As we’ve previously described, Section 4191 of the Internal Revenue Code imposes a 2.3% excise tax on the sale of certain medical devices by the manufacturers/importers of the devices. In December of 2012, the Internal Revenue Service (IRS) issued final regulations and interim guidance regarding the determination of sale price and other issues related to the tax. The tax applies to sales of taxable medical devices made after December 31, 2012.
The tax applies to any device that is listed as a device with FDA under section 510(j) of the Federal Food, Drug, and Cosmetic Act and 21 C.F.R part 807, unless the device falls within an exemption from the tax. Such exemptions include those for eyeglasses, contact lenses, and hearing aids.
One effect of the tax may be the need for manufacturers to revisit the prices of devices sold under long-term contracts. For Federal Supply Schedule (FSS) contracts with the federal government, contractors may be able to use the economic price adjustment clause of their FSS contract to seek a price increase that reflects the new tax. The Department of Veterans Affairs, which administers the FSS program for medical devices, recently described this process in its January 2013 newsletter.
According to the newsletter, contractors may be eligible to receive a price increase if their request meets the requirements of Federal Acquisition Regulation 552.216-70, including:
- The excise tax is reflected as a change to the commercial price list upon which contract award is predicated;
- The proposed FSS percentage increase is equal to or less than the increase to the commercial list price change;
- Proposed pricing is no higher than permitted by the awarded tracking ratio;
- At least 30 days have elapsed between price increases; and
- The increase is requested at least 60 days prior to the end of the contract (including option periods).
When submitting a request for a price increase, contractors will need to provide (1) a copy of the commercial catalog/pricelist showing the price increase and the effective date for commercial customers; (2) a commercial sales practice format regarding the contractor’s commercial pricing practice relating to the reissued or modified catalog/price-list, or a certification that no change has occurred in the data; and (3) documentation supporting the reasonableness of the price increase.