The Internal Revenue Service (IRS) published a Notice of Proposed Rulemaking (NPRM) on February 7, 2012, that provides guidance on how it will tax certain medical devices under the 2.3 percent excise tax provided for in the Affordable Care Act (ACA). Comments on the NRPM are due by May 7, 2012. A public hearing on the NPRM is scheduled for May 16, 2012.
The proposed regulations will affect manufacturers, producers, or importers who sell taxable medical devices after December 31, 2012. The NPRM defines “taxable medical devices” as those that generally meet the definition under the Federal Food, Drug, & Cosmetic Act (FFDCA) and are used in humans. Under the ACA, veterinary devices and those sold for export or further manufacture are automatically excluded. In response to industry concerns that this definition was too broad, the IRS guidance clarifies that all devices required to be listed by FDA are considered “taxable medical devices” and are subject to the excise tax unless the device falls within an exemption. Medical devices that are not required to be listed because they fall under an IDE or are for research purposes only also fall outside of the definition of “taxable medical devices,” because they are not subject to FDA listing requirements.
Significantly, the “retail exemption” exempts devices such as eyeglasses, contact lenses, and hearing aids that the general public typically purchases for individual use. The NPRM outlines the criteria that IRS will use when determining whether a medical device is typically purchased by the general public for individual use, which include how readily consumers who are not medical professionals can purchase the product and whether the product is primarily used in a medical institution or office or by medical professionals. The NPRM additionally contains a safe harbor provision for many over-the-counter products that would otherwise be considered “taxable medical devices.”
The tax has been controversial from the beginning and industry has been steady and strong in vocalizing its opposition, primarily complaining that the tax will hamper innovation that is already stifled by slow and inconsistent regulation of medical devices. In response to industry backlash, several lawmakers have introduced legislation to repeal the tax.