The accounting departments of many hospitals and medical practices are preparing for increased costs on medical supplies. Beginning January 1, 2013, new Section 4191 of the Internal Revenue Code (the “Code”) now imposes a 2.3% excise tax (the “Medical Device Tax”) upon the sale by a manufacturer or producer of any “taxable medical device.”
Hospitals purchasing directly from manufacturers are likely to see the Medical Device Tax imposed directly on the purchase of these devices, since manufacturers are liable for reporting and responsible for remitting the tax. Like a sales tax, the manufacturer is expected to collect the Medical Device Tax from purchasers and then remit the tax to the Treasury.
The following summarizes some of the most pressing issues surrounding the Medical Device Tax. Note that the IRS has indicated that it soon will publish guidance intended to clarify much of the confusion surrounding this new tax. At this point, medical practices should ensure they are up to date with IRS regulations and the most recent published guidance regarding the Medical Device Tax.
I. What is a Taxable Medical Device?
Regulations under the Code define “taxable medical device” broadly to mean any “instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article” which is intended for humans and intended to affect the structure or function of the body. This broad definition means that this new tax reaches virtually all medical devices developed and sold by the manufacturers.
There are, however, a number of exemptions. Most importantly, the Code provides a broad exclusion for “any other medical device determined . . . to be of a type which is generally purchased by the general public at retail for individual use.” Whether a device fits under this “Retail Exemption” requires a fact-intensive analysis. While each determination is made on a case-by-case basis, examples given by the IRS of products found to meet the Retail Exemption include adhesive bandages, blood glucose monitors and test strips, mechanical and powered wheelchairs, and even portable oxygen concentrators.
Additionally, the IRS has indicated that special rules will apply to “convenience kits” sold by manufacturers. These kits typically contain some taxable medical devices, such as a scalpel, along with devices that are otherwise exempted from the tax, such as gauze or bandages. The IRS has provided guidance on how these kits should be taxed, depending on the source of the kits.
II. What Price Should Be Taxed?
As if the determination of whether a product is a “taxable medical device” was not complicated enough, the IRS has muddied the waters with guidance regarding the price on which the Medical Device Tax should be assessed. Tax laws generally require that these federal excise taxes be imposed based not according to the actual sales price, but instead based on a sale to an independent “wholesale distributor”.
However, prior to imposition of the tax, the IRS became concerned that many manufacturers in the medical industry do not employ wholesale distributors in their distribution chains. Instead, according to the IRS, many sales are made directly to retailers or end-users. In response, the IRS has provided interim guidance to approximate the constructive sales price when the manufacturer does not regularly sell its devices to wholesale distributors, but instead is making a “sale at retail” or a sale to a “retailer”. For purposes of the Medical Device Tax, the constructive sales price for a “sale at retail” is 75% of the actual sales price, with certain exclusions, while the constructive sales price to a “retailer” is 90% of the actual sales price. Note that these alternative methods can be used only when the manufacturer does not regularly sell its devices to independent wholesale distributors and thus cannot base the tax on that sale price.
This means that the taxable price, and therefore the amount of taxes owed, may vary depending on the purchaser. For hospitals and medical offices, the IRS has made clear that until further guidance is issued, it will treat the sale of a taxable article to these medical institutions as a “sale at retail”.
III. In Conclusion
Although hospitals and medical offices are not directly responsible for paying the Medical Device Tax to the federal government, they should not blindly pay the tax to manufacturers and retailers. By understanding the intricacies of the Medical Device Tax, these medical providers can better protect themselves from excessive and unwarranted tax collection from sellers.
IRS CIRCULAR 230 NOTICE: Any federal tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending any transaction or matter addressed in this communication.