By: Michael Fletcher and Amol Jain
Beginning January 1, 2013, the federal government will impose a 2.3-percent excise tax on manufacturers and importers on the sale of medical devices listed with the Food and Drug Administration (“FDA”) under section 510(j) of the Federal Food, Drug, and Cosmetic Act and 21 CFR part 807. The mechanics of this tax and its complex rules impose a number of tax and operational burdens on medical device manufacturers and importers. The medical devices companies must develop a process to calculate this tax accurately and reflect its impact in product pricing models. The tax regulations also contain complex definitions of taxable device transactions, as well as exemptions from the tax. Companies must define all taxable transactions and build a process for reporting the tax and to analyze the impact of the tax on product pricing.
This is a new and highly complex tax requirement for the medical device community. The regulations create as much uncertainty as they resolve. While many devices are clearly taxable, and others are clearly non-taxable, the application of this tax on numerous devices is still uncertain and must be carefully analyzed to determine proper tax application. For example, medical devices that are generally purchased by the public at retail for individual use are exempt from this tax. To apply this retail exemption provision, IRS regulations provide a multifactor test, with no one factor being determinative, along with 15 unique examples. Those factors include whether a medical professional is required to operate the device and whether purchasing the device requires a large investment.
This new tax also creates complexities with respect to the determination of the sale price as the basis for computing the tax. The taxable value can depend on the type of purchaser. The regulations establish a complex “constructive sale price” rule for sales to a related reseller that leases and sells at retail. The price in this instance is 75 percent of the product of 95 percent and the actual selling price. Alternatively, the constructive sales price for sales to unrelated retailers is 90 percent of the lowest price for which the devices are sold to unrelated retailers. Thus, taxpayers need not only to evaluate if a device is subject to this tax, but also to determine the nature of operations of the purchaser of the device
Many other similar complex rules are enumerated in the regulations. We have analyzed their implications and can help medical device companies resolve the uncertainties and develop the necessary internal tax policies to comply with the new regime’s requirements. The first remittance of this tax is due on January 29, 2013, so taxpayers have a short timetable to implement a process to comply with this federally mandated tax.
The views expressed in this article are those of the authors and do not necessarily reflect the position or policy of Berkeley Research Group, LLC.
TAX ADVICE DISCLOSURE: ANY TAX ADVICE CONTAINED IN THIS COMMUNICATION (INCLUDING ANY ATTACHMENTS) IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, FOR THE PURPOSE OF (I) AVOIDING PENALTIES UNDER THE INTERNAL REVENUE CODE OR (II) PROMOTING, MARKETING, OR RECOMMENDING TO ANOTHER PARTY ANY TRANSACTION OR MATTER ADDRESSED HEREIN. BERKELEY RESEARCH GROUP, LLC IS NOT A LAW FIRM AND DOES NOT PROVIDE LEGAL ADVICE. BRG IS NOT A CPA FIRM AND DOES NOT PROVIDE AUDIT, ATTEST, OR PUBLIC ACCOUNTING SERVICES.
