The US Health Care and Education Reconciliation Act of 2010
created a new medical device excise tax under section 4191 of the
US Internal Revenue Code. Final regulations interpreting the new
rules were released in 2012, along with Notice 2012-77, which
provides interim guidance on certain issues that remain unresolved
in the final regulations. Manufacturers, producers, importers and
end-users of the medical devices subject to these rules should pay
close attention to legislation recently introduced in the House and
the Senate to repeal these rules, although the Obama administration
has threatened to veto the repeal absent sufficient revenue offset
provisions.
Section 4191 imposes a 2.3% excise tax (the "MDET") on
the actual sales price (and in related party situations, the deemed
sales price) of any 'taxable medical device' sold by its
manufacturer, producer or importer. The MDET must be reported and
paid in full quarterly on Internal Revenue Service Form 720.
However, profitable taxpayers may ultimately pay a lower effective
rate of MDET because the MDET is deductible from gross income as an
ordinary cost of doing business. While price increases generally
will not eliminate the MDET's cost because of corresponding
increases in revenue and likely reductions in demand, careful
planning may allow taxpayers to approximate pre-MDET profits.
A 'taxable medical device' is any 'medical device'
under the Federal Food, Drug, and Cosmetic Act that is intended for
human use. Statutorily exempt items include eyeglasses, contact
lenses, hearing aids and 'any other medical device determined
by the US Department of Treasury to be of a type which is generally
purchased by the general public at retail for individual use.'
This exemption generally requires the device to be regularly
available for purchase and use by individual consumers and not
primarily intended for use by a medical professional.
Although courts historically have interpreted the Federal Food,
Drug and Cosmetic Act's definition of 'medical device'
broadly, the final MDET regulations generally limit the scope of
'taxable medical device' to those that currently must be
registered and listed as medical devices with the Food and Drug
Administration. Notably, registered and listed devices (and,
therefore, 'taxable medical devices') could include those
with non-human or non-medical uses, even if they are intended
solely for human or medical use.
The final MDET regulations still contain areas of uncertainty. For
example, it is unclear under the regulations whether the MDET
applies to licenses of medical software, although medical software
itself is generally a taxable medical device for MDET purposes.
However, under Notice 2012-77, the IRS will treat licenses of
taxable medical devices, whether software or otherwise, as leases
(and not as sales subject to the MDET) until further guidance is
issued.
While the MDET has remained unchanged since its passage, it has
been a target for repeal for nearly as long. The latest repeal
attempt passed the House on June 18, 2015 in a 280-140 vote (with
46 Democrats voting in favor but not all House members voting),
just one vote shy of a veto-proof majority.
The legislation was received by the Senate and has been read twice
but no further action has been taken. It is unclear that the repeal
legislation will have sufficient support to gain a veto-proof
majority in the Senate, with the primary concern being the absence
of a revenue provision that would offset the MDET's projected
revenue of $30 billion over the next 10 years. Further, the Obama
administration has threatened to veto any legislation that repeals
the MDET without satisfactory offsetting revenue provisions.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.