medical device excise tax presentation by gss

Right Answers. Right Now.®

Medical Device Excise Tax Presented to the

Florida Medical Manufacturers Consortium 12/18/2012


Today’s Presenters

Geary Havran, NDH Medical, Inc. Jim Newman, Managing Shareholder, GSS Debbie Fallucca, Tax Principal, GSS

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Medical Device Excise Tax


Today’s Agenda Ø Regulatory Changes Ø History of Medical Device Excise Tax Ø Which devices are taxable Ø Who is subject to tax Ø Exemptions Ø Determining Sales Price Ø Compliance Ø Q&A

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Regulatory Changes

FDA Registration and Listing Requirements ØContract manufacturing exemption deleted ØRegistration references § http://www.fda.gov/medicaldevices/deviceregulationand

guidance/howtomarketyourdevice/registrationandlisting/default.htm

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http://www.fda.gov/medicaldevices/deviceregulationandguidance/howtomarketyourdevice/registrationandlisting/default.htm�




History of Medical Device Excise Tax ØEnacted as part of Health Care Reform in 2010 Ø IRS issued proposed rules in Feb 2012 Ø Final regulations and interim guidance issued Dec

2012 ØAdditional guidance expected in 2013 ØOngoing efforts to delay or repeal

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Which devices are taxable? Ø Taxable medical devices are defined with reference to Section 201(h) of

the Federal Food Drug and Cosmetic Act. § An instrument, apparatus, contrivance, in vitro reagent, recognized in

the National Formulary or the US Pharmacopoeia § Listed as a device with the FDA under section 510(j) of the FFDCA

and 21 CFR Part 807 • For example, not biologics since those are not listed under 510(j)

§ Only those intended for use on humans are listed Ø All medical devices falling within this definition are taxable unless an

exemption applies.

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Retail Exemption Eyeglasses, contact lenses and hearing aids and, to the extent provided in regulations, devices, of a type generally purchased by the general public at retail for the purchaser’s individual use.

Facts and circumstances tests: Ø Purchase test: Regularly available for purchase at retail, Ø Use test: Regularly available for use by individual consumers who are

not medical professions, and Ø Design test: Design demonstrates that they are not primarily intended

for use in a medical institution or office or by medical professionals All 3 tests need not apply to get the retail exemption.

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Retail Exemption Purchase Test: Whether consumers who are not medical professionals can purchase the device in person, over the telephone, or over the internet, through retail businesses such as drug stores, supermarkets, or medical supply stores and retailers that primarily sell devices. Use Test: Whether consumers who are not medical professionals can use the device safely and effectively for its intended medical purpose with minimal or no training from a medical professional; and Whether the device is classified by the FDA under Subpart D of 21 CFR part 890 (Physical Medicine Devices).

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Retail Exemption Design Test:

Ø Whether the device generally must be implanted, inserted, operated, or otherwise administered by a medical professional

Ø Whether the cost to acquire, maintain, and/or use the device requires a large initial investment and/or ongoing expenditure that is not affordable for the average individual consumer

Ø Whether the device is a Class III device under the FDA system of classification Ø Whether the device is classified by the FDA under certain enumerated parts or subparts

of 21 CFR; and Ø Whether the device qualifies as Durable Medical Equipment, Prosthetics, Orthotics, and

Supplies (DMEPOS) for which payment is available exclusively on a rental basis under the Medicare Part B payment rules and is an “item requiring frequent and substantial servicing.”

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Retail Exemption The regulations included many examples, Ø Meet retail exemption: non-sterile absorbent tipped applicators,

adhesive bandages, snake bit suction kits, denture adhesives, mechanical and powered wheelchairs, portable oxygen concentrators, and therapeutic AC-powered adjustable home use beds.

Ø Do not meet retail exemption: mobile x-ray systems, non-absorbable silk sutures and nuclear magnetic resonance imaging systems.

The regulations also include retail exemption safe harbors.

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Retail Exemption Over the Counter Safe Harbor Ø Devices that are included in the FDA’s online IVD

Home Use Lab Tests database Ø Devices that are described as “OTC” devices in the

relevant FDA classification regulation heading Ø Devices that are described as “OTC” devices in the

FDA’s product code name, the FDA’s device classification name, or the “classification name” field in the FDA’s device registration and listing database.




