Beginning January 1, 2013, manufacturers, producers, and importers of medical devices must report and pay a 2.3% excise tax on the sales price of taxable medical device pursuant to Section 4191 of the Internal Revenue Code enacted by the Health Care and Education Reconciliation Act of 2010. Just a few of the many questions this raises include: (1) what is a taxable medical device; (2) are there exemptions; (3) are you a manufacturer or importer of a taxable medical device; (4) how and when do you need to report? While each case is unique and deserves a thorough review, below are the answers to guide you as you plan for your 2013 fiscal year.
A taxable medical device is a device listed with the Food and Drug Administration under section 510(j) of the Federal Food, Drug and Cosmetic Act ("FDCA"), intended for humans, or classified as dual use devices if listed. Section 201(h) of the FDCA defines a medical "device" as "an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article, including a component part, or accessory which is:
recognized in the official National Formulary, or the United States Pharmacopoeia, or any supplement to them,
intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment, or prevention of disease, in man 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 any of its primary intended purposes through chemical action within or on the body of man or other animals and which is not dependent upon being metabolized for the achievement of any of its primary intended purposes."
Exemptions do apply to the general definition of medical devices, for purposes of the imposition of this excise tax. For example, contact lenses, eyeglasses and hearing aids are exempt. Also, devices exclusively for veterinary use are not taxable medical devices, but those intended for human use as well as veterinary use will be taxable. There is also a "retail exemption" excluding from this tax those devices that are generally purchased by the general public at retail for individual use. To determine if a specific device qualifies, we must apply the "facts and circumstances test", unless the device qualifies for the "safe harbor" provisions in §48.4191-2(b)(2)(iii) of the regulations.
The regulations impose the excise tax on the sales price by a manufacturer, producer or importer of the taxable medical device. The manufacturer is the entity who produces the taxable medical device from scrap or from new or raw materials by processing, manipulating or changing the form of a device, or by assembling two or more devices. The importer responsible for reporting is the entity who imports or brings the taxable medical device into the United States or withdraws the taxable medical device from a customs-bonded warehouse for sale or use in the United States.
Manufacturers or importers (depending on which entity makes the first U.S. sale) must report (on IRS Form 720) on a quarterly basis this excise tax. The first return to report will be due on April 30, 2013, for the period including January 2013. There will be semi-monthly deposits in certain situations.
If you are subject to this excise tax, careful and professional consideration should be given to the treatment of this tax on your income statement. Factors to consider will include whether the sale is subject to a transfer pricing policy in situations where there is an intercompany sale, or whether the sale is to an unrelated third party. It is important that your company is prepared for the reporting and payment of this excise tax and that you are properly registered before the IRS.