IRS Struggling to Collect the Medical Device Tax

Here come the “I told you so’s.”

The Internal Revenue Service is having a hard time figuring out which companies need to comply with the medical device tax, and has collected roughly 25 percent less than the estimated total revenue expected to be generated by the levy.

“The IRS cannot identify the population of medical device manufacturers registered with the [U.S.] Food and Drug Administration that are required to file a Form 720 and pay the excise tax,” claims a recent audit report from the Treasury Inspector General for Tax Administration (TIGTA).

Form 720, the “Quarterly Federal Excise Tax Return,” must be filed by medical device manufacturers, producers and importers, and those companies are required to pay the 2.3 percent excise tax on devices sold since Jan. 1, 2013, the report said. The tax is incurred on devices like pacemakers, but consumer items such as contact lenses and hearing aids are exempted.

The tax is projected to generate about $20 billion through 2019 to partly fund the Affordable Care Act, according to the
report’s citation of estimates from the Joint Committee on Taxation.

The IRS contends it collected only 5,107 Forms 720 and $913 million in the first six months of the tax’s implementation through the quarter ending June 30, 2013. The total is far short of the projected 9,000 to 15,000 returns and $1.2 billion in revenue it had anticipated from the levy.

The audit said the IRS obtained medical device registration data from the FDA to identify the companies required to pay the tax. But the “data cannot be used to definitively identify manufacturers subject to the medical device excise tax reporting and payment requirements,” the report said. “Specific exemptions, other safe harbors, and retail exemptions apply, and therefore not all businesses registered with the FDA are engaged in taxable sales of medical devices.”

Of the 16,370 medical device businesses registered with the FDA as of May 21, 2013, only 4,500 to 7,800 have been identified by the IRS as selling taxable medical devices, the Treasury report noted.

In a written response in the audit report, the IRS said it is studying the recommendations put forth by TIGTA, including the need to improve ways of identifying non-compliant manufacturers, conducting reviews of tax forms to address discrepancies, and corresponding with taxpayers in obtaining missing information.

Naturally, device tax opponents used the audit report to bolster their arguments against the levy.

“We’ve expressed concerns from the outset that the device tax is poorly conceived, applying an excise tax—usually reserved for rubber tires, alcohol and tobacco—to an extremely diverse high-technology manufacturing industry,” J.C. Scott, head of government affairs for the Advanced Medical Technology Association, said in a statement cited by the Associated Press. —Michael Barbella

(Editor’s note: For an update on states’ individual battles against the device tax, see Medtech Musings on page 90).