04 Feb The Medical Device Excise Tax: Suspended Animation
Israel’s medical device scene is flourishing these days. A report published last year by the IATI organization indicates that in 2016 alone, local medical device companies raised a total of $61 million, turning them into the strongest sector in Israel’s booming life sciences industry.
Naturally, many of Israel’s medical devices companies view the US as their target market. These companies should, however, realize that their products sold in the US might be subject to special taxation.
One of the provisions enacted in the Health Reform Act in 2010 was Code Section 4191 or the medical device excise tax (MDET). This section imposes an excise tax of 2.3 percent of the sale price of any “taxable medical device” by the manufacturer, producer or importer of the device. The MDET may even be imposed on devices used for clinical trials.
The MDET applies to any device defined in §201(h) of the Federal Food, Drug, & Cosmetic Act (FFDCA) that is intended for human use. This includes instruments, machines, implants and in vitro reagents, among other things.
Also included are associated parts and accessories, which are intended for use in the diagnosis, cure, treatment or prevention of disease or other conditions, or intended to affect the structure or any function of the body.
At the same time, however, devices that are purchased by the general public at retail for individual use (“Retail Exemption”) are not subject to the MDET tax. Devices that benefit from the Retail Exemption are those that are regularly available for purchase and use by individual consumers who are not medical professionals.
For products not specifically addressed, the regulations provide a series of factors that must be applied to determine whether the Retail Exemption applies.
Although these factors must be weighed to determine if a device will be exempt, the regulations do not provide a fixed weight for each of the various factors. Instead, a facts and circumstances test is applied to determine if the device is primarily intended for use in a medical institution or by a medical professional.
The fact that a device is of a type that requires a prescription is not a factor in determining whether it falls under the retail exemption. Some of the factors include:
- Whether consumers who are not medical professionals can purchase the device in person, over the telephone or the Internet, through retail businesses such as drug stores, supermarkets or medical supply stores and retailers that primarily sell devices
- Whether consumers, who are not medical professionals, can use the device safely and effectively for its intended medical purpose with minimal or no training from a medical professional
- Whether the device generally must be implanted, inserted, operated or otherwise administered by a medical professional
- Whether the cost to acquire, maintain, or use the device requires a large initial investment or ongoing expenditure that is not affordable for the average individual consumer
- Whether the device is a Class III device under the FDA system of classification
- Whether the device qualifies as durable medical equipment, prosthetics, orthotics, and supplies for which payment is available exclusively on a rental basis under the Medicare Part B payment rules and is an “item requiring frequent and substantial servicing.”
In 2015, Congress imposed a moratorium or freeze on the MDET for the years 2016–2017. Although a permanent repeal of the tax was discussed, when the Senate tried to overhaul the Affordable Care Act, this was not legislated, nor did it make it into the new Tax Cuts and Jobs Act (i.e., President Donald Trump’s tax reform). As a result, the moratorium on the MDET lapsed and sales of medical devices beginning from January 1, 2018, were to be subject to the MDET on a quarterly basis, with the first report and payment due in April 2018.
Aware of this looming deadline, Congress has once again passed legislation to suspend the MDET tax for an additional two years. If you are selling medical devices to the US market you can breathe a little easier for now.
The writer is a Senior Tax Advisor at Philip Stein & Associates