Tax Reform for Manufacturers: Medical Device Excise Tax
Medical device manufacturers are once again safe from an industry-wide tax on medical devices manufactured or imported. While tax reform legislation did not originally extend the suspension of the medical device excise tax, Congress later retroactively suspended the tax through the end of 2019.
What is the medical device excise tax?
Enacted in January 2013 to assist in funding the healthcare premiums stemming from the Affordable Care Act, the medical device excise tax levied a 2.3% tax on the sale price of taxable medical devices manufactured or imported. The tax imposed a significant impact on the medical industry’s profitability starting in 2013 with its introduction and running through 2015 until relief was enacted. With the signing of a bill in December 2015, the medical device excise tax entered a temporary two-year suspension starting January 1, 2016 and ending December 31, 2017.
What qualifies as a taxable medical device?
A taxable medical device is defined using a variety of criteria, but is generally defined as an instrument, apparatus, machine, implant or another similar article that falls within at least one of the following groups:
- Recognized medical equipment in the official National Formulary or U.S. Pharmacopeia
- Is intended to diagnosis, cure, mitigate, treat or prevent disease
- Affects the body’s structure or function in a nonchemical manner
While the true definition and designation as taxable medical devices is open to some interpretation and analysis, the IRS clearly states eyeglasses, contact lenses, and hearing aids are not qualified medical devices subject to taxation. These items fall underneath what the IRS calls the “retail exemption”, which disqualifies the sale of medical devices from the tax burden if they fit both descriptions below:
- Individual consumers who do not have a medical background are able to purchase the item, such as over-the-counter goods
- The item’s design and purpose is not sophisticated enough that its use is restricted to only medical professionals
What criteria determines a taxable sale of a medical device?
Even if the medical device sold qualifies as a taxable item, the sale could ultimately prove nontaxable depending on certain circumstances. Two situations that will not subject the seller/importer to medical device excise taxes are as follows:
- If the medical device is sold by the manufacturer or importer to a party who will use the product in further manufacturing.
- If the medical device is sold by the manufacturer or importer as an export or to a party who will then export the product to a second purchaser overseas.
Additionally, tax-exempt status for income tax purposes does not qualify the seller of taxable medical devices from excise tax exemptions. Manufacturers and importers conducting their trade or business around taxable medical devices will be subject to the excise tax on each sale unless they fall into one of the two exemption cases above.
Are medical devices taxable under tax reform?
The Tax Cuts and Jobs Act passed in December 2017, originally failed to extend the suspension of the medical device excise tax that had spanned over the last two years, so the healthcare manufacturing industry once again faced the 2.3% taxation on qualified sales as of January 1, 2018.
On January 22, 2018, Congress passed legislation to not only temporarily re-open government operations, but also to retroactively extend the medical device excise tax moratorium through December 31, 2019. With the extension’s retroactive provision, Congress confirmed that no tax would be assessed to medical device sales occurring between January 1, 2018 and January 22, 2018. Even though medical device sales could once again be subject to taxation following 2019, the healthcare and medical manufacturing industries can now continue to operate without excise tax payments hindering their research and development efforts.