Preparing for the medical device excise tax.

• Author: Smith, Annette B.

The Health Care and Education Reconciliation Act of 2010 (Health Care Act), P.L. 111-152, added new Sec. 4191, Medical Devices, to the federal excise tax subtitle of the Code, effective for sales of taxable medical devices after Dec. 31, 2012. Under this new provision, a tax equal to 2.3% of the sale price is imposed on the sale of any taxable medical device by the manufacturer, produce; or importer of the device. Taxpayers may face a number of unresolved issues in preparing to comply with the tax.

Taxable Medical Device

Under Sec. 4191(b)(1), a taxable medical device is a device, as defined in Section 201(h) of the Federal Food, Drug, and Cosmetic Act (FFDCA) (21 U.S.C. [section] 321(h)), that is intended for humans. The latter provision defines "device" as an "instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article"--including "any component, part, or accessory"--that meets certain requirements. The device must be:

(1) Recognized in the official National Formulary, or the United States Pharmacopeia, or any supplement to them;

(2) Intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment, or prevention of disease in man or other animals; or

(3) Intended to affect the structure or any function of the body of man or other animals.

The device must also "not achieve its primary intended purposes through chemical action within or on the body of man or other animals" and not depend "upon being metabolized for the achievement of its primary intended purposes." Sec. 4191(b)(1) limits the definition for purposes of the tax to devices intended for humans.

Under what is commonly called the "retail exemption," the tax provision does not apply to eyeglasses, contact lenses, hearing aids, and any other medical device determined by Treasury to be of a type that is commonly purchased by the general public at retail for individual use. As stated in the Joint Committee on Taxation's Technical Explanation of the Revenue Provisions of the "Reconciliation Act of 2010," as Amended, in Combination With the "Patient Protection and Affordable Care Act" (JCX-18-10), p. 138 (March 21, 2010), Treasury may determine that a specific medical device is exempt if the device generally is sold at retail establishments (including over the internet) to individuals for their personal use.

The exemption is not limited by device class as defined in Section 513 of the...