From the Consultant’s Corner Newsletter, March/April 2013
Medical device companies active in the US market began 2013 facing more complicated compliance requirements. As of January 1 2013, a new 2.3% Medical Device Excise Tax (MDET) on medical devices sold in the United States has been in effect. Established under the Patient Protection and Affordable Care Act in 2010, the MDET applies to manufacturers and importers of devices whose products meet “taxable” criteria established by the US Federal Food, Drug and Cosmetic Act. Foreign manufacturers do not fall under the scope of the MDET, but their partners in the United States do.
Final MDET regulation was published by the US Internal Revenue Service in December 2012; the IRS has also issued Notice 2012-77 regarding MDET compliance as well as a Frequently Asked Questions resource page.
So which devices qualify as taxable according to US law?
- Any device or in vitro reagent recognized by the US National Formulary and/or the US Pharmacopoeia.
- Any device intended for use in the diagnosis, treatment or prevention of a disease.
- Any device intended to affect human or animal bodily structures and/or functions in a nonchemical manner.
Furthermore, any medical device assigned a three-letter FDA product code falls under the MDET. Those devices without FDA product codes are exempt from the tax, but if the agency later decides that a device should be assigned a product code, the MDET will apply to that device from the date that the FDA notifies the manufacturer or importer in writing that the device will require a product code.
Some types of medical devices will be exempt from the MDET, including devices developed solely for use in research, devices developed exclusively for veterinary procedures, and devices with Investigational Device Exemptions (IDE). In addition, some retail medical devices sold to the public without prescriptions qualify for MDET exemption, including:
- durable medical equipment and supplies;
- adhesive bandages and dentures;
- devices that fall under FDA’s IVD Home Use Lab Tests list;
- devices whose FDA classification headings have OTC descriptions.
Companies whose devices fall under these categories must submit applications to the IRS in order to verify their products’ exempt status.
What is the sale price?
Manufacturers and initial importers must properly identify the device sales price to ensure MDET compliance. The IRS assesses a firm’s MDET liability according to a device’s gross sales—not the net income from each sale of that device.
As a general rule of thumb, the IRS considers the price at which a manufacturer or importer sells a medical device to be the price at which that firm would sell the device to a wholesale distributor. In situations where a manufacturer has sales to both unrelated retailers and unrelated wholesalers, the constructive price upon which the excise tax is applicable is generally the lower of either the price for which the article was sold, or the highest price for which the article was sold to a wholesale distributor. For companies that employ a different distribution channel, such as selling directly to end users, the IRS has provided guidance in Notice 2012-77 on how to calculate the constructive sales price.
MDET payment requirements
MDET filings and payments are due on a quarterly basis, and companies must also make estimated tax payments totaling 95% of their actual tax liability on a semi-monthly basis. Although underpayment and nonpayment of taxes can incur penalties, the IRS will provide penalty relief for the first three quarters of 2013 in order to allow affected companies to come into full compliance.
What the MDET means for the US medical device market
The MDET has not been in effect long enough to assess its full impact on medical device manufacturers and importers selling in the United States. Industry trade groups such as AdvaMed have warned that firms will have to lay off staff and scale back product development to offset the new tax. However, a recent medical device industry survey by Emergo Group found that only 11% of senior managers plan to reduce staff in response to the MDET’s implementation. More likely, according to the survey, firms will pass on added costs of doing business to their customers and also seek out less expensive means of production. That’s especially true for small and medium sized device companies. By the end of 2013 we will certainly know whether the MDET will be rescinded and the extent to which it will have a negative impact on the industry. Time will tell.
—Elisa Maldonado-Holmertz, Emergo Group
Elisa Maldonado-Holmertz is Vice President of Business Development at Emergo Group. Kevin Fincher, CPA at Pagett, Stratemann & Co., L.L.P. provided information on the MDET used for this article.