After Dec. 31, 20 12, the sale of a taxable medical device (as defined below) by the manufacturer, producer, or importer of the device is subject to a tax equal to 2.3% of the price for which it is sold (the “excise tax on medical devices”).
Proposed regulations, which would take effect for sales of taxable medical devices after Dec. 31, 2012, would make clear that the existing rules governi ng Chapter 32 manufacturers excise taxes (statutory, regulatory, lRS guidance, and published case law) apply to the Code Sec. 4191 excise tax on medical devices.
Taxable medical devices defined.
“Taxable medical device”, for the purposes of the manufacturers excise tax, means any device, as defined in Sec. 201(h) of the Federal Food, Drug, and Cosmetic Act (FFDCA) (21 USC § 321), intended for humans, unless excepted from tax as described below.
FFDCA Sec. 201(h) provides that a device is an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other si milar or related mticle, including any component, part, or accessory, that is:
- recognized in the official National Formulary, or the United States Pharmacopeia, or any supplement to them;
- intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment, or prevention of disease, in humans or other animals; or
- intended to affect the structure or any function of the body of humans or other animals, and that doesn’t achieve its primary intended purposes through chemical action within or on the body of humans or other an imals and that isn’t dependent upon being metabolized for the achievement of its primary intended purposes.
Exemptions from the excise tax on medical devices. The following devices are specifically exempted from the above definition of taxable medical device subject to the manufacturers excise tax:
- contact lenses;
- hearing aids; and
- any other medical device the IRS determines to be of a type that is generally purchased- including over the Internet- by the general public at retail for individual use, i.e, an item that meets the “retail exemption” discussed below.
Under the above-described proposed regs, for purposes of the excise tax on medical devices, a device defined in FFDCA Sec. 201(h) that’s intended for humans would be defined as one that’s listed as a device with the Food and Drug Administration (FDA) under FFDCA Sec. 510(j) and 21 CFR Palt 807, under FDA requirements. That is, the definition of a “taxable medical device” would be tied to the FDA’s listing requirements for devices. And so, a device that’s listed with the FDA under FDA requirements would be a taxable medical device, unless it falls within an exemption from the tax under Code Sec. 4191 , such as the retail exemption (see below).
Under the proposed regs, if a device isn’t listed as a device with the FDA but the FDA determines that the device should have been listed as a device, then the device would be deemed to be 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.
In add ition to the specific items above that are excepted from the definition of taxable medical devices and so are exempt from the manufacturers excise tax, also excepted from that definition and exempted from tax are any other medical devices determined by the IRS to be of a type that are generally purchased-including on the Internet-by the general public at retail for individual use (the so-called “retail exemption” or “retail exception”).
Congress says that the retail exemption isn’t limited by device class as defined in FFDCA Sec. 513. For example, items purchased by the general public at retail for individual use could include Class I items such as certain bandages and tipped applicators, Class II items such as certain pregnancy test kits and diabetes testing supplies, and Class III items such as certain denture adhesives and snake bite kits. These items would be exempt only if they are generally designed and sold for individual use. Congress says that it expects the IRS to publish a list of medical device classifications that are of the type generally purchased by the general public at retail for individual use.
Under the above-described proposed regs, a device would be considered to be of a type generally purchased by the general public at retail for individual use if:
- it is regularly available for purchase and use by individual consumers who aren’t medical professionals, and
- the device’s design demonstrates that it isn’t primarily intended for use in a med ical institution or office or by a medical professional.
Whether a device satisfies the above definition would be evaluated based on all the relevant facts and circumstances. Factors relevant to the evaluation are listed below. There may be facts and circumstances that are relevant in evaluating whether a device is of a type generally purchased by the general public at retail for individual use, in addition to those listed below. The fact that a device is of a type that requires a prescription isn’t a factor in the determination of whether the device falls under the retail exemption. The proposed regs provide that the following factors would indicate that a device is of a type that’s regularly available for purchase and use by individual consumers who aren’t medical professionals:
- Consumers who aren’t medical professiona ls can purchase the device tlU’ough retail businesses that also sell items other than medical devices, such as drug stores, supermarkets, and similar vendors.
- Consumers who aren’t medical professionals can use the device safely and effectively for its intended medical purpose with minimal or no training from a medical professional.
- The device is classified by the FDA under Subpart D of 21 CFR Part 890 (Physical Medicine Devices).
If you have any questions or need assistance with your taxes or accounting, contact Hill, Barth & King in the Fort Myers, Florida office at 239-482-5522 and ask to speak with one of our Certified Public Accountants.