4 Things You Didn’t Know About the Medical Device Tax

The 2.3% excise tax on medical devices includes a few provisions you might not be familiar with.

May 24, 2013

4 Min Read
4 Things You Didn’t Know About the Medical Device Tax

You already know that the medical device tax is a nuisance for medical device manufacturers, but are you familiar with some of the intricacies of the tax?

The tax law can be confusing, but after sifting through it we came up with four items that are causing a great deal of the confusion in the medical device community. You may find some of these surprising.

  1. Medical devices used on animals are being taxed. You may be asking yourself why devices used on animals made this list; they’re not registered with the FDA, right? In writing up the regulations related to the device tax, the IRS specifically stated that a medical device is taxable if it is “intended for humans.”Some of the confusion in the industry has been over whether sales of registered devices for veterinary use can be segregated from other sales, so the tax would not need to be paid on these items. Unfortunately, only devices that are specifically for veterinary use are exempt. Once again, the IRS falls back to the FDA registration listing. If a device is registered with FDA but has veterinary applications, it is considered a taxable device, regardless of whether it is ultimately used on an animal or a human. Purely veterinary medical devices aren’t required to be registered with FDA, and thus aren’t taxed.

  2. The device tax doesn’t apply to smartphones. Don’t worry! The cost of your next smartphone won’t increase because of the medical device excise tax. With the advances in technology over the past few years, smartphones have become an increasingly convenient and useful tool for medical applications. In some cases, the software running on these phones may be required to be registered as a medical device and would be taxable. However, in recent months there has been an outcry and fear that the actual smartphones running the software applications would be subject to the excise tax at the retail level. IRS guidance has made it clear that only devices that are required to be registered with FDA will be taxable. Therefore, mobile applications registered with FDA will be saddled with the tax, but the physical mobile device itself will not.

  3. Nonprofits are required to pay the medical device excise tax. The excise tax regulations extend the tax to not only sales of medical devices, but also to certain uses of those devices. A question that has arisen is whether donations to charitable organizations constitute a taxable use. Recent IRS regulations have determined that these donations are not considered taxable at the time of donation and thus aren’t subject to the excise tax. However, if that charitable organization sells the medical device at a later point, the charitable organization, rather than the manufacturer, is required to pay the excise tax. At this point, it is not clear whether these charitable organizations would have to go through a formal registration process or if they could just remit the tax on an excise tax return.

  4. Further manufacturer is no longer further manufacturer. Until new IRS guidance was issued in December 2012, it seemed that medical device manufacturers would get a break on the medical device excise tax if their devices were placed into a convenience kit because under initial IRS guidance, production of a convenience kit constituted further manufacture. However, under December’s IRS guidance, being placed into a convenience kit no longer constitutes further manufacture. Therefore, the 2.3% excise tax is being applied to each medical device within a domestic convenience kit individually. The tax will be assessed on the manufacturer or importer when they sell the device to the convenience kit manufacturer.

The medical device excise tax is complex and is shaking up the industry. Manufacturers must continue to learn about the excise tax, so they will be better prepared for different intricacies as they arise.

What oddities have you noticed in the excise tax? What aspects of the excise tax are confusing to you? We want to hear from you, so leave a comment below.

Mitchell Kopelman is the partner in charge of the technology and biosciences practice at Habif, Arogeti, & Wynne (Atlanta). He focuses on helping medical device companies with R&D tax credit studies, mergers and acquisitions, and proactive tax and accounting planning. He also works with companies as they expand globally or enter the United States. Kopelman graduated from Georgia State University with a bachelor’s degree in accounting. He can be reached at [email protected]. 

Ori Epstein is a tax manager in Habif, Arogeti, & Wynne’s technology and biosciences practice. He regularly speaks at medical device industry conferences on topics such as the excise tax, business trends within the medical device industry, and tax planning and preparation for medical device companies. Epstein graduated from the University of Georgia with a bachelor’s degree in accounting and a master’s of accounting with a concentration in tax. E-mail him at [email protected]

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