Health Care Law Alert: Proposed Regulations Issued on Medical Device Tax

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The IRS recently issued proposed regulations regarding the newly enacted excise tax on sales of medical devices. Effective January 1, 2013, the sale of a taxable medical device by the manufacturer, producer, or importer of the device will be subject to a tax equal to 2.3% of the selling price. The term "taxable medical device" is defined in the medical device tax statute as "any device (as defined in section 201(h) of the Federal Food, Drug, and Cosmetic Act) intended for humans." The proposed regulations specify that any device that is listed or should be listed as a device with the Food and Drug Administration under section 501(j) of the FFDCA generally is subject to the tax. The statute creates exemptions from the tax, however, for (1) eyeglasses, (2) contact lenses, (3) hearing aids, and (4) "any other medical device determined by the Secretary [of Treasury] to be of a type which is generally purchased by the general public at retail for individual use." This retail exemption has been the subject of a great deal of discussion and questions from the industry.

The proposed regulations focus primarily on the retail exemption from the medical device tax. They provide generally that a device is eligible for the retail exemption if it is regularly available for purchase by individual consumers who are not medical professionals, and if the design of the device demonstrates that it is not primarily intended for use in a medical institution by a medical professional. The proposed regulations provide that all facts and circumstances must be taken into account in determining whether a device qualifies for the retail exemption and lists a number of specific factors that should be considered. Examples of devices that would be subject to the retail exemption include non-sterile absorbent tipped applicators, adhesive bandages, snake bite suction kits, denture adhesives, pregnancy test kits, blood glucose monitors, blood glucose test strips, lancets, and similar items. On the other hand, a mobile x-ray system is an example of a device that would not be exempt from the tax.

The proposed regulations also address the treatment of "convenience kits," which are defined as kits consisting of two or more different medical devices, or a combination of medical devices and other items, packaged together for the convenience of the user. The proposed regulations provide generally that the process of producing or assembling a kit that is a taxable medical device constitutes further manufacture and is therefore subject to the tax, even if individual components included in the kit might have been exempt from the tax.

The Internal Revenue Service has requested comments on the proposed regulations. Written comments must be received by May 7, 2012. A public hearing will be held on May 16, 2012.

Please contact a key contributor if you have questions regarding the tax or the proposed regulations.

Key Contributors

Kevin T. Pearson
Scott F. Young
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