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Is 3M Being Audited By the IRS For Its Medical Device Tax Payments?

There seems to be a little mystery over whether 3M is being audited for its device tax payments. But mysteries aside, does the industry expect to see more companies get audited because it is a new tax.

June 28, 2013

4 Min Read
Is 3M Being Audited By the IRS For Its Medical Device Tax Payments?

[Story has been updated by comment from AdvaMed]

Reporters loathe mysteries, and I am no exception to the rule.

On Monday, Debra Rectenwald, President and General Manager, 3M Infection Prevention Division, appeared as a panelist at an event hosted by LifeScience Alley in Minnesota, and made this startling admission when the topic of the 2.3% medical device tax arose: 3M was being audited for its medical device tax payments. Rectenwald was part of a panel in which two Minnesota startup CEOs participated with AdvaMed President and CEO Stephen Ubl playing moderator.

Wow, I thought. I suppressed my initial desire to tweet the information. I thought this was a story that needed a little more context and elaboration. I let a few days slide as I wrote other stories based on an interview that Medtronic CEO Omar Ishrak gave on-stage at the same event following the panel in which Rectenwald spoke.

On Thursday, I was still a bit stunned by the revelation and decided I want to check with co-panelist to make sure my ears weren't lying. So I contacted John Dinusson, CEO of OrthoCor Medical who sat next to Rectenwald as she spoke Monday. Dinusson confirmed that he had also heard the same thing - that 3M was being audited. 

So I contacted 3M spokeswoman Jacqueline Berry to know when the company was informed of an audit and what 3M is doing to resolve the situation. Berry called back and said simply: "I contacted the tax department and we are not under any audit."

I was stunned. She ventured that Rectenwald was probably referring to a first-quarter regulatory filing that 3M made informing the public about the new tax and the potential for future audits. Rectenwald was traveling and Berry said she would try and get a comment from her. I asked Berry if she could send me the filing.

She later told me that the document she was referring to wasn't a public document. In other words, I couldn't take a look at it.

I contacted AdvaMed's Stephen Ubl, but he did not respond. The group's spokeswoman, Wanda Moebius, said, "We've said all along that the tax is burdensome. But we can't comment on an individual company's situation."

I then turned to tax experts. If the mystery of 3M can't be resolved, perhaps they could say whether the device industry would see a several companies get audited because of the new 2.3% tax.

Ori Epstein, a tax manager at Habif, Arogeti, & Wynne’s technology and biosciences practice, said that there are two ways a company can get audited - an excise tax audit and an income tax audit. In an email, he went on to say: 

While one type of audit can lead to the other, the current audit rate for companies is around 1% and I would be very surprised to hear that companies were being selected for income OR excise tax audits simply because they had begun filing excise tax returns.

However, he did say that tax is complex and can result in confusion. Here are three examples of what can perplex device makers, Epstein explained:

Responsible Party Determination - Determining who is responsible for paying the tax is very confusing and has caused a great deal of dialogue between medical device companies and their customers. People are intuitively thinking about the medical device excise tax as a sales tax.  In reality, it is more like a reverse sales tax.  Essentially the tax is assessed at the lowest price point: manufacturer to distributor, for example.  

Taxable Product - Another area driving confusion is what device is actually taxable.  The IRS regulations refer to the FDA registration database.  At the same time, the regulations also provide exemptions for specific devices (e.g. hearing aids, eyeglasses) and devices that qualify for the “retail exemption”.  For example, a pacemaker device would be taxable, but latex gloves may not be taxable.  This is a very simple example of  a very confusing aspect of the medical device tax.

Many companies assume that the medical device tax only applies to tangible devices.  However, many software companies are subject to the tax on their license fees when the software is regulated by the FDA. Take, for example, a company that  produces imaging software that is required to be registered with the FDA as a medical device. Although the related equipment used to run the software may not be a registered medical device, the registered software is considered a taxable medical device.

I look forward to a chat with Rectenwald to clarify whether 3M is being audited in relation to its device tax payments. Meanwhile Epstein says companies need to ensure that they register with the IRS, make their semi-monthly payments to the agency and work with a qualified CPA to make sure that they are in compliance, to avoid being audited.

Whether 3M is being audited or not, its pretty clear there is confusion over the device tax and many companies could soon be under IRS scrutiny. 

[Photo Credit: iStockPhoto.com user VCTStyle] 

 —By Arundhati Parmar, Senior Editor, MD+DI

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