Tax Policy Alert - Medical Excise Tax: Avoid Surprises, Seek Answers Now Document Transcript
June 3, 2011 Medical Excise Tax: Avoid Surprises, Seek Answers NowTAX POLICY CLIENT ALERT This Alert provides only Beginning January 1, 2013, manufacturers, producers and importers of certain medical general information and devices will be subject to an excise tax equal to 2.3 percent of the price for which the should not be relied upon as product is sold. The statutory language for the tax leaves open a variety of important legal advice. We would be questions, such as the breadth of the definition of “taxable medical device,” the scope of pleased to discuss our the exemption for products generally sold to the public at retail, the deductibility of the tax experience and the issues and the tax base when the producer or importer is also the wholesaler or retailer. Therefore, it is imperative for manufacturers, importers, distributors and retailers of presented in this Alert with products potentially subject to the excise tax to become involved in the regulatory process. those contemplating investments in these markets. The excise tax, which is codified in section 4191 of the Internal Revenue Code, was added For more information, contact by the 2010 health care legislation (The Patient Protection and Affordable Care Act [Pub. your Patton Boggs LLP L. No. 111-148] as amended by the Health Care and Reconciliation Act of 2010 [Pub. L. attorney or the authors listed No. 111-152]) to help pay for the legislation’s cost. Section 4191(b) defines “taxable below. medical device” using a reference to the Federal Food, Drug, and Cosmetic Act. The term “taxable medical device” includes only devices intended for humans. Section 4191(b)(2) George Schutzer exempts eyeglasses, contact lenses, hearing aids and any “other medical device 202-457-5273 determined by the Secretary [of the Treasury] to be of a type which is generally purchased firstname.lastname@example.org by the general public at retail for individual use.” Thus, an exemption is available only if the Treasury Secretary determines that a product is exempt. WWW.PATTONBOGGS.COM Although the term “device” as used in the Federal Food, Drug and Cosmetic Act is often clear-cut, significant ambiguities exist for many classes of products. Laboratory developed tests (LDTs), dual-use products, combination products, mobile electronics used for wireless health-related purposes and device components and accessories, are just a few examples of products for which clarification may be required. In Notice 2010-89, the Treasury Department and the Internal Revenue Service (IRS) invited written public comments on the medical device excise tax. The Notice generally requested comments regarding issues that “should be” addressed in guidance implementing the tax, presumably allowing stakeholders to submit comments on a broad array of issues. The Notice specifically requested comments on the exemption in section 4191(b)(2)(D) for any medical device “determined by the Secretary to be of a type which is generally purchased by the general public at retail for individual use.” The Notice also specifically requested comments on issues pertaining to the application of the existing Internal Revenue Code Chapter 32 manufacturers excise tax rules to the new excise tax. While the deadline for submitting comments was in March, the IRS received comments after the deadline.
The comments received by the IRS are indicative of the range of significant issues thatneed to be addressed. A sampling of those issues includes the following: • Many commenters sought exemptions for products that they produce or sell as a “type generally purchased by the general public at retail for individual use.” These include, among others, orthotic and prosthetic devices, bandages, pregnancy kits, diabetes testing kits and supplies, components of eyeglasses, canes and crutches, wheelchairs, snake bite kits, remote patient monitoring devices, incontinence products, feminine hygiene products, ostomy products, asthma inhalers, electronic hand sanitizers, bath safety items, portable oxygen systems, home care beds and other medical equipment and supplies for home use. • A law firm asked for definitions of “generally purchased,” “general public,” “at retail” and “individual use.” • A trade association for the medical device industry asked that the general exemption apply to all devices approved by the FDA as nonprescription, over-the- counter devices and all home use devices whether or not they require prescriptions. • One commenter objected to the taxation of any dental care devices because the health care legislation does not promote dental care. • Another commenter asked that the IRS clarify that the term “taxable medical devices” only includes those “articles that are marketed with claims of medical, diagnostic, or therapeutic utility,” thereby excluding devices such as nail files and razors. • A commenter asked that sales of devices of a type intended for humans be exempt from tax if they are sold for use in veterinary