Congressional Research Service Report Sheds Light on Medical Device Tax

November 8, 2013 — Leave a comment

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The Congressional Research Service (CRS) has issued a report in which it summarizes many of the medical device excise tax rules and sheds some light on which devices are subject to that tax.

Medical Device Tax Background

Since Dec. 31, 2012, manufacturers, producers, and importers have imposed a 2.3 percent tax on the sale price of most medical devices for humans. A taxable medical device is any device defined in § 201(h) of the Federal Food, Drug, and Cosmetic Act (FFDCA).

Where will this medical device tax money go? The Internal Revenue Service (IRS), upon collecting the medical device tax, must deposit all funds received in the general fund of the Treasury as a miscellaneous receipt.

0There are some exceptions to the medical device tax. Code Sec. 4191(b)(2) provides that a “taxable medical device” does not include eyeglasses, contact lenses, hearing aids, or “any other medical device determined by the Secretary to be of a type which is generally purchased by the public at retail for personal use” (retail exemption).

Under the regulations, a device meets the retail exemption if: (a) it is regularly available for purchase and use by individual consumers who are not medical professionals, and (b) the design of the device demonstrates that it is not primarily intended for use in a medical institution or office or by a medical professional.

Examples that the Treasury has provided with respect to devices that are exempt from the tax are: absorbent tipped applicators, adhesive bandages, snake bite suction kits, denture adhesives, pregnancy test kits, blood glucose monitors, test strips, and lancets, prosthetic legs, endoskeletal shin systems, mechanical and powered wheelchairs, portable oxygen concentrators, urinary ileostomy bags, and powered adjustable home use beds.

IRS rejected suggestions that the phrase “intended for humans” distinguished between devices intended for use directly on patients or directly in patient care from other devices (such as sterilization process indicators and containers) that are otherwise used in human medicine.

Repeal of the medical device excise tax has been the subject of several bills in Congress, and amendment of the tax received serious discussion in the past several weeks as part of the partial government shutdown negotiations. However, no change in the original law has yet been enacted.

CRS’s thoughts on which devices are subject to medical device excise tax. 

CRS noted that courts have recognized that Congress defined the term “medical device” in the FFDCA very broadly and that the excise tax “casts a wide net” with the term “taxable medical device.”

Importantly, it said, the IRS resisted efforts by commenters to narrow the scope of the general term “taxable medical device,” by limiting, for example, the term to devices that could exclusively be used by humans or could only be used for a medical purpose, preferring instead to maintain a broad reading of what devices are subject to the excise tax.

As a result, devices like infusion pumps, which can be used on both humans and animals, and latex gloves, which can be used for both medical and non-medical purposes, fall within the broad definition of a “taxable medical device.”

CRS then indicated areas for which it thought additional guidance might be needed. The safe harbor provisions clarify that devices recognized as over-the-counter devices generally will not be the subject of the tax, providing an easy to understand exemption to manufacturers, importers, and producers of such products.

However, the safe harbor provisions are narrow, and the two-part test (above), which defines the limits of the retail exemption, is very broad. Thus, the regulations, while providing flexibility as to the scope of the exemption, naturally create ambiguity with respect to which products are subject to the excise tax.

CRS also said, “the limits of the retail exemption, which are based, in part, on regs that were not crafted with the retail exemption in mind, could prove to be either over- or under-inclusive of Congress’s original intent in enacting the medical device excise tax.”

Given the wide variety of items that are categorized as medical devices, some taxpayers may see a need for further clarification with respect to other medical devices, including potentially expanding the safe harbor provisions. As a result, CRS said, the existing regulations could be only the first step in clarifying the application of a tax that IRS acknowledges “may present certain implementation challenges.”

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