The Health Care and Education Reconciliation Act of 2010 in conjunction with the Patient Protection and Affordable Care Act enacted excise tax on sales of medical devices by manufacturers, producers, or importers of such devices. The tax, which is effective January 1, 2013, is imposed by IRC Sec. 4191 and is equal to 2.3% of the sale price.
A taxable medical device is any device defined in § 201(h) of the Federal Food, Drug, and Cosmetic Act (FFDCA) that's intended for humans. Generally, this includes any component, part, or accessory which is intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment, or prevention of disease. The following devices are specifically exempted from the manufacturers excise tax: Eyeglasses; contact lenses; hearing aids; and any other medical devices the IRS determines to be of a type that is generally purchased – including over the Internet – by the general public for retail use (the retail exemption).
Retail Exemption From Excise Tax
The retail exemption is based on facts and circumstances. Factors that are relevant in determining whether a medical device is regularly available for purchase and use by consumers are as follows:
- whether consumers who are not medical professionals can purchase the device;
- whether consumers who are not medical professionals can use the device safely and effectively;
- and whether the device is classified by the FDA as a Physical Medical Device.
Factors that would support a taxable medical device are as follows:
- whether the device must be implanted, inserted, operated, or otherwise administered by a medical professional;
- whether the cost to acquire the device requires a large initial investment;
- whether the device meets certain FDA classifications;
- and whether the device is available exclusively on a rental basis under Medicare Part B rules.
The regulations outline various examples of taxable and non-taxable medical devices. Based on facts and circumstances, the examples conclude that items such as adhesive bandages, denture adhesives, wheelchairs, and portable oxygen concentrators meet the retail exemption while mobile x-ray systems and nuclear MRI systems do not meet the retail exemption.
Resale and Export Exemptions From Excise Tax
The final regulations under IRC Sec. 4191, issued December 7, 2012, provide an exemption for sales of medical devices (1) for use by the purchaser for further manufacture, or for resale by the purchaser to a second purchaser for use by such second purchaser in further manufacture; or (2) for export, or for resale by the purchaser to a second purchaser for export.
In order to claim this exemption, manufacturers, producers, and importers of taxable medical devices that sell taxable medical equipment for further manufacturing and export must register with the IRS by filing Form 637, Application for Registration (For Certain Excise Activities). If the application is approved, the taxpayer receives a Letter of Registration listing the activities for which the taxpayer is registered, effective date, and registration number. Form 637 and frequently asked questions can be found here.
Collecting and Remitting the Tax
The medical device excise tax must be reported on Form 720 (Quarterly Federal Excise Tax Return). Semimonthly deposits are required if the tax exceeds $2,500 per quarter and must be made via electronic funds transfer. The first deposit of the medical device excise tax, covering the first 15 days of January, is due by Jan. 29, 2013. In consideration of the short time frame between the effective date of the tax and the due date of the first deposit, the IRS has provided temporary relief from the penalty for failure to make timely deposits of tax for the first three calendar quarters of 2013. Penalty relief is available provided the taxpayer demonstrates a good faith attempt to comply with the law and that the failure was not due to willful neglect.
While this excise tax is fast approaching, the IRS is still working to provide guidance on certain issues. A list of frequently asked questions can be found here.