Medical Device Excise Tax – Technical Overview And Congressional Efforts To Repeal

Author:Mr Mitchell Kops, Steven Moore and Nancy Yamaguchi Esq
Profession:Withers LLP

The US Health Care and Education Reconciliation Act of 2010 created a new medical device excise tax under section 4191 of the US Internal Revenue Code. Final regulations interpreting the new rules were released in 2012, along with Notice 2012-77, which provides interim guidance on certain issues that remain unresolved in the final regulations. Manufacturers, producers, importers and end-users of the medical devices subject to these rules should pay close attention to legislation recently introduced in the House and the Senate to repeal these rules, although the Obama administration has threatened to veto the repeal absent sufficient revenue offset provisions. Section 4191 imposes a 2.3% excise tax (the "MDET") on the actual sales price (and in related party situations, the deemed sales price) of any 'taxable medical device' sold by its manufacturer, producer or importer. The MDET must be reported and paid in full quarterly on Internal Revenue Service Form 720. However, profitable taxpayers may ultimately pay a lower effective rate of MDET because the MDET is deductible from gross income as an ordinary cost of doing business. While price increases generally will not eliminate the MDET's cost because of corresponding increases in revenue and likely reductions in demand, careful planning may allow taxpayers to approximate pre-MDET profits. A 'taxable medical device' is any 'medical device' under the Federal Food, Drug, and Cosmetic Act that is intended for human use. Statutorily exempt items include eyeglasses, contact lenses, hearing aids and 'any other medical device determined by the US Department of Treasury to be of a type which is generally purchased by the general public at retail for individual use.' This exemption generally requires the device to be regularly available for purchase and use by individual consumers and not primarily intended for use by a medical professional. Although courts historically have interpreted the Federal Food, Drug and Cosmetic Act's definition of 'medical device'...

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