or office by a medical professional, generally suggesting:
      • Not implanted, inserted, operated or otherwise administered
      • Not unaffordable by average consumer N
      • Not a Class III device
      • Not classified by FDA as a:
        • Clinical Chemistry and Clinical Toxicology Device
        • Immunology and Microbiology Device
        • Anesthesiology Device
        • Cardiovascular Device
        • Ear, Nose, and Throat Device
        • Gastroenterology – Urology Device
        • General and Plastic Surgery Device
        • Neurological Device
        • Opthalmic Device
        • Orthopedic Device
        • Radiology Device
        • Dental Device
        • Obstetrical and Gynecological Device
        • Physical Medicine Device

III. Now through May 7 the IRS is accepting comments on:

  1. Suggestions for additional specific devices to exclude from the tax
  2. Additional factors or examples that could be added to the rule to provide greater certainty for those affected
  3. How to provide greater clarity with respect to taxable medical devices sold primarily or exclusively through specialty medical retailers
  4. Whether the following should impact whether a device is exempt:
    • Packaging and labeling
    • Manufacturer’s warranty
    • Substantial Internet sales
  5. Other types of durable medical equipment, prosthetics, orthotics and supplies that should be excluded from the tax
  6. How to avoid double taxation/BPD fees on combination devices (drug/device)

Please contact McGuireWoods for support in petitioning the IRS for tax exclusion or for additional information on the proposed Medical Device Tax.