Retail Exemption DMEPOS Safe Harbor (1) Devices that qualify as durable medical equipment, prosthetics, orthotics, and supplies (2) for which payment is available on a purchase basis under Medicare Part B payment rules, (3) and are: Ø Prosthetic and orthotic devices, that do not require implantation or

insertion by a medical professional; Ø Parenteral and enteral nutrients, equipment, and supplies; Ø Therapeutic shoes; Ø Customized items; Ø OR supplies necessary for the effective use of DME




Which Devices are Taxable? Combination Products: products that combine drugs, devices and/or biological products (e.g., a prefilled syringe, an inhaler) may be considered taxable medical devices if the combination is a listed medical device. Kits: 2 or more different medical devices, or a combination of medical devices and other items, packaged together for the convenience of the user. The IRS is further studying kits and intends to issue additional guidance in the future. In the interim, the sale of taxable medical device that goes into a kit will be subject to tax upon its sale by the manufacturer or importer, however, the sale of the convenience kit by the kit producer will not be subject to tax.




Who is Subject to Tax? It is imposed on a manufacturer or importer of a taxable medical device. Ø Definitions are well developed through IRS rules and case law. Ø Contract manufacturing Ø The first sale in the US following the completion of manufacturing

triggers the tax. Ø The first sale in the US following importation triggers the tax. Ø Additional triggers: lease or rental, demonstration uses, loaners, use in

research, intercompany sales. Ø Interim guidance on charitable contribution of medical devices: not

taxable if donated to an eligible donee defined in Internal Revenue Code Section 170(c).




Exemptions “Further manufacturing” Ø applies to buyers of taxable medical devices for use in

further manufacture or for resale to a buyer for further manufacture.

Ø Form 637 activity letter “B” “Export” Ø applies to buyers with their principle place of business in

the US purchasing taxable medical devices for export or for resale to a second purchaser for export.

Ø Form 637 activity letter “D”




Determining Sales Price The price for which a manufacturer sells a taxable article to an independent wholesale distributor is the applicable price for purposes of imposing the tax.

There are general constructive pricing rules which the IRS may impose, and taxpayers may use, where a manufacturer sells other than to an unrelated wholesaler.

Interim guidance in Notice 2012-77 provides a series of safe harbor constructive pricing rules which are industry specific for sales at retail, or to related retailers or related resellers.




Determining Sales Price Interim rule pricing guidance if no sales to independent wholesale distributors: Ø Sales at retail (directly to end user such as hospitals and medical

service providers) = 75% of the actual selling price Ø Sales to unrelated retailers = 90% of the lowest price for which

the articles are sold to unrelated retailers Ø Sales to related retailer = 75% of 95% of the actual selling price Ø Sales to related reseller that leases and sells at retail = 75% of

95% of the actual selling price Ø Sales to related reseller that only leases at retail = actual selling

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Compliance Form 637 Application for Registration Ø the application gets assigned to an IRS Revenue Agent Ø must list social security numbers for all company owners and

officers Ø must list all related companies Ø have to file by 12/31/12 to be able to say “applied for” on

exemption certificate Ø need separate certificates for further manufacturing and export

exemptions Ø within 6 months of sale, need proof of resale after further

manufacturing or proof of export




Compliance Tax is reported on Form 720, Quarterly Federal Excise Tax Return Ø Deposits required semi monthly if tax exceeds $2,500 for

the quarter Ø Must use Electronic Funds Transfer (EFTPS) Ø Deposits and reporting required for each legal entity

including disregarded entities Ø Quarterly form due last day of the month following end of

quarter Ø Form 720 has not yet been updated by IRS




Compliance The interim guidance provides for relief from failure to deposit penalties for the first three calendar quarters of 2013, provided the taxpayer shows a good faith attempt to comply.

No failure-to-pay or failure-to-file penalty relief is provided.

Failure-to-register penalties start at $10,000, with an additional $1,000 per day of noncompliance.




Compliance Accounting Systems: Ø Do current billing systems allow for appropriate pricing and

proper calculation of the excise tax base? Ø Do current inventory systems monitor and track taxable and

nontaxable uses of medical devices? Ø Do current accounting systems allow for proper accounting and

application of debit memos, credit memos, discounts, volume rebates, chargebacks and partial payments when calculating and paying the excise tax?

Ø Need to develop processes and procedures to track devices sold for remanufacturing or export.




Compliance

The regulations and guidance do not address whether the tax should be separately stated because it is a business decision.

The excise tax is deductible as part of Cost of Goods Sold.

State and Local tax considerations.




Questions & Answers




Gregory, Sharer & Stuart, CPAs 100 Second Avenue South, Suite 600

St. Petersburg, Florida 33701 (727) 821-6161

Contact information:

Jim Newman [email protected] Debbie Fallucca [email protected]



mailto:[email protected]�

mailto:[email protected]�


Circular 230 disclaimer

Any US tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.



medical device excise tax presentation by gss

Documents

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ndh medical

medical professions

medical institution

taxable medical devices

intended medical purpose

medical supply stores

tax exemptions