Medical device tax: AdvaMed warns IRS on double tax risk for drug device combination products

Health care reform

The medi-tech industry is trying to stay ahead of medical device fees to assure some products are not taxed twice under the new excise tax on industry contained in the health care bill.

As expected, the Advanced Medical Technology Assn. submitted another round of public comments to the IRS in an effort to mitigate the chance of some medical device companies being taxed twice under the new 2.3 percent excise tax, which is slated to go into effect in 2013.

Back in May, AdvaMed president & CEO Stephen Ubl told MassDevice that industry officials had met with representatives of the IRS and the U.S. Treasury Dept. about concerns over double taxation. Ubl said he’s confident that the industry’s concerns were understood by the brass at the Internal Revenue Service and Treasury and that the council was planning on issuing another round of recommendations.

In its supplemental comments, AdvaMed asked the IRS to make special considerations for drug-device combination products, so that they weren’t hit with the excise tax and a prescription drug fee. The industry council said only one fee should be assessed in those cases, stating that “congress did not intend medical devices in combination products to be subject to a double taxation.”

In addition, AdvaMed asked for a clarification that companies that build certain medical kits be considered exempt from the tax, as pre-packaged surgical, maintenance and other kits should not be considered a manufacturing activity in itself.

The medical device industry is making a concerted effort to mitigate the effects of the annual tax on U.S. sales, which will be administered by the IRS. Under current excise tax statutes, the tax bureau defines a manufacturer as “any person who produces a taxable article from new or raw material, or from scrap, salvage, or junk material, by processing or changing the form of an article or by combining or assembling two or more articles. If you furnish the materials and keep title to those materials and to the finished article, you are considered the manufacturer even though another person actually manufactures the taxable article. … A manufacturer who sells a taxable article in knockdown (unassembled) condition is liable for the tax. The person who buys these component parts and assembles a taxable article may also be liable for tax as a further manufacturer depending on the labor, material, and overhead required to assemble the completed article if the article is assembled for business use.”

The public comment period will be critical in shaping how the medical device tax is administered. Because the medical device industry is heavily reliant on a vast network of component manufacturers, the possibility of a single product being taxed multiple times is possible under a broader definition. Including contract manufacturers in the excise tax formula could have broad implications for small contract and component manufacturers.

Ubl told us this spring the IRS is planning on a second public comment period after it releases a proposal on how it plans on administer the tax.

“They were asking good questions and providing feedback,” Ubl said of the tax officials, adding that he’s confident they understood the industry’s concerns. But, he noted, the agency is facing a daunting task: It’s never applied existing excise tax statues to an industry structured like the medical technology business.

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