The Internal Revenue Service (IRS) has published final regulations on the medical device excise tax that will begin after January 1, 2013.
In order to pay for coverage for the uninsured, the new health care law provided that any “manufacturer, producer, or importer” of taxable medical devices shall be required to pay a tax equal to 2.3% of the sales price of the device. The regulations apply to all manufacturers.
BMO Capital analyst Joanne Wuensch said the final regulations were largely in line with the proposal, including the retail exemption (e.g., contact lenses and sleep apnea devices), and few comments were adopted. However, the discussions of commenter suggestions do provide further clarity on two key issues.
Constructive Sale Price
Zimmer Holdings, Inc. recently suggested that its organizational/legal structure, wherein a manufacturing entity sells to a wholly owned distribution entity, provides a lower cost basis on which the tax is levied. This correlates to a commenter’s suggestion that taxpayers can use transfer pricing to determine the taxable price. The final regulations do not adopt this suggestion. Wuensch believes, based on this and prior documents, that the constructive sale price is likely to be the price at which a manufacturer/importer sells to an “independent” wholesaler. Interim guidance that further clarifies this issue is expected to be published along with the final rule.
Manufacturer Versus Importer
Wuensch noted that some media pundits suggested that importers would be treated differently from U.S.-based manufacturers. “The final regulations dispel this myth—importers and manufacturers are both required to pay the medical device tax on the constructive sale price. We therefore do not expect the excise tax to accelerate relocation of U.S. facilities abroad or to provide an additional competitive advantage to companies with outsized [foreign] manufacturing operations.
Two other items of note caught Wuensch’s attention: 1) investigational devices, promotional products and those under evaluation are all subject to the tax; and 2) software is not subject to the tax.
Industry Complains
AdvaMed continued its drumbeat to dump the tax.
“AdvaMed is carefully reviewing the regulations released by the IRS. But regardless, Congress should act to address this $30 billion tax before it takes effect on January 1, ” AdvaMed President Steven Ubl said in a prepared statement. “There is strong bipartisan support for action. While Washington talks about a fiscal cliff, this tax could push us off an innovation cliff, costing as many as 43, 000 jobs and hurting the ability of medical technology companies to find tomorrow’s treatments and cures. It should be repealed. Already, medical technology companies are laying off workers or cutting back on research and development or other expansions.”
Ubl added that the tax is “scaring away investors and it threatens U.S. leadership in medical technology, where America is a net exporter to the tune of $5.4 billion a year.”
Zimmer CEO Dave Dvorak is chairman of AdvaMed.
Mark Leahey, president of the Medical Device Manufacturers Association issued a similar statement, saying that the final rules do “nothing to prevent the loss of jobs and innovation that has already occurred as a result of the medical device tax, and will unfortunately continue if we do not repeal this bad policy.”
President Obama Says Tax Stays
The President said he would not back down from the tax because manufacturers were going to get a “bunch” of new patients with the expansion of health care insurance benefits.
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