On February 3, 2012, the Internal Revenue Service issued proposed regulations under Internal Revenue Code Section 4191, which imposes a 2.3% excise tax on the sale of certain medical devices after December 31, 2012. Section 4191 was added to the Internal Revenue Code by the Healthcare and Education Reconciliation Act of 2010.
When it becomes effective, the medical device excise tax will be imposed on manufacturers, producers and importers of medical devices intended for humans that are included in the definition of "device" contained in Section 201(h) of the Federal Food, Drug, and Cosmetic Act. That definition includes any "instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article," or any component, part or accessory thereof, that is recognized in the National Formulary or the United States Pharmacopeia (or any supplement to them), intended for use in the diagnosis of disease or other conditions or in the cure, mitigation, treatment or prevention of disease, or intended to affect the structure or any function of the body. Specifically exempted from the application of the medical device excise tax are eyeglasses, contact lenses, hearing aids and other medical devices determined by the IRS to be of a type generally purchased by the general public at retail for individual use.
The newly-proposed regulations provide guidance on the definition of taxable medical devices, the application of the retail exemption, the treatment of devices intended for both human medical and veterinary medical purposes and of devices that have both medical and non-medical uses, the exemption for certain "investigational" devices, the taxability of dental instruments and equipment and the application of existing manufacturers excise tax rules. The proposed regulations also address comments raised in response to IRS Notice 2010-89 (which was issued on December 27, 2010 and solicited comments on the implementation and administration of the medical device excise tax) concerning the taxation of "convenience kits" combining medical devices and other items which are packaged together for the user's convenience, associated or secondary devices sold with a primary device (such as a monitor sold as part of an x-ray system) and components of devices, combination products (combining drugs, devices and/or biological products) and sales contracts for medical software and IT systems.
A May 16, 2012 public hearing on the proposed regulations has been scheduled, and comments on the proposed regulations and outlines of topics to be discussed at the public hearing are due by May 7, 2012.
This article was prepared by Jeffrey M. Marks, for lawyers for Fulbright's Tax Practice Group.
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