New US Medical Device Tax on Manufacturers and Importers
Many clients ask us about the new US Medical Device Excise Tax (MDET), so we wanted to provide a brief overview of the tax, which products it impacts and when payments are due.
The US Patient Protection and Affordable Care Act (PPACA) healthcare reform legislation passed in 2010 includes a 2.3% excise tax applicable to manufacturers and importers of taxable medical devices sold or imported in/to the United States. The industry has known about the Medical Device Excise Tax (MDET) since the passage of the PPACA, but now it is crunch time for manufacturers and importers to ensure compliance with the new tax requirements.
The US Internal Revenue Service (IRS) issued final regulations regarding the MDET in late 2012, and also issued Notice 2012-77 to further address compliance issues. The IRS has also posted a web page to answer common questions about the MDET.
Defining “taxable medical device” under the MDET
The US Federal Food, Drug, and Cosmetic Act defines taxable medical devices as:
- Any instrument or in vitro reagent recognized by either the US National Formulary or the US Pharmacopoeia;
- Any device intended for use in diagnosing, treating or preventing a disease;
- Any device intended to affect human or animal bodily structures or functions in a non-chemical manner.
According to the US Food and Drug Administration’s medical device listing rules, any listed device containing a three-letter FDA product code falls under MDET unless the manufacturer obtains a qualifying exemption. Medical devices that currently do not have FDA product codes assigned to them are not subject to the MDET. Should the FDA later determine that a device should be listed, MDET will generally apply from the date the company is notified in writing that such listing is required. The MDET casts a rather wide net in terms of which device types are taxable:
- Devices intended for human patients but also used in veterinary procedures
- Devices with both medical and non-medical uses
- Devices used in clinical and other research
- Dental devices and equipment
- Device components and accessories
- Combination products
There are exemptions for taxable articles sold for further manufacturing, export and retail sales. Companies may have to register with IRS in order to claim some exemptions.
What does “sales price” mean under the MDET?
Properly identifying the “sales price” of a medical device is obviously crucial to full compliance with the MDET.
The MDET is assessed on the gross selling price of a medical device, not the net income from each sale. Generally, the IRS provides that the price for which a manufacturer or importer sells a taxable device is the price the entity would sell the device to an unrelated wholesale distributor. In situations where a manufacturer has sales to both unrelated retailers and unrelated wholesalers, the constructive price upon which the excise tax is applicable is generally the lower of either the price for which the article was sold, or the highest price for which the article was sold to a wholesale distributor. For companies that employ a different distribution channel, such as selling directly to end users, the IRS has provided guidance in Notice 2012-77 on how to calculate the constructive sales price.
Manufacturers or importers of taxable devices are responsible for filing and paying the MDET on a quarterly basis using IRS Form 720; estimated tax payments are due on a semi-monthly basis, and should total 95% of firms’ actual tax liability.
The first payment of the tax was due January 29, 2013; penalties apply in cases of nonpayment and underpayment. However, the IRS has provided penalty relief for the first three quarters of 2013 to allow sufficient time compliance with the MDET. As long as taxpayers make a reasonable attempt to comply, they should not be subject to underpayment penalties for the first three quarters of 2013.
Special thanks to Kevin Fincher, CPA at Pagett, Stratemann & Co., L.L.P.for providing information about the MDET and for confirming the information above.