Press Room: Tax Release

January 23, 2013

Navigating the Medical Device Excise Tax Provisions

One of the new taxes imposed under the Affordable Care Act, a federal excise tax of 2.3% on the sale of medical devices, became effective January 1, 2013. The manufacturer, producer, or importer making the sale is liable for the tax imposed. In the past month, IRS has finalized two regulations and promulgated a notice addressing a number of questions stemming from the imposition of this new tax. While there are still areas where clear guidance needs to be issued, as of right now IRS expects a good faith effort to comply with the tax.

The new law provides that generally the tax will be imposed on any device that is an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article, including any component, part, or accessory, that is intended for use in humans and does not achieve its primary intended purpose through chemical action.

The tax must be reported by those liable on Form 720 (the Quarterly Federal Excise Return). IRS has not issued a final notice yet indicating where the medical excise tax should be reported on the form. The first required filing of Form 720 is due on April 30, 2013, for the first three months of the calendar year.

Furthermore, those subject to the tax are required to make semi-monthly deposits if their quarterly liability exceeds $2,500 (or quarterly if $2,500 or less). The first of these deposits, for the period January 1, 2013, through January 15, 2013, is due on or by January 29, 2013. The deposit must either be 95% of the liability for the period covered, or meet certain safe harbor provisions, to avoid penalties. It should be noted that IRS will not impose penalties on those failing to make timely deposits required for the first three quarters of 2013, provided that the taxpayer demonstrates a good faith effort to comply with requirements, and the failure was not the result of willful neglect. 

Notice 2012-77, which IRS released on December 7, 2012, also illustrates the constructive pricing rules for these medical devices until further guidance is issued. These guidelines are used to adjust the sales price when sales are made to someone other than an independent wholesale distributor. The effect is to estimate the sales price as if the device were sold to an independent wholesale distributor. Generally, these guidelines are as follows:

Sales at Retail  
75% of the actual selling price

Sales to Unrelated Retailer  
90% of the lowest price for which articles are sold to unrelated retailers

Sales to Related Retailer
75% of 95% of the actual sales price when selling to a related retailer

Sales to Related Reseller that Leases and Sells at Retail
75% of 95% of the actual sales price when selling to a related retailer

Sales to Related Reseller that only Leases at Retail
Actual selling price, assuming it reasonably approximates fair market price

The statute provides four general exemptions to the tax:

  1. Products exported or destined for export;
  2. Components sold for further manufacture;
  3. Products intended for non-human use; or
  4. Eyeglasses, contact lenses, and hearing aids or any other medical device that is of a type that is generally purchased by the general public for use at retail for individual use (referred to as the “retail exemption”).

There are also a number of devices listed by the Food and Drug Administration as physical medical devices (e.g., wheelchairs, crutches, certain prosthetics, etc.) that are exempt from the tax.

To implement these provisions, affected taxpayers must analyze product lines to determine taxability of products sold, develop internal processes for identifying and tracking exempt sales, analyze pricing of products to ensure that the correct constructive price base is taxed, develop systems and processes to accrue and remit the correct semi-monthly tax deposits, and prepare the required quarterly filings.