Medical Device Manufacturers and Importers prepare for New Federal Tax on Medical Devices
posted Nov 6, 2012 by Paul Oliveira, CPA
Despite some political uncertainty, the new medical device federal excise tax is waiting to spring into action. It is important for medical device manufacturers and importers to prepare for this new federal excise tax now.
The medical device federal excise tax is imposed on the sale of qualifying medical devices. To keep this added federal tax liability to a minimum, medical device manufacturers and importers must thoroughly understand which sale transactions constitutes tax-exempt sales and undertake the actions necessary to qualify for the exemptions. A brief summary of the medical device excise tax is provided at the end of this article in a question and answer format.
There are three primary federal excise tax exemptions available on the sale of medical devices outlined below:
Retail Exemption - The retail exemption applies if the medical device is regularly available and purchased by individual consumers at retail who are not medical professionals. A medical layperson must be able to use the device. The medical device cannot be primarily intended for use in a medical office or use by a medical professional.
Further Manufacturing Exemption – The further manufacturing exemption applies to sales in which the medical device sold is used by the purchaser as material or a component part of another taxable medical device.
Export Exemption – The export exemption applies if the manufacturer, the purchaser or a second purchaser (someone who buys from the first purchaser) exports the medical device.
In order to qualify for the further manufacturing and export exemptions, both the manufacturer and the purchaser must be registered for excise tax activities with the IRS. The purchaser must provide their registration number and written certification of the exempt purpose of the medical device to the manufacturer.
An Immediate To Do List For Affected Businesses
- Register your business for the federal excise tax with the IRS. Registration is accomplished by completing and submitting IRS Form 637. Information regarding Form 637 is available on the IRS website. Be sure to give the IRS as much time as possible to process your application.
- Consider notifying your customers if your product pricing is expected to change as a result of this new tax. If pricing is increasing, consider whether customer invoices should include the federal excise tax as a separate line item. Remember, the federal excise tax is not a sales tax mandatorily imposed on the purchaser. It is generally passed along indirectly through product pricing.
- Do not delay in obtaining the information necessary to claim exemption from the excise tax. For sales to customers qualifying for the further manufacturing or export exemptions, begin requesting the customer’s tax registration number and written certification of exempt purpose now. If applicable, provide your vendors the same information as it may reduce your purchasing costs.
- Gain an understanding of your business’s federal excise tax return compliance and the timing and method of making federal excise tax deposits. Review IRS Form 720, Quarterly Federal Excise Tax Return, and related instructions. Determine who in your business will be responsible for this tax compliance.
- Assess your business accounting system’s ability to accurately capture all sales transactions qualifying for tax exemption and provide detailed reports that can be used in completing excise tax returns, calculating the correct amount of excise tax to remit and as supporting tax audit documentation. Plan to modify your accounting system immediately to the extent necessary.
Q&A: Basic Information on the Medical Device Excise Tax
Q: Who is subject to the medical device excise tax?
Manufacturers, importers and producers of “taxable medical devices” are subject to the excise tax
Q: What is the definition of a “taxable medical device”?
A taxable medical device is a medical device intended for humans. A medical device is any instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article, including any component, part, or accessory, that is recognized in the official National Formulary, or the United States Pharmacopeia, or any supplement to them. A medical device is intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment or prevention of disease, or intended to affect the structure or any function of the body, and that does not achieve its primary intended purpose through chemical action within or on the body and that is not dependent upon being metabolized for the achievement of its primary intended purpose.
Q: How is the federal excise tax on medical devices calculated?
A 2.3% federal excise tax is imposed on the sales price of all taxable medical devices
Q: When does the federal excise tax apply?
All sales of taxable medical devices occurring on or after January 1, 2013.
Q: Does the federal excise tax apply to the leasing of taxable medical devices by a manufacturer?
If you have any questions regarding the medical device federal excise tax, please contact any member of our Tax Services Team.