Jason Rager may have the best job security in the world right now.
As the global tax director for Cook Medical, Rager is responsible for making sure the company is in compliance with the new medical device tax when it becomes law in January. It’s a tall order, to say the least.
With more than 15,000 medical devices being sold into 4,000 hospitals at thousands of different price points, Ranger has to make sure the company accounts for the 2.3% levy on each device sold and then pays the feds. To do so, he says, he’ll have to divert staff from at least 3 departments. And that’s just his best guess for now.
"We’re going to have to engage some consultants, as well, to make sure we calculate this correctly so when this gets audited that we’ve paid our share of tax in a timely fashion," Rager told MassDevice, noting that until the IRS clears up nagging issues with the constructive sales rule – the point at which the tax should be levied – it’s still up in the air as to how big an undertaking the accounting and compliance effort will be.
With less than 9 months until the 2.3% sales tax becomes a reality, many in the industry are coming to realize that the levy may, in fact, be even more expensive than initial projections indicated.
Most of those costs will be soft, such as the opportunity cost of diverting staff from other projects. Others will be more tangible, such as having to hire accounting, IT and other specialists.
For Bloomington, Ind.-based Cook, there’s no time to waste in trying to decipher how the device tax will shake out. In addition to being one of the industry’s most vocal critics of the tax, the company is also working hard to make sure it ends up in full compliance with a law it says will cut into med-tech profits by 15%.
The firm has already started working with representatives from the big 4 accounting firms to help determine what software systems will need to be implemented and from what department people will need to be pulled in order to get a handle on the tax.
Although those added costs might not make a big dent in a $1.7 billion multi-national conglomerate, none were factored into previous estimates of the tax effect, chairman Stephen Ferguson told us.
"We were going on a calculation of 2.3% on sales," he said. "It’s just another shoe that’s falling."
While Ferguson admits that Cook can easily absorb a few more consultants, he expressed concern for the constellation of small med-tech firms across the country that are the sector’s backbone. Firms with less than $100 million in sales make up the majority of the medical device industry.
"One thing they may have is fewer products, but they also don’t have the resources to apply and figure this out," he said. "Plus, if you don’t make any money, the tax is still due. That’ll be quite an awakening for them."
Worries over the so-called "little guys" was echoed earlier this week by Zara Muradali, a managing director in the federal tax practice at KPMG, who told us she’s advising clients to get their ducks in a row by the end of the 3rd quarter this year in order to prepare for the impact of the tax.
The billion-dollar companies are on top of the situation, she told us – it’s the "$100 million companies that are really at risk."
The device tax, which became law nearly 2 years ago as part of the Patient Protection & Affordable Care Act, is expected to net some $2 billion a year in order to pay for certain provisions of the landmark health care law. The bulk of those funds will come from large companies such as Medtronic (NYSE:MDT), which says it will fork over somewhere between $125-$175 million in 2013.
The IRS is expected to administer the tax and has already released some guidance. But, Muradali said, there’s is still some ambiguity for medical device companies about the point at which the tax should be levied. Medical device companies have multiple units in the manufacturing process, she said, meaning that determining where an actual sale occurs still isn’t clear. For example, a medical device manufacturer may have several of its products or components outsourced to engineering and design firms during the manufacturing process.