The Internal Revenue Service has issued proposed regulations to provide guidance on the excise taxes imposed on the sale of medical devices under the health care reform law.
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The proposed regulations in REG-113770-10 affect manufacturers, importers, and producers of taxable medical devices, and have been eagerly awaited by them. They come at a time when medical device makers have come under scrutiny in Congress for overcharging health care providers and providing little transparency into the cost of the devices, while insisting on “gag clauses” to hide the price of the devices.
The health care reform law added Section 4191 to the Tax Code, imposing an excise tax on the sale of certain medical devices by the manufacturer, producer, or importer of the device in an amount equal to 2.3 percent of the sale price. It applies to sales of taxable medical devices after Dec. 31, 2012.
Section 4191(b)(1) provides that, in general, a “taxable medical device” is any device, as defined under the Federal Food, Drug & Cosmetic Act of 206 as an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article, including any component, part, or accessory, that is recognized in the official National Formulary, or the United States Pharmacopeia, 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; or intended to affect the structure or any function of the body, and that does not achieve its primary intended purposes through chemical action within or on the body and that is not dependent upon being metabolized for the achievement of its primary intended purposes.
Section 4191(b)(2) provides that the term “taxable medical device” does not include eyeglasses, contact lenses, hearing aids, and any other medical device determined to be of a type that is generally purchased by the general public at retail for individual use.
In addition, the Affordable Care Act amended Section 4221(a) to limit tax-free sales of taxable medical devices to sales 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, and for export, or for resale by the purchaser to a second purchaser for export. The ACA makes a corresponding amendment to section 6416(b)(2) with regard to claims for refund.
In late 2010, the IRS published a notice requesting comments on the implementation and administration of the new tax under Section 4191. It received numerous comments, including commentators who observed that the statutory definition of “taxable medical device” still left uncertainty as to which devices are included in the definition. The proposed regulations address this concern.
The IRS noted that the FDA has promulgated classification regulations for approximately 1,700 different generic types of devices. Each classification regulation includes one or more product codes that describe a subcategory of the device type described in the regulation. Currently, manufacturers may, under certain circumstances, list multiple different devices that fall within the same product code under a single listing. Therefore, all devices that are listed under a single product code listing in conjunction with the FDA’s device listing requirement are “taxable medical devices” unless they fall within an exemption under section 4191(b)(2).
The proposed regulations also provide that if a device is not listed with the FDA but the FDA later determines that the device should have been listed as a device, the device will be deemed to have been listed as a device with the FDA as of the date the FDA notifies the manufacturer or importer in writing that corrective action with respect to listing is required.