On December 5, 2012, the IRS issued final regulations on the excise tax imposed on the sale of certain medical devices under section 4191 of the Internal Revenue Code (Code). The regulations resolve numerous ambiguities relating to when a manufacturer, producer, or importer of a “taxable medical device” must pay the medical device excise tax. The regulations apply to sales of medical devices after December 31, 2012. This post provides an introduction to the regulation, which we will be exploring further in blog posts over the coming days.
As previously reported, Code section 4191 tax imposes a 2.3 percent tax on the sale of a “taxable medical device.” The statute expressly refers to the definition of a “device” in the Food, Drug & Cosmetic Act (FDCA) and also states that a “taxable medical device” does not include certain devices sold at retail. The two predominant issues addressed by the IRS’s final regulation are the definition of “taxable medical device” and the scope of the retail exemption.
Definition of “Taxable Medical Device”
The IRS’s definition of “taxable medical device” remains unchanged from the definition the IRS proposed in its notice of proposed rulemaking on February 7, 2012. Under the final regulations, a taxable medical device that is intended for humans means “a device that is listed as a device with the Food and Drug Administration (FDA) under section 510(j) of the FFDCA and 21 CFR part 807, pursuant to FDA requirements.” The IRS rejected almost all of the comments asking the agency to establish specific exemptions from this general definition.
In defining the scope of the retail exemption, the IRS specified a “safe harbor” for devices that are:
- included in FDA’s online database of IVD Home Use Lab Tests;
- described as over the counter devices by FDA (either in the product code name, the device classification name, or the classification name field in the registration and listing database); or
- durable medical equipment such as prosthetics, orthotics, or supplies necessary for their effective use.
If a device does not fall within one of the safe harbor provisions, the IRS will employ a “facts and circumstances” approach that follows a two-prong analysis: first, the device must be regularly available for purchase and use by individual consumers who are not medical professionals, and second, the device’s design must demonstrate that it is not primarily intended for use in a medical institution or office, or by medical professionals.
Each prong of the analysis involves consideration of multiple, non-exclusive factors. As with all “facts and circumstances” tests, the approach adopted by the regulations leaves significant uncertainty with respect to its potential application.
Additional issues also remain open. FDA requires some components of devices to be separately listed as devices, but it is not clear whether such listed devices, which if ultimately used as component parts of exempt devices, are also exempt. The IRS has requested additional public comment on this issue, and stated it would issue separate interim guidance on other outstanding issues.
Deadlines are fast approaching. Beginning January 29, 2013, taxpayers having a tax liability greater than $2,500 per quarter must start making bi-monthly tax deposits (with some transitional penalty relief). Then, on April 30, 2013, some taxpayers are required to file Form 720, the form used to report the medical devices excise tax (the quarterly deadlines are listed here).
In issuing the final regulations, the IRS rejected most requests for a transition period and waivers of penalties during such a transition period, but provided relief to taxpayers who entered into continuing agreements for the lease, installment sale, or sale on credit of a taxable medical device prior to March 30, 2010 (so long as the agreements were not materially modified after that date).
Several industry groups have reportedly asked Congress to delay implementation of the tax, but it is not clear whether such efforts will succeed.