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Medical Device Excise Tax Update

04.23.13

There have been many conflicting reports on whether the Medical Device Excise Tax (MDET) still exists. Let this set the record straight: IT DOES.

Last month, the U.S. Senate did vote in favor of repealing this tax, which is part of the Health Care and Education Reconciliation Act of 2010. However, the vote did not effectively repeal the tax as it was a non-binding resolution.

So, What Does This Mean?

It means that companies are required to report their taxable sales and the remit MDET soon. The following guidelines may assist with the first filing of Form 720 to report the MDET, due April 30, 2013.

What Is Taxable?

As of January 1, 2013, a 2.3 percent excise tax is imposed on the sales of "taxable medical devices" by the manufacturer, producer, or importer, under IRC Section 4191. Sales to foreign customers and those to parties who will perform further manufacture of the device are exempt.

On What Sale Price Should The Tax Be Calculated?

On December 7, 2012, the IRS issued final regulations and IRS notice 2012-77. This notice provides interim guidelines on constructive pricing rules, treatment of convenience kits, treatment of donations of taxable medical devices, and interim penalty relief for the first three quarters of 2013.

It is imperative that companies understand the constructive pricing rules, because the tax is intended to be levied on manufacturer’s sales to an unrelated wholesale distributor. In instances a company does not have an established wholesale price for its medical devices, the company will need to use the constructive pricing rules to determine the taxable sales price.

According to the guidelines, if a company sells to wholesale distributor and has retail sales, the tax is computed on whichever is lower:

  • The price for which such article is sold.
  • The highest price for which such articles are sold by the company to wholesale distributors.

If the company has no sales to wholesale distributors and all of its sales are retail sales, then the following rule will apply:

  • The tax is calculated on 75 percent of the actual selling price after adjusting it for exclusions (shipping, insurance, etc.).

If the company has no sales to wholesale distributors and all of its sales are to retailers, then the following rule will apply:

  • The tax is computed on 90 percent of the lowest price for which the articles are sold to unrelated retailers. This computation is made without adjustment for any exclusions (shipping, insurance, etc.).

If the company has no sales to wholesale distributors and all of its sales are to a related retailer, then the following rule will apply:

  • The tax is calculated on 75 percent of the product of 95 percent and the actual selling price (that is, the price at which the article is sold to a person that is not a member of the group of companies that are related to the company). No adjustments for insurance, shipping, transportation, etc. are allowed in computing the sales price.

Registration For Tax-exempt Sales

It is important that a company registers with the IRS by filing Form 637 before engaging in any tax-free sales, such as exports, or sale for further manufacture. It takes the IRS at least 90 days to process the form.

Deadlines

MDET deposits are required to be made semi-monthly if the expected liability for a quarter is $2,500 or more. The first deposit, covering the first 15 days of the year, was due on January 29, 2013. Companies are required to report their taxable sales and the MDET on Form 720, which is due within 30 days from the end of the calendar quarter.

Action Items

Companies should complete the following steps to ensure compliance with the MDET by April 30, 2013

  1. If making tax-free sales to foreign customers or further manufacturers, register with the IRS by filing Form 637.
  2. Review the constructive pricing regulations from Notice 2012-77 to arrive at the proper sales price.
  3. If tax will exceed $2,500 per quarter, establish electronic filing account to make deposits on a semi-monthly basis.
  4. Complete Form 720 within 30 days of the calendar quarter.

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