IRS issues regs on $20 billion medical device tax

by Brendon Nafziger, DOTmed News Associate Editor | February 03, 2012
The medical device industry continues to bang the drum over a $20 billion excise tax it says will eat into profits and drive jobs overseas, as the Internal Revenue Service releases proposed regulations for implementing the tax.

On Friday, the Internal Revenue Service issued its proposed rules for the 2.3 percent tax on manufacturers and device importers, which Stephen Ubl, president of the Advanced Medical Technology Association, an industry lobby, called an "anti-competitive, job-killing tax."

"The anticipated tax has already forced companies to lay off workers and to reduce critical R&D that will help drive the next wave of treatments and cures," he said in a statement, calling on Congress and the Obama administration to repeal the tax.

The tax, which goes into effect next year, was included in the Affordable Care Act and is meant to raise $20 billion over the next decade to help pay for the costs of health reform -- that is, adding millions of new Americans to the insurance rolls. Earlier versions of the bill included a higher tax on device companies, but it was brought down for the final bill.

The IRS' proposed regulations are aimed partly at clearing up any confusion about what constitutes a "taxable" medical device, largely arguing that devices are subject to the tax if they fall within the Food and Drug Administration's domain and are human-use products.

For instance, the proposed regulations say human devices used in veterinary medicine are taxable, although purely veterinary products are not. Investigational devices, on the other hand, which have not been cleared by the FDA for typical marketing, are not taxable.

One sticky point has been over what counts as a "consumer" medical item, such as eyeglasses, contact lenses and hearing aids, which are specifically excluded from the tax. In its proposals, the IRS offered some "non-exclusive" guidelines as to what constitutes such a product, such as whether it needs to be operated by a medical professional or demands a large, upfront investment out of the financial reach of the ordinary American. The agency is also putting forth a safe harbor provision that includes devices, such as those contained within an FDA database for over-the-counter tests, that are exempt.

IRS is accepting comments on the proposals until May 7, and is holding a public hearing on the issue May 16.

Wayne Horsman

Tax Policy

February 10, 2012 09:16

It has been my understanding that one of the goals of government taxation policy is to reduce something that is undesirable (alcohol, cigarettes, pollution, etc.). In other words, tax it more if you want less of it. Are medical devices undesirable? -- A "targeted tax" (ie: gas tax to pay for roads) is more of a "user fee" than a tax. It is intended to generate revenue to pay for a government expense caused by a particular set of users. Is this tax intended to pay the cost of running the device portion of the FDA?

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