Source: http://thefederalregister.com/2012/12/07/2012-29628.html
Timestamp: 2018-03-18 21:12:49
Document Index: 658869341

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[TD 9604]
SUMMARY: This document contains final regulations that provide guidance on the excise tax imposed on the sale of certain medical devices, enacted by the Health Care and Education Reconciliation Act of 2010 in conjunction with the Patient Protection and Affordable Care Act. The final regulations affect manufacturers, importers, and producers of taxable medical devices.
Applicability date:These regulations are applicable to sales of taxable medical devices after December 31, 2012.
FOR FURTHER INFORMATION CONTACT: Natalie Payne, Michael Beker, or Stephanie Bland, at (202) 622-3130 (not a toll-free number).
This document contains final regulations that provide guidance on the excise tax imposed on the sale of certain medical devices under section 4191 (the medical device excise tax) of the Internal Revenue Code (Code), enacted by section 1405 of the Health Care and Education Reconciliation Act of 2010,Public Law 111-152 (124 Stat. 1029 (2010)), in conjunction with the Patient Protection and Affordable Care Act, Public Law 111-148 (124 Stat. 119 (2010)) (jointly, the ACA).
On February 7, 2012, the IRS and the Treasury Department published a notice of proposed rulemaking (REG-113770-10) (the proposed regulations) in theFederal Register(77 FR 6028). The IRS and the Treasury Department received numerous written comments from the public in response to the proposed regulations. A public hearing was held on May 16, 2012. After consideration of the public written comments and hearing comments, the IRS and the Treasury Department are finalizing the proposed regulations with the changes described in this preamble.
Public comments on the proposed regulations identified two issues that the IRS and the Treasury Department will study further and on which the IRS and the Treasury Department have requested additional comments. Those issues are discussed later in this preamble. Comments with regard to those issues should be submitted in writing and can be mailed to the Office of Associate Chief Counsel (Passthroughs and Special Industries), Re: REG-113770-10, CC:PSI:B7, Room 5314, 1111 Constitution Avenue NW., Washington, DC 20224. All comments received will be available for public inspection athttp://www.regulations.gov(IRS REG-113770-10).
Explanation of Provisions and Summary of Comments I. Definition of a “Taxable Medical Device”
Section 4191(b)(1) provides that, in general, a “taxable medical device” is any device, as defined in section 201(h) of the Federal Food, Drug & Cosmetic Act (FFDCA) (codified as amended at 21 U.S.C. 301et seq.(2006)) that is intended for humans.
The proposed regulations provide that for purposes of the medical device excise tax, a device defined in section 201(h) of the FFDCA that is intended for humans 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, pursuant to FDA requirements. The proposed regulations further provide that if a device is not listed with the FDA, but the FDA later determines that the device should have been listed as a device, the device will be deemed to have been listed as a device with the FDA as of the date the FDA notifies the manufacturer or importer in writing that corrective action with respect to listing is required.
B. Public Comments and the Final Regulations Listing Requirement
The final regulations do not adopt this suggestion. Congress linked the definition of a taxable medical device to the definition of a “device” under section 201(h) of the FFDCA