The medical device industry is pressing its case against including contract manufacturers in a tax provision from the health care law.
AdvaMed president and CEO Stephen Ubl told MassDevice that a meeting with officials at the IRS and the U.S. Treasury Dept. went well. Ubl said he’s confident that the industry’s concerns were understood by the brass at the Internal Revenue Service and Treasury.
The issue is whether medical device components will be taxed as they make their way along the production chain into the final product. That would open contract manufacturers up to the 2.3 percent top-line tax, essentially creating double taxation. The provision in the Patient Protection & Affordable Care Act is slated to go into effect in two years.
“I think we had a good dialogue. Our comments were well-received,” Ubl told us.”We’re going to get a couple more bites at the apple.”
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 said 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.
