Medical Device Manufacturers Must Prepare for the Medical Device Excise Tax

By John Lanza

The 2010 Patient Protection and Affordable Care Act contains a 2.3 percent excise tax on the sale of taxable medical devices. While the tax is scheduled to go into effect on January 1, 2013, there remains considerable uncertainty regarding the types of transactions and taxpayers that the tax will apply to. With only months remaining until 2013, companies need to take the steps necessary to comply with the Act’s requirements.

Which taxpayers are affected?

The tax applies to manufacturers, producers and importers of taxable medical devices. It does not apply to several types of transactions, including:

* sales by a manufacturer to a purchaser for further manufacture, or for resale by the purchaser to a second purchaser for use by such second purchaser in further manufacture (devices assembled into “kits” are deemed to be further manufactured)

* sales by a manufacturer for export, or for resale by the purchaser to a second purchaser for export

* sales to governments and nonprofit entities

What is a taxable medical device?

A taxable medical device is any product that is:

* For use in the diagnosis of disease, or in the treatment or prevention of disease, in humans or other animals OR

* Intended to affect the structure or any function of the body of man or other animals, and which does not achieve its intended purpose through chemical action within the body (i.e. not drugs)

Any device that is required to be listed as a device with the Food and Drug Administration (FDA) under section 510(j) of the FFDC Act is considered a taxable medical device.

What is not a taxable medical device?

Several products are specifically excluded from the definition of taxable medical device, including eyeglasses, contact lenses, and hearing aids. Additionally, a “retail” exemption excludes any medical device that can be generally purchased by members of the general public at retail for individual use. Whether a product falls within the retail exemption will depend on the facts and circumstances of each case. However, the IRS has provided that several products fall within this exemption, including:

* Devices identified in the FDA’s IVD Home Use Lab Tests database

* Devices described as “over the counter” or “OTC” in the relevant FDA classification regulation heading, product code name, device classification name, or the “classification name” field in the FDA’s device registration and listing database

Proposed Treasury Regulations also provide additional guidance that a device will meet the retail exemption if it is regularly available for purchase and use by individual consumers who are not medical professionals, and the design of the device demonstrates that it is not primarily for use in a medical institution or office, or by medical professionals.

For assistance in developing and evaluating the steps necessary to comply with the new tax, consult your tax advisor.

John Lanza is a Tax Partner at McGladrey and can be reached at john.lanza@mcgladrey.com

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