Smart Phones Safe from Tax; Smart Content not Exempt

The U.S. House of Representatives’ Energy and Commerce Committee held a hearing March 19 on the potential effect of the 2.3 percent medical device excise tax on smartphones, tablets and mobile applications. Run by a Communications and Technology Subcommittee, the conclusion was that smart personal devices will not be taxed as medical devices—but certain medical apps may not be exempt.

“These types of taxes, if they are applied to mobile medical applications and devices, will stifle innovation, will tempt entrepreneurs to pursue . . . other types of innovation, and apply their genius and their efforts to other parts of the mobile ecosystem rather than efforts to make our children, our families, our parents, healthier,” Jonathan Spalter, chairman of Mobile Future, said at the hearing. “So there is an impact, and we need to be very, very vigilant and cautious about going down this path.”

Mobile Future is a group of businesses, non-profit organizations and individuals with a special interest in wireless technology.

In July 2011, the U.S. Food and Drug Administration (FDA) published draft guidance in which it proposed regulating any mobile app deemed to be a medical device. Agency representatives said FDA would not regulate personal wellness apps such as pedometers or heart-rate monitors, but would regulate an app that, for example, attaches to a mobile platform to collect and analyze heart and brain signals.

Christy Foreman, director of the FDA device evaluation division, represented the agency at the hearing. On the third day of proceedings, she told the subcommittee that the agency’s goal is to foster technological innovation while protecting public safety. The agency would not, as some had feared, regulate the sale or general consumer use of mobile devices, she said.

However, some challenged Foreman. “The FDA says they are trying to limit the regulation to a small subset of apps but they have not clearly explained to the public what they consider a medical device,” said Areta Kupchyk, partner at the New York, N.Y.-based law firm Nixon Peabody LLP, whose clients include mobile app developers.

The FDA actually outlines what it considers a “medical device” on its website. According to its definition, a medical device is “an instrument, apparatus, implement, machine, contrivance, implant, in-vitro reagent, or other similar or related article, including a component part, or accessory” which is recognized in the official National Formulary, or the United States Pharmacopoeia, 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, in man or other animals; or intended to affect the structure or any function of the body of man or other animals, and which does not achieve any of its primary intended purposes through chemical action within or on the body of man or other animals and which is not dependent upon being metabolized for the achievement of any of its primary intended purposes. The FDA further breaks down medical devices by class according to risk factor and intended use.

Charles Yim, founder and chief executive officer of Breathometer Inc., an experimental, key fob-sized breathalyzer that plugs into a smartphone and calculates a breath alcohol content reading, believes the FDA’s involvement with medical apps could frustrate many developers. “I wouldn’t say it is preventing us from doing what we wanted to but it is an inhibitor,” he told Reuters. “Apple has approved our app contingent on it getting FDA clearance, so that means we are solely reliant on government now.”

Foreman said it takes the FDA an average of 67 days to clear a mobile app and that most require the less rigorous 510(k) clearance procedure rather than pre-market approvals. The cost of an FDA application for a big company is $5,000, she said, and half that amount for small businesses.

“FDA has no intention of stifling innovation in this exciting and rapidly growing field,” Foreman wrote in a follow-up blog post on FDA Voice. “The fact is, only a fraction of mobile apps would require FDA review. However, when a mobile app is doing the job of a medical device that requires FDA clearance or approval, it’s only logical that both should be governed by the same rules.”

Foreman said the FDA plans to release the final guidance on mobile apps by October.