29 January 2025 IRS issues proposed regulations on applying IRC Section 5000D excise tax The Treasury Department and IRS have issued proposed regulations (REG-115560-23) on imposing and calculating the IRC Section 5000D excise tax on manufacturers, producers or importers (collectively, taxpayers) of designated drugs1 sold during the applicable statutory period. The statutory period relates to a taxpayer's noncompliance with certain milestones prescribed in the Medicare Drug Price Negotiation Program. At the same time, the IRS released Revenue Procedure 2025-9, which provides a safe harbor and safe harbor percentage that may be used to identify applicable sales of a designated drug made during a day described in IRC Section 5000D(b). This safe harbor can be used for returns filed beginning in 2025 until the proposed regulations are finalized or other guidance is issued. Final regulations on reporting liability for the excise tax were issued in July 2024 (see Tax Alert 2024-1364). At that time, the IRS and Treasury indicated they would issue separate regulations addressing substantive issues. The proposed regulations, which are consistent with Notice 2023-52, define applicable sales as "the sale transaction that is the subset of each sale in units of a designated drug." The taxpayer would have to use a reasonable method to identify the applicable sale based on its books, records or other information, as described in the proposed regulations. Under the safe harbor in Revenue Procedure 2025-9 and the proposed regulations, a safe harbor and safe harbor percentage of 40% may be used to identify applicable sales. Taxpayers that use the safe harbor must apply it to all sales and do so for four consecutive calendar quarters, beginning with the calendar quarter in which the safe harbor is first used. Taxpayers cannot later recalculate their excise tax liability for a quarter using a different method to identify applicable sales. The proposed regulations also provide a formula to calculate the excise tax. Under the formula, the applicable percentage would equal the ratio of the excise tax divided by the sum of the tax and the price of the applicable sale expressed as a percentage. The proposed regulations would apply to sales of designated drugs on or after the date the proposed regulations are finalized, but taxpayers may continue to rely on Sections 3.01 and 3.02 of Notice 2023-52 until then. Comments on the regulations must be received by March 3, 2025. Affected taxpayers should review the proposed regulations and consider whether (1) the proposed regulations alter the taxpayer's understanding of the operation of the IRC Section 5000D excise tax (i.e., imposition, tax calculation), and (2) they need to submit any comments or request a public hearing to clarify any matters relating to the IRC Section 5000D excise tax.
Document ID: 2025-0348 | ||||