Section 4191 imposes a medical device excise tax on the sale, use, or lease of a "taxable medical device" by its manufacturer or importer at a rate of 2.3% of the price for which each device was sold. Certain adjustments to the sale price are allowed, and in some situations, a constructive sale price may be used to determine the tax base. In addition, export sales are generally not subject to the tax, subject to certain registration requirements.
The definition of a “taxable medical device” is any device listed with the Food and Drug Administration (“FDA”) under section 510(j) of the Federal Food, Drug, and Cosmetic Act and 21 C.F.R. Part 807, pursuant to FDA requirements. There are exemptions provided for eyeglasses, contact lenses, and hearing aids, and devices of a type generally purchased by the general public at retail for individual use (the “retail exemption”).
In December 2015, Congress enacted a two-year moratorium on application of the medical device excise tax on taxable medical devices sold, used, or leased between January 1, 2016, and December 31, 2017. Thus, manufacturers and importers of devices were not required to make semi-monthly deposits of the excise tax or to file Forms 720 relating to those sales.
With the expiration of the moratorium, the medical device excise tax is currently effective with respect to sales, uses, and leases of taxable medical devices by manufacturers and importers. Affected companies will need to begin making semi-monthly deposits of tax and filing excise tax returns.
What you should do now
Manufacturers and importers of taxable medical devices should consider taking the following steps:
- Review existing MDET processes and procedures
- Review tax base calculations
- Consider constructive sale price methods to potentially reduce tax base
- Identify new products and SKUs that may be subject to MDET
- Communicate with customers to obtain required paperwork to make tax-free sales or claim refunds for nontaxable transactions
- Consider adjustments to contracts and invoices to take into account MDET
- Analyze technology solutions to minimize burden of tax compliance
Whether Congress chooses to extend the moratorium or not, there still may be an opportunity to claim refunds of MDET incurred during open past periods. There are a number of ways to identify potential refund opportunities, including:
- Review product listings to determine whether tax was paid on products that are not taxable medical devices (including products sold as part of a package that contained non-taxable components).
- Review tax calculations to determine whether the tax base computation took into account all applicable rules, including:
- Safe harbor methods in Notice 2012-77
- Constructive sale price methodologies other than those in the safe harbor
- Section 4216 adjustments (e.g., reductions in sale price for MDET, shipping expenses, and other allowable exclusions)
- Review export sales and sales for use in “further manufacturing” to determine whether such sales were of tax-paid medical devices.
- Review price readjustments (such as devices returned or rebates paid in 2016 and 2017) to determine whether bona fide adjustments were taken into account.