Medical Device Tax: IRS shows (some) mercy to medical device companies

December 6, 2012 by MassDevice staff

The IRS will waive penalties for the first 3 quarters of 2013 for medical device companies who do not make semi-monthly payments on time due to "reasonable cause."

MassDevice.com coverage of the medical device tax

The IRS will waive penalties for late payments of the medical device excise tax for the first 3 quarters of 2013, provided it's an honest mistake, according to new regulations released the U.S. Treasury Thursday.

In doing so, the IRS acknowledged that medical device companies will have a difficult time complying with a new host of tax rules, which will require most companies to pay semi-monthly payments of 2.3% of all sales to the feds. While the move isn't the delay industry had been lobbying for, it is perhaps some small bit of conciliation on behalf of the agency that the regulations took so long to get finalized.

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"The IRS and the Treasury Department recognize that many medical device manufacturers will still be preparing their systems to comply with the medical device excise tax when the tax goes into effect on January 1, 2013, including the requirement to make semimonthly deposits," the agency wrote. "The first deposit of the medical device excise tax, covering the first 15 days of January, is due by January 29, 2013. In consideration of the short time frame between the effective date of the tax and the due date of the first deposit, and in the interest of sound tax administration, the IRS and the Treasury Department have decided to provide temporary relief from the § 6656 penalty for the first three calendar quarters of 2013. The normal rules under § 6656 and the corresponding regulations will apply with respect to deposits due during the fourth calendar quarter of 2013 and thereafter."

The agency added the caveat that it would uphold the delay "provided that the taxpayer demonstrates a good faith attempt to comply with requirements ... and that the failure was not due to willful neglect."

In addition, the agency tried to clear up some lingering issues on the so-called "constructive sales price" or the point of sale at which an excise tax is levied, a particularly sticky wicket for medical device companies because there is so much variation in the sales process. The agency defined how it would look at sales to a host of different parties, including wholesalers, retailers and distributors.

For example, the IRS said that for medical device companies selling into hospitals or a physician's office, the agency would treat the sale as "at retail" and the price at which the sales would be taxed would equal 75% of the actual selling price.

The agency made other special designations for donations of medical equipment, writing that "the donation of a taxable medical device by the manufacturer of the device to an eligible donee will not constitute a taxable use as defined in § 4218 of the Code."

In addition, the agency gave some small relief to small medical device companies whose taxable burden would be smaller than $2,500 for the quarter. Those companies would not be required to pay semi-monthly payments.

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