Medical Device Tax

Just as medical device manufacturers were preparing to submit their first payments to the IRS following a two-year moratorium on excise taxes, Congress’ vote on a short-term spending bill last month also included another delay on said taxes. The 2.3 percent tax on qualified medical devices was set to go into effect in January, after a previous hiatus established under The Consolidated Appropriations Act of December 2015. Now, device companies are celebrating a continuation of the tax halt while the government will see a sharp decline in tax revenue as a result.

Following are five things to know about the medical device tax.

  1. The tax was originally architected as part of the Affordable Care Act and was enacted in 2013 to offset the rising costs associated with providing additional health insurance coverage to millions of Americans.

     

  2. While device manufacturers have praised the extension of the temporary halt, the Congressional Budget Office estimates the delay will cost the government more than $3.7 billion in tax revenue during the additional two years. Before its original hiatus beginning in 2016, the IRS collected between $1 billion and $2 billion per year between 2013-2015 as a result of the tax.

     

  3. Generally, the tax applies to any device listed under the Food and Drug Administration’s (FDA) Federal Food, Drug and Cosmetic Act. This typically includes pacemakers, artificial joints, and dental instruments, among other devices – and does not include devices sold at retail or for individual use, such as eyeglasses, contact lenses or hearing aids. Additional “retail exemptions” may include over-the-counter (OTC) devices and those that qualify as durable medical equipment.

     

  4. This 2-year moratorium on the medical device excise tax ends at the end of December 2019. After that, tax deposits are required in the form of semi-monthly deposits if tax liability exceeds $2,500 for a quarter. Taxpayers impacted by the medical device tax must also report sales of taxable devices on their Quarterly Federal Excise Tax Return (Form 720).

     

  5. Under certain circumstances, manufacturers may sell taxable medical devices tax-free. Circumstances of this nature may include when devices are for resale to a second purchaser for further manufacturing or for resale for export. To avoid taxes in either of these scenarios, manufacturers and receiving parties must both register with the IRS via the Application for Registration for Certain Excise Tax Activities.

For more information on the matters discussed above, please contact the MFA Tax Team.