medicine. • Several commenters raised questions about the base price for the tax if the manufacturer is a distributor; they suggested that a base price should be imputed. Commenters also suggested procedures for determining the tax base (the imputed price for which the device is sold) in the case of taxable transactions for which there is not an arm’s length selling price. • At least one commenter sought guidance on how to treat price adjustments after the tax had been paid. • One commenter sought confirmation that the tax could be deducted as an ordinary or necessary business expense. • The Federation of American Hospitals, the American Hospital Association, the Catholic Health Association of the United States and the Health Industry Group Purchasing Association submitted combined comments that focused on the shared responsibility commitment from a broad group of key health care stakeholders. The group wants the IRS to prohibit manufacturers and importers from passing the tax through to health care providers or to employers and patients through the cost of insurance. The comments state that if manufacturers claim deductions for the excise tax paid, and pass the tax on to purchasers through higher prices, there would be an instance of double dipping. The comments seek an exemption for devices sold to hospitals and health care providers if they are of a type often purchased at retail for personal use. • Several commenters noted the need to address kits, which may consist of multiple devices prepared by different manufacturers. Questions included whether the manufacturers should pay the tax or whether the assembler of the kit is the taxable producer. • Commenters noted the need to address “combination products,” such as those that include both a drug and a device.
• Two commenters sought guidance on dual use devices—devices marketed to customers who uses them for both medical and non-medical uses. • A trade association recommended that no excise tax be imposed on free samples, demonstration products, evaluation products, loaned surgical equipment and articles used in the testing of the manufacturer’s products. • A commenter requested that sales of inventory as part of the sale of a company or business not be subject to tax. • One medical device company provided comments on the identity of the manufacturer for purposes of the tax (e.g., is it manufacturer of the device that is included in a kit or the assembler of the kit? In the case of contract manufacturing, is it the company that contracts with another to the manufacturing or is it the actual manufacturer?).Although the deadline for comments on the notice has passed, the IRS and Treasury arelikely to continue to accept comments until they have prepared draft guidance. It seemslikely that the IRS and Treasury will begin a formal rulemaking process by publishingproposed regulations for comment, or will begin a less formal process by publishing a draftnotice, ruling or revenue procedure for commentInterested parties that produce, import or sell products that may fall within the definition of“taxable medical device,” or for which there is some doubt as to whether they will qualifyfor an exemption, should, if they have not already done so, develop a strategy forpresenting their position to the IRS and Treasury. Manufacturers, wholesalers, retailersand purchasers of medical devices should consider supplementing comments provided bytheir trade associations. Companies can both reinforce comments of their tradeassociations and address nuances or issues of special importance with a sharper focusthan association comments.By the time the tax is effective, producers, manufacturers and importers will need tounderstand its full scope if they want to attempt to pass on all or a portion of the tax to thepurchaser. A producer who invoices for an excise tax that is not due could be subject topenalties. *****To assist clients on matters relating to the excise tax on medical devices, Patton Boggshas assembled a team of attorneys experienced in tax, FDA regulatory matters and publicpolicy, including attorneys who are actively involved in health care lobbying (includinglobbying with regard to the medical excise tax). When necessary, we supplement the teamwith patent attorneys who have a deep understanding of medical device intellectualproperty and related issues.Legislation has been introduced to repeal the tax. In addition to advising and assisting ontechnical issues relating to the implementation of the excise tax, our team can assist inassessing whether the tax is likely to be repealed, cut back or amended before its effectivedate.Our team consists of:Rosemary Becchi202email@example.com
Martha Kendrick 202-457-6520 firstname.lastname@example.org Darryl Nirenberg 202-457-6022 email@example.com Paul Rubin 202-457-5646 firstname.lastname@example.org George Schutzer 202-457-5273 email@example.com For additional information, please feel free to contact us.WASHINGTON DC | NORTHERN VIRGINIA | NEW JERSEY | NEW YORK | DALLAS | DENVER | ANCHORAGE DOHA, QATAR | ABU DHABI, U.A.E.