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Manufacturing and Wholesale Distribution: The Medical Device Excise Tax: Does it Apply to You?


Key Takeaways

  • Manufacturers, producers, or importers who sell certain “medical devices” are subject to a 2.3 percent excise tax on the sale of such devices.
  • In general, according to the Internal Revenue Code, a medical device is an item listed with the Food and Drug Administration under a section of the Food, Drug, and Cosmetic Act and is intended for humans.

Synopsis:

Manufacturers, producers or importers who sell certain “medical devices” are subject to a 2.3 percent excise tax on the sale of such devices. The excise tax is effective for sales beginning January 1, 2013 and is subject to remittance to the government as early as the end of January.

Suggested Action:

After reviewing this Alert and the relevant code and regulation sections, please contact your CohnReznick client service professional to determine if this tax applies to you and how to navigate the impact of the additional costs to your business.

Who Does the Tax Apply to?

A taxpayer must first determine whether they manufacture, produce, import or sell a “medical device.” In general, according to the Internal Revenue Code, a medical device is an item listed with the Food and Drug Administration (FDA) under Section 510(j) of the Food, Drug and Cosmetic Act (FFDCA) and which is intended for humans.

What Events Trigger Taxation?

Next, a taxpayer must determine whether they conduct sales activities or use products which are considered taxable or could cause the taxpayer to have a filing obligation.  A taxable event occurs at the time of the first sale or use of a finished medical device which is ready for use. The initial sale in the United States of imported goods ready for use is an example of a taxable event.

Certain sales of medical devices are considered exempt from the tax, thus requiring manufacturers and importers to examine each type of transaction conducted. Retail sales to the general public for individual use are specifically excluded from taxation under what is referred to as the “retail exemption” – examples include eyeglasses, contact lenses, hearing aids and other such manufactured devices. Selling a device or component to another manufacturer, including export of such device or a part of a device outside of the United States, for further development is also exempt from tax. In addition, some exemptions are specific to the ultimate consumer, such as sales to nonprofit educational organizations or sales for use in vessels or aircrafts - to name a few.

For a device to be sold tax free, the taxpayer must first register for the exemption on IRS Form 637. The only exception to the Form 637 registration requirement is for sales to:

  • State and local governments;
  • The United States;
  • The United Nations; and
  • Sales for export or resale for export where the purchaser (exporter) is located in a foreign country or U.S. Possession.


How to File:

Taxpayers who may be subject to the tax or those engaging in specific exempt sales of medical devices should consider registering for an excise tax number. Registration is executed by filing IRS Form 637 (Application for Registration for Certain Excise Tax Activities). The registration number is needed even to report exempt sales as it is used by taxpayers to provide and receive exemption certificates. If a taxpayer is subject to reporting, quarterly filing of the excise tax is required on IRS Form 720 (Quarterly Federal Excise Tax Return). Payment of taxes due is made via the IRS Electronic Federal Tax Deposit System (EFTPS). To avoid penalties for late filing, taxpayers are held responsible for determining whether filings are required, whether taxes are due and for paying taxes timely in the prescribed manner.

Contact:

Please visit the CohnReznick Manufacturing and Wholesale Distribution webpage and contact the following for more information:

Alan Wolfson, Manufacturing and Wholesale Distribution Industry Practice Leader, at 646-254-7416
 

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