December 17, 2012

A new 2.3 percent tax on medical devices is scheduled to go into effect after December 31. Attempts by the medical device industry to repeal or delay implementation of the new tax have thus far been unsuccessful. 

The medical device tax is one of the tax provisions in the Affordable Care Act, commonly known as Obamacare. The tax will be paid by manufacturers and importers of medical devices, according to the Internal Revenue Service.  In very general terms, a taxable medical device has been broadly defined as anything under the jurisdiction of the U.S. Food and Drug Administration that is not actually a food or a drug.  However, devices sold to the general public at retail, such as eyeglasses and hearing aids, are generally exempt from the new tax.  Investigational devices and those devices used solely for research purposes are generally not subject to the tax.  There is also an export exemption for devices that are ultimately to be sold to purchasers outside of the U.S.  The tax will be assessed on gross sales revenue, not profits, and currently there is no exception for early stage medical device companies that are not yet profitable.

The GOP-controlled U.S. House of Representatives passed a bill this summer that would repeal the medical device tax.  The Democrat-controlled Senate, however, has refused to bring a bill to repeal the tax to the floor for a vote.  In November, over 800 medical device companies, medical groups and investment firms sent a letter to Senate leaders demanding action.  In early December, eighteen Democratic senators and senators-elect urged Senate Majority Leader Harry Reid for a delay in the implementation of the medical device tax.  However, much of the current debate in Washington is concentrated on broader “fiscal cliff” negotiations.  President Barack Obama made it clear in an interview last week that he does not support delaying or repealing the medical device tax.  He stated that medical device companies will ultimately benefit from the tax as it is part of a health reform package that will bring the industry 30 million new customers.

The medical device tax is to be reported on quarterly federal excise tax returns. Medical device manufacturers will generally be required to make semimonthly deposits of tax unless the manufacturer’s net tax liability does not exceed $2,500 for the quarter.  The first payment will be due January 29, 2013.  The IRS released guidelines on December 7 for paying the new tax.   See http://www.irs.gov/pub/newsroom/reg-113770-10.pdf

As federal budget negotiations continue to play out during the remainder of the year, medical device companies are watching for possible changes to the medical device tax currently set to take effect in two weeks.