The IRS and Treasury Department issued final regulations (TD 10003), which adopt the proposed regulations with minor clarifications, on how to report liability for the IRC Section 5000D excise tax imposed on manufacturers, producers or importers (collectively, taxpayers) of designated drugs¹ sold during the applicable statutory period (see Tax Alert 2023-1822). The statutory period relates to certain milestones prescribed in the Medicare Drug Price Negotiation Program.

The final regulations are effective on August 5, 2024, and apply retroactively to calendar quarters beginning on or after October 1, 2023.

The final regulations amend the existing procedural rules that apply to most excise taxes (26 CFR Part 40) to add Chapter 50A, which is where IRC Section 5000D was added by the Inflation Reduction Act. Additionally, the final regulations add a new Part 47 to 26 CFR to contain the "Designated Drugs Excise Tax Regulations" related to the IRC Section 5000D excise tax.

Taxpayers must report the IRC Section 5000D excise tax on Form 720, Quarterly Federal Excise Tax Return, and file the return in each quarter in which liability for the tax is incurred. The final regulations do not require a return to be filed for a calendar quarter in which IRC Section 5000D imposes no liability. The final regulations do not require taxpayers to make semimonthly deposits of the IRC Section 5000D tax.

To more closely conform to the language of IRC Section 5000D(a), the final regulations make three non-substantive modifications to the proposed regulations by clarifying in Treas. Reg. Sections 40.0-1, 40.6011-1(d) and 40.6302(c)-1 that the IRC Section 5000D excise tax is imposed on "the sale of" designated drugs.

Implications

Affected taxpayers should review the final regulations and consider whether they have any tax reporting or payment obligations because of IRC Section 5000D tax liability incurred on or after October 1, 2023.

While these final regulations outline procedural guidance, the IRS and Treasury indicated they would issue separate regulations addressing substantive issues related to the IRC Section 5000D excise tax. Specifically, those regulations would clarify (1) the scope of taxable sales, (2) the method for calculating the IRC Section 5000D liability and (3) the exclusion of the separately charged IRC Section 5000D excise tax from the price of the drug (see IRS Notice 2023-52).