Medical Device Tax: IRS makes levy a reality with final guidance documents coverage of the medical device tax

UPDATED at 2:59 p.m., with comment from Rep. Erik Paulsen (R-Minn.)

The U.S. Department of the Treasury today released proposed regulations on who and what will and won’t be subject to the 2.3% medical device tax, pushing off some key provisions but mostly rejecting industry attempts to narrow the scope of the tax, which will go into effect in less than 1 month.

Under the new law medical device manufacturers will be required to make semimonthly tax deposits to the IRS in the amount of 2.3% of every sale, unless the manufacturer’s net tax liability does not exceed $2,500 for the quarter.

The news touched off another salvo from industry and its friends on Capitol Hill, which quickly mobilized in calling for swift action in repealing the top-line tax, which is part of the the Patient Protection & Affordable Care Act and slated to go into effect January 1st.

Rep. Erik Paulsen (R-Minn.) said the IRS’ move to release the documents so close to the implimentation amounted to the agency telling the industry "good luck."

"Pure and simple, this is bad policy and it’s clearly costing jobs," Paulsen said in a statement. "The regulations released by the IRS today, just 26 days before the tax goes into effect, are placing further burdens on the backs of med tech small businesses that are credited with creating thousands of jobs for our state. There is still time to stop the regulations and stop the tax, but the Senate must act now.”

Medical Device Manufacturers Assn. president Mark Leahy added that the final rules do "nothing to prevent the loss of jobs and innovation that has already occurred as a result of the medical device tax, and will unfortunately continue if we do not repeal this bad policy. There is growing bipartisan support in Congress to repeal the medical device tax, and MDMA remains committed to working with elected officials to fix a policy that was a bad idea when it passed, and is proving to be more harmful than imagined to our economy and patient care as it gets closer to implementation."

In a vast preamble that took up more than 40-pages of a 58-page document, the IRS defined a medical device as any "device that is listed as a device with the Food and Drug Administration (FDA) under section 510(j) of the FFDCA and 21 CFR part 807, pursuant to FDA requirements."

"The proposed regulations further provide that if a device is not listed with the FDA, but the FDA later determines that the device should have been listed as a device, the device will be deemed to have been 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 agency rejected several attempts from industry to narrow its interpretation of the rule and create carve-outs to limit the impact of the tax, mostly falling back on the FDA’s current definitions of what constitutes a medical device and previous guidance, which was released last February.

However, officials pushed off a final decision on some key issues related to enforcing the tax. Specifically, those issues were related to pricing – the use of the so-called constructive pricing rule – as well as the definition of components.

The constructive pricing rule is the point of sale at which an excise tax is levied. It’s a complicated determination for medical devices, which are often made using components from other companies – each a potential point of sale at which to levy the tax. AdvaMed had asked the IRS to cut device companies a little slack when auditing initial returns, slated to roll in next year.

The IRS seemed to head the suggestion, noting that the "Treasury Department recognizes that the medical device industry will likely face some implementation issues when the medical device excise tax goes into effect on January 1, 2013, and the IRS intends to work with stakeholders on compliance-related issues, such as the determination of price."

On the issue of components used in medical devices, the agency said it will again seek more input from stakeholders on what types of components will be exempt from the tax.

"The IRS and the Treasury Department request public comments to help identify listed components of devices that are exempt under section 4191(b) and §48.4191-2(b) that are not included in a safe harbor or that do not otherwise fall within the retail exemption by an by an application of the facts and circumstances test."

On the issue of medical kits, officials said they will "issue separate interim guidance along with these regulations on the treatment of kits for purposes of the medical device excise tax" but said the kits were subject to the excise tax unless they were created by hospitals or medical institutions that produce kits for their own use.

The IRS did carve out some exemptions to the levy, including a "retail exemption" for eyeglasses, contact lenses, hearing aids and any other medical devices purchased by the general public at retail for individual use. It also singled out medical devices used in veterinary medicine and software upgrades.

The agency rejected several calls from industry to exempt devices for dental products, such as crowns, bridges and braces and swatted back a call for an exemption for drug-device combination products, which are already paying the branded prescription drug fee.

"The ACA enacted both the medical device excise tax and the BPD fee, but provided no coordination between the provisions," according to the IRS. "The proposed regulations tie the definition of taxable medical device to the FDA’s listing requirements for devices. Therefore, under the proposed regulations, a combination product that is listed as a device with the FDA under section 510(j) of the FFDCA and 21 CFR part 807 25 and that does not fall under a statutory exemption, such as the retail exemption, is subject to the medical device excise tax."

Reaction from industry is expected to continue to trickle in throughout the afternoon and in Washington, D.C. where industry allies were planning to push once again for repeal of the tax.

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