On December 7, 2012, the Department of the Treasury and the Internal Revenue Service issued final regulations explaining the scope of the medical device excise tax created by the Health Care and Education Reconciliation Act of 2010 (HCERA), which modified the Patient Protection and Affordable Care Act of 2010. The new regulations were issued less than a month before the 2.3% excise tax took effect on January 1, 2013. This report provides a brief overview of the recently enacted Treasury regulations, analyzes the legal implications of the regulations, and answers frequently asked questions about the medical device tax.
The Treasury regulations on the medical device excise tax explain both who is subject to the excise tax and the scope of the statutory exemptions provided for the tax. Specifically, the regulations incorporate by reference the general definitions for a “manufacturer, producer, or importer” outlined in the Internal Revenue Code, meaning that the excise tax will be directly paid by manufacturers, as opposed to consumers or others that use a given medical device.
Furthermore, the regulations attempt to clarify the limits to the medical device excise tax. Beyond the statutory exemptions created for eyeglasses, contact lenses, and hearing aids, the law created a “retail exemption” to the excise tax, excluding from the tax medical devices that are “generally purchased by the general public at retail for individual use.” The Treasury regulations attempt to simultaneously provide certainty to potential taxpayers as to which devices are subject to the retail exemption, while allowing the government the flexibility to properly apply the retail exemption to the variety of devices that could be exposed to the excise tax. The regulations provide a flexible two-prong test to determine whether a device should fall within the retail exemption, applying the exemption when the device is (1) regularly available for purchase by non-professional consumers and (2) not primarily intended for use by medical professionals. The regulations provide several factors to consider when applying the two-prong test. To provide some certainty to the scope of the retail exemption, the regulations also included several “safe harbor” provisions, explicitly acknowledging that certain devices, such as “over-the-counter” devices, fall within the retail exemption.
The new Treasury regulations on the medical device excise tax, while providing some certainty with respect to what devices will be exempt from the tax, generally favor a more flexible approach to defining the scope of the central exemption to the tax. As a consequence, uncertainty remains as to which medical devices will be subject to the tax. Indeed, Treasury, in releasing the medical device excise tax regulations, notes that further clarification on various issues implicated by the tax is still needed. As such, the regulations constitute only the first step in defining the limits of the medical device excise tax.
Date of Report: October 11, 2013
Number of Pages: 16
Order Number: R42971
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