IRS Issues Guidance and Regulations on Medical Device Tax

The Internal Revenue Service has released interim guidance on the medical device excise tax that was included as part of the Affordable Care Act.

Notice 2012-77, released Wednesday, provides interim guidance for determining price and also about donated taxable medical devices, the licensing of taxable medical devices, and the tax treatment of medical convenience kits.

In addition, the notice provides transition relief to medical device manufacturers from the failure to deposit penalties imposed the health care reform law. In addition, the notice requests comments from taxpayers about the rules described in this notice.

The Patient Protection and Affordable Care Act imposes an excise tax of 2.3 percent on the sale of certain medical devices. The IRS and the Treasury Department also released TD 9604, containing final regulations under Section 4191 of the Tax Code. The IRS and the Treasury noted Wednesday that the final regulations do not address certain issues that the IRS and the Treasury Department are continuing to study. These issues include the determination of price under Section 4216(b), the tax treatment of medical software licenses, the taxability of donated medical devices; and the taxability of medical convenience kits.

The IRS and the Treasury Department said they may issue additional published guidance on these issues in the future, although they also recognize that medical device manufacturers need rules on these issues that will apply on an interim basis.

In addition, several comments on the proposed regulations requested transition relief from the deposit penalty under Section 6656 of the Tax Code. In response to those comments, the notice waives those penalties for the first three calendar quarters of 2013.

The IRS said it developed the final regulations in consultation with technical experts at the Food and Drug Administration and the Centers for Medicare and Medicaid Services, and after carefully reviewing numerous public comments.

Generally, under the final regulations, a “taxable medical device” is a device that is listed as a device with the FDA under Section 510(j) of the Federal Food, Drug and Cosmetic Act, and 21 CFR part 807, pursuant to FDA requirements. If a device is not listed as a device with the FDA but the FDA determines that the device should have been listed as a device, the device will be deemed to be 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.

The new tax does not apply to sales of eyeglasses, contact lenses, and hearing aids, the IRS noted. The new tax also does not apply to the sale of any other devices that are of a type generally purchased by the general public at retail for individual use (the retail exemption). 

In general, the final regulations provide a facts-and-circumstances approach to evaluating whether a type of device qualifies for the retail exemption. Specifically, the final regulations suggest factors to consider in evaluating whether a particular type of device qualifies for the retail exemption. The factors enumerated in the final regulations are non-exclusive, the IRS noted. Additional factors may be relevant to determining whether a given type of device qualifies for the retail exemption.

The final regulations also identify several categories of medical devices that qualify for the retail exemption (the retail exemption safe harbor). The retail exemption safe harbor includes devices in the FDA’s online in vitro diagnostics Home Use Lab Tests (Over-the-Counter Tests) database, devices that the FDA describes as “OTC” or “over the counter” in certain official FDA classification or product code headings or descriptors, and a number of devices that qualify as durable medical equipment, prosthetics, orthotics or supplies for which payment is available on a purchase basis under the Medicare Part B payment rules.

The medical device excise tax applies to manufacturers and importers and generally does not apply to individual consumers.

Sales of taxable medical devices for further manufacture or export may be made tax free if certain registration and other requirements are met.

The medical device excise tax is reported on Form 720, Quarterly Federal Excise Tax Return. Payment is due with the return. The first quarterly return for the medical device excise tax is due April 30, 2013, for the months of January, February, and March 2013. Form 720 may be filed electronically or on paper. Manufacturers and importers of taxable medical devices may also pay the tax via the Electronic Federal Tax Payment System.

Manufacturers and importers of taxable medical devices are generally required to make semi-monthly deposits of tax.  The first semimonthly deposit for the medical device excise tax, which covers the first 15 days of January, is due Jan. 29, 2012.  In general, manufacturers and importers must use electronic funds transfer to make excise tax deposits through EFTPS. Notice 2012-77 provides transition relief from deposit penalties during the first three calendar quarters of 2013.