The U.S. Department of the Treasury released proposed regulations on who will and who won’t be subject to the 2.3% medical device tax today, carving out some exemptions for early-stage devices and providing a little clarity on fears of a double tax for contract manufacturers, importers and component manufacturers.
However, the news was of little comfort to the industry and its allies on Capitol Hill, who quickly mobilized in calling for swift action in repealing the top-line tax, which is part of the the Patient Protection & Affordable Care Act, slated to go into effect in January of next year.
“Today’s report from the Treasury Department further highlights the fierce urgency of repealing this job-crushing tax on innovation before it is too late,” said Rep. Erik Paulsen (R-Minn.) in a prepared release. “Today’s move by the Obama Administration is further proof that the medical innovation tax will increase healthcare costs while putting thousands of jobs on the line. I look forward to working with House Leadership to schedule a vote on the Protect Medical Innovation Act before this burdensome tax takes effect.”
Under the new guidelines, titled Section 4191 of Internal Revenue Code, "all devices that are listed under a single product code listing in conjunction with the FDA’s device listing requirement are ‘taxable medical devices’ unless they fall within an exemption," according to the guidance documents.
The Internal Revenue Service did carve out some exemptions to the levy, specifically 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, instruments that fall under the investigative device exemption with the FDA and devices used for "research puroposes only" as being shielded from the tax. Meanwhile, the IRS allayed fears that so-called "medical convenience kits" would be double-taxed, saying that just the "entire sale price of the kit" was subject to the tax.
The IRS also provided some clarity on another issue of great concern to the industry, particularly on how the agency defines a "manufacturer." Medical device advocates have been lobbying Treasury for months, attempting to make sure contract manufacturers and original equipment manufacturers are not taxed twice for the same product.
The agency took note of the argument in a nuanced response, saying that while contract manufacturers technically fell under the definition of manufacturer in excise tax statutes, "if more than one person is involved in the manufacture or importation of an item, such as a contract manufacturing arrangement, the determination of which person is the manufacturer or the importer is based on the facts and circumstances of the arrangement."
For a more accurate definition of which party was the actual manufacturer the statute referred to a 1956 appeals court ruling involving Polaroid Corp.
In that case Polaroid officials argued that they were due a refund on excise taxes paid to the government because a contract manufacturer had actually assembled and shipped the product. A federal judge denied the request, ruling that the sale of the product from the Greist Manufacturing Company to Polaroid did not represent a "first sale," and was therefore exempt from the tax.
A public hearing on the documents is set for May 16, 2012, and the public is encouraged to submit written comments to the Treasury Dept.
