As of December 31, 2017, Congress did not enact legislation to extend the current moratorium on the assessment of the Medical Device Excise Tax (MDET). Therefore, effective January 1, 2018, the MDET was reinstated and a deposit of excise taxes due for taxable sales made during the period January 1, 2018 through January 15, 2018 is due on January 29th (January 26th if filing by the Electronic Federal Tax Payment System (EFTPS). Filing by EFTPS may take some time to set up.)

Taxable medical devices

The MDET is imposed at the rate of 2.3% on the sale price of a taxable medical device by the manufacturer, producer or importer of the device. Unless otherwise exempt, the MDET generally applies to medical devices defined in Section 201(h) of the Federal Food, Drug and Cosmetic Act (FFDCA) that are for human use.¹ Under Treas. Reg. Section 48.4191-1(c), a device defined in Section 201(h) of FFDCA that is intended for human use means a device that is listed as a device with the Food and Drug Administration (FDA) under Section 510(j) of the FFDCA and 21 CFR part 807, under FDA requirements.²

Manufacturers, producers and importers of medical devices should be aware that several exemptions from the MDET exist, including: the retail exemption, sales for export and sales for further manufacturing. Specifically, eyeglasses, contact lenses, hearing aids and any other medical devices that are generally purchased by the general public for individual use are exempt under the retail exemption.³ Additionally, a device may satisfy the retail exemption: if (1) it is regularly available for purchase and use by individual consumers who are not medical professionals and (2) its design demonstrates that it is not primarily intended for use in a medical institution or office or by medical professionals.⁴

An exemption from the MDET is available for the sale of a FDA-listed medical device that the purchaser will export.⁵ Therefore, the first sale by the manufacturer of an FDA-listed medical device for "export, or for resale by the purchaser to a second purchaser for export" qualifies as a tax-free sale.⁶ For this exemption to apply, the exportation must occur before any other use.⁷

An exemption from the MDET also is available for the sale of an FDA-listed medical device that the purchaser will use in further manufacturing.⁸ Therefore, the first sale by the manufacturer of a FDA-listed medical device for "use by the purchaser for further manufacture, or for resale by the purchaser to a second purchaser for use by such second purchaser in further manufacture" is a tax-free sale.⁹ In order to meet the further manufacturing requirement, the device must be used as a material or as a component in the production or manufacturing of another taxable article.¹⁰

All MDET manufacturers that participate in a tax-exempt transaction (other than under the retail exemption) must have obtained from the IRS a tax-exempt registration for either export or further manufacture (use IRS Form 637 to request exemption registration). If Congress does not act to either further suspend or repeal the MDET, each manufacturer should analyze its tax-exempt transactions to make certain that it has the proper registration to claim any exemption. Taxpayers should be aware that obtaining the tax-exemption registration from the IRS takes a significant amount of time.

Tax base

Generally, the MDET is imposed on the sale price at which a manufacturer sells to a wholesaler in an arm's-length transaction at fair market value.¹¹ If the taxpayer [i.e., manufacturer, producer or importer] of an article regularly sells such articles at wholesale in arm's-length transactions, the tax liability on its use is computed on its lowest established wholesale price for such articles in effect at the time of the taxable use.¹² If the taxpayer does not regularly sell such articles at wholesale in arm's-length transactions, the IRS Commissioner is authorized to determine a constructive price on which the MDET will be computed on such articles.¹³ The price determined must take into consideration the selling practices and price structures of manufacturers, producers and importers of similar articles.¹⁴

IRS Interim Notice 2012-77 provides guidance for determining the MDET base and how taxpayers may apply constructive pricing rules to certain model distribution chains utilized by some manufacturers in the medical device industry.

1. Sales at Retail; no regular sales to independent wholesale distributors (hereinafter referred to as "Pricing Rule #1") Manufacturers sell taxable articles directly to unrelated end-users. The constructive price for this supply chain is 75% of the actual selling price after taking into consideration the adjustments provided by IRC Section 4216(a).

2. Sales to unrelated retailers; no regular sales to independent wholesale distributors (hereinafter referred to as "Pricing Rule #2"). Manufacturers sell taxable articles directly to unrelated retailers (which then sell at retail). The constructive price for this supply chain is 90% of the lowest price for which such articles are sold.

3. Sales to related retailer; no regular sales to independent wholesale distributors (hereinafter referred to as "Pricing Rule #3"). Manufacturers sell taxable articles directly to related retailers (which then sell at retail). The constructive price for this supply chain is 75% of 95% of the actual sales price, without any further adjustments provided under IRC Section 4216(a).

Implications

Legislation to do so was introduced in mid-December 2017 but was not concluded before Congress left for its recess. At this time, it is too early to have a clear picture as to whether any such legislation will gain traction or even be adopted. Accordingly, taxpayers should assume that the suspension of the MDET has not been extended and prepare to comply with the January 2018 filing deadline, including having a current analysis of their listed medical devices and supply chain in order to determine whether an exemption applies and to determine the appropriate methodology to calculate the tax base.

———————————————

———————————————
ENDNOTES

¹ IRC Section 4191.

² Treas. Reg. Section 48.4191-2(a)(1); see 21 U.S.C.S Section 360(j) (Lexis Nexis 2012).

³ IRC Section 4191(b)(2).

⁴ Treas. Reg. Section 48.4191-2(b)(2).

⁵ Treas. Reg. Section 48.4191-1(e).

⁶ 26 U.S.C. Section 4221(a)(2).

⁷ 26 U.S.C. Section 4221(a).

⁸ Treas. Reg. Section 48.4191-1(e).

⁹ 26 U.S.C. Section 4221(a)(2).

¹⁰ Treas. Reg. Section 48.4221-2(b)(1).

¹¹ Treas. Reg. Section 48.4218-5(b); see Treas. Reg. Section 48.4191-1(b); Treas. Reg. Section 48.4216(a)-1(a).

¹² Treas. Reg. Section 48.4218-5(b).

¹³ Id.

¹⁴ Id.