Offset Elixir: Elusive Antidote for Medical Device Excise Tax Pain

The Medical Devices Excise Tax was imposed pursuant to Section 1405(a) of the Health Care and Education Reconciliation Act of 2010 (P.L. 111-152, the "Act").  Almost immediately after the Act was signed into law, calls for repeal began.  Proposed repeal legislation was introduced in both houses shortly after the tax went into effect in January 2013. See 2013 H.R. 523 and 2013 S. 232.  While the Senate has voted 79-20 to repeal the tax, the approved amendment requires a complete offset of the loss from repeal through new revenue from undetermined sources.  At $10 billion over 10 years, the revenue loss is not insignificant if the tax is repealed.

Defining the Tax and Possible Exemptions

The Medical Devices Excise Tax is a 2.3 percent levy on the gross sales price of any "taxable medical device" by a medical device manufacturer, producer, or importer of such device.  The tax applies to all sales of such devices after January 1, 2013.  A "taxable medical device" is a device, as defined under the Federal Food, Drug and Cosmetic Act's Section 201(h), that is intended for humans.  See IRC Section 4191(b)(1) (defining "taxable medical device"); 21 U.S.C. 321(h) (providing a full definition of device under the FDCA).  Retail sales of medical items the public generally buys at retail for individual use, such as eyeglasses, hearing aids, contact lenses, etc., are exempt from the tax.  Sales of devices for further manufacture or export are also exempt.  See IRC Section 4221.

Guidance from the IRS

The IRS issued final regulations in December 2012 regarding how the Medical Devices Excise Tax would be applied. See T.D. 9604, 2012-52 I.R.B. 730, as corrected and clarified by Announcement 2013-23, 2013-16 I.R.B. 940.  The IRS further issued interim guidance for determining the price of a taxable device.  In the interim guidance, the IRS also said that penalties for nonpayment of the tax will not be imposed until September 2013, unless such nonpayment is due to willful neglect.  See IRC Section 6656 and Notice 2012-77.

Prospects for Repeal

Finding an offset is perhaps the key to the repeal of the Medical Devices Excise Tax, but reaching consensus on how an appropriate offset worth tens of billions of dollars is possibly an insurmountable challenge.  Repeal may have greater potential if it is included in a larger tax reform package, but such reform is, of course, unpredictable at this point.   In the meantime, compliance with the new tax remains a challenge for many taxpayers.

RELATED LINKS:

• Matthew Dalton, "Compliance with Medical Device Tax a Work in Progress," taxanalysts® Tax Notes Today, March 25, 2013

• "Finding an Offset for Medical Device Tax Repeal Presents Challenges," taxanalysts® Tax Notes Today, April 17, 2013

• Lexis Tax Advisor - Federal Code § 4191

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