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July 23, 2014

Excise Tax Kicks In Jan. 1 on Certain Medical Devices

Beginning January 1, 2013, manufacturers and importers of certain medical devices will be required by the U.S. Internal Revenue Service (IRS) to pay a new 2.3 percent medical device excise tax on the sales of taxable medical devices.  The new excise tax was enacted in 2009 as part of the Patient Protection and Affordable Care Act.  The IRS issued final regulations and issued guidance implementing the new excise tax on December 5, 2012.

The new excise tax is imposed on manufacturers and importers of "taxable medical devices."  Generally, a taxable medical device is a device that is listed as a device with the U.S. Food and Drug Administration (FDA) under section 510(j) of the Federal Food, Drug and Cosmetic Act, and 21 CFR part 807, unless a specific exemption is available.

A subject manufacturer is generally a person who produces a taxable medical device from scrap, salvage or junk material, or from new or raw material, by processing, manipulating or changing the form of a device or by combining or assembling two or more devices.  A subject importer is generally a person who brings a taxable medical device into the United States from a source outside the United States, or withdraws the device from a customs-bonded warehouse for sale or use in the United States.  However, the IRS regulations permit a manufacturer or importer, in certain circumstances, to sell a taxable medical device tax-free if the purchaser is using the device for further manufacture or for export.

One significant exemption is the so-called "retail exemption" which is available for devices that are of a type that are generally purchased by the general public at retail for individual use.  A facts and circumstances approach is used to determine what devices meet the retail exemption requirements.  The IRS regulations include examples of types of medical devices that generally meet or do not meet the retail exemption requirements.  For instance, the IRS examples conclude that, generally, non-sterile absorbent tipped applicators, adhesive bandages, snake bite suction kits, denture adhesives, mechanical and powered wheelchairs, portable oxygen concentrators and therapeutic AC powered adjustable home use beds do meet the retail exemption requirements.  By contrast, the IRS examples conclude that, generally, mobile x-ray systems, nonabsorbable silk sutures and nuclear magnetic resonance imaging systems do not meet the retail exemption requirements.

The IRS regulations also provide a retail exemption safe harbor for certain categories of devices that will be deemed to meet the retail exemption requirements.  Among these categories are, generally, certain devices described or classified by the FDA as over-the-counter or that qualify as durable medical equipment, prosthetics, orthotics and supplies eligible for purchase under Medicare Part B payment rules.

The new excise tax must be reported quarterly with other manufacturers' excise taxes on IRS Form 720, the first of which is due on April 30, 2013.

Additional details regarding how and when the new excise tax will apply to particular devices and in particular supply arrangements will have to wait for further guidance from the IRS.

© 2014 Varnum LLP

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