On Feb. 3, the U.S. Department of the Treasury released proposed regulations on how the device tax will be applied. While those proposals do set out some exemptions for early-stage devices and also somewhat mollify those who had worried about a potential double tax for contract manufacturers, their release has spurred the med-tech industry and its congressional allies to accelerate their drive for repeal of the tax.
Part of the Patient Protection & Affordable Care Act that is scheduled to take effect next January, the medical device tax is a top-line tax that is to be applied to sales, which opponents say is particularly difficult on the smaller companies that make up the vast majority of the device industry.
The new guidelines, titled Section 4191 of Internal Revenue Code, say that “all devices that are listed under a single product code listing in conjunction with the FDA's device listing requirement are ‘taxable medical devices’ unless they fall within an exemption.”
In general, a “taxable medical device” is described as “any device defined under the Federal Food, Drug & Cosmetic Act as an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article, including any component, part, or accessory, that is recognized in the official 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, and that does not achieve its primary intended purposes through chemical action within or on the body and that is not dependent upon being metabolized for the achievement of its primary intended purposes.”
Among the exemptions carved out by the Internal Revenue Service (IRS) are a specific retail exemption for eyeglasses, contact lenses, hearing aids, and any other medical devices purchased by the general public at retail for individual use.
Also exempted from the tax are instruments that fall under U.S. Food and Drug Administration (FDA) investigational device exemptions and devices labeled for “research purposes only,” as well as devices used in veterinary medicine.
The industry has worried for months about potential double taxation of contract manufacturers and OEMs, but the IRS clarified that issue somewhat by saying that if more than one entity is involved in the manufacture or importation of an item, the determination of which entity is in fact regarded as the manufacturer would be based on the “facts and circumstances of the arrangement.”
Addressing additional concerns that medical products organized into “convenience kits” would be double-taxed, the IRS guidelines say the tax applies only to the “entire sale price of the kit,” not once for the components and again for the final completed kit.
Especially outspoken about the device-tax issue were officials of the largest industry trade association, AdvaMed, along with Rep. Erik Paulsen (R-Minn.), who has been leading the congressional charge against the device tax. He said the report from the Treasury Department “further highlights the fierce urgency of repealing this job-crushing tax on innovation before it is too late. [This] move by the Obama Administration is further proof that the medical innovation tax will increase healthcare costs while putting thousands of jobs on the line.”
Paulsen said he plans to work with leadership of the House of Representatives to schedule a vote on his Protect Medical Innovation Act before the tax takes effect. Joining in the fight this past Monday were 75 freshmen congressional Republicans, who wrote a letter to House GOP leadership asking them to bring to the floor H.R. 436, the aforementioned Protect Medical Innovation Act of 2011. A little over a year since its initial introduction by Paulsen, the bill has just under 230 co-sponsors, and is plodding its way through committee.
Todd Rokita, a first-term Indiana Republican who is spearheading the freshmen’s push, said, “We must act now to repeal this onerous and irresponsible tax. With so many jobs hanging in the balance, this should not be a political issue.” Their letter cited the impact of the planned tax on smaller companies, which the politicos termed the “engine” of the U.S. economy.
The 75 lawmakers brandished their political bona fides by adding: “We believe this is exactly the kind of bill we were elected to pass.”
AdvaMed President and CEO Stephen Ubl said in a statement that the proposed IRS regulations highlight the need for “prompt action” by Congress and the Obama Administration to repeal what he termed “this anti-competitive, job-killing tax.” He said the continued failure to repeal the device tax “flies in the face of the President’s comments during the State of the Union about the need to reform our tax system to make our nation more competitive in the world market, a view shared by members of Congress from both parties. I’d like to keep the focus on the need to repeal the tax,” Ubl said.
As for the IRS guidelines themselves, he said AdvaMed will be “carefully examining the proposed regulation. Obviously, the rule is not going to do anything to simplify our tax code or make our tax burden more rational.” Ubl said that implementation will create “a number of complex administrative and technical burdens that must be addressed.”
Four days after release of the IRS guidelines, Ubl and AdvaMed Chairman James Mazzo outlined the organization’s plans to unhook the “no device tax” effort from the health care reform debate and instead rebrand it as part of a tax reform push. “Let me make one thing very clear. This isn’t about health care reform,” he said. “Repealing the device tax is the first down-payment on much-needed tax reform. The device tax had little to do with the Accountable Care Act, except that it was added to obtain $20 billion to help pay for the bill.”
In a statement issued the day the IRS guidelines were released, Mark Leahey, president and CEO of the Medical Device Manufacturers Association, also turned their release into an opportunity to rail against the device tax. Citing what he termed the “complexities and unanswered questions” in the proposed regulations, he said they “show just how important it is to repeal the onerous medical device tax.”
Saying that the device tax threatens America’s traditional leadership position in medical innovation, Leahey added a final broadside: “It’s time to repeal this job-killing tax.”
A public hearing on the final IRS regulations is scheduled for May 16.
Jim Stommen, retired editor of industry publication Medical Device Daily, is a freelance writer focusing on the medical product sector.