Mark Leahey
How the IRS determines the definition of “manufacturer” could have a profound effect on the medical device industry if contract and component manufacturers are subject to the medical device excise tax contained in the health care reform law.
“One of the things that’s clear is that the existing regulations dealing with excise taxes aren’t in industries as complex and involved as the medical technology industry,” Medical Device Manufacturing Assn. president told MassDevice this morning. “I think there’s a lot of uncertainty.”
The industry council, which represents more than 200 small to mid-sized medical device manufacturers, remains steadfastly opposed to the device tax and is pushing hard for an outright repeal, Leahey told us.
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In the meantime, he added, MDMA will submit comments to the IRS asking the agency to petition Congress for a one-year delay in implementing the tax “so that all these issues can be addressed in a thoughtful manner.”
Under current excise tax statutes, the IRS 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.
The Advanced Medical Technology Assn. filed an 18-page letter with the IRS yesterday, expressing similar concerns about the impact of the tax.
“AdvaMed recommends that the IRS retain the current definition of ‘manufacturer’ but clarify that manufacturing activities only involve physically transformative activities, including the re-processing or re-manufacturing of taxable medical devices,” Advamed officials wrote. “AdvaMed further recommends that the IRS give consideration to the factors reflected in the contract manufacturing regulations in determining which of two parties to a contractual arrangement involving manufacturing is the manufacturer, rather than relying primarily on which party has legal title to the articles during the manufacturing process.”
The 2.3 percent annual tax on U.S. sales, passed as part of the Patient Protection and Affordable Care Act back in September 2009, is slated to go into effect in 2013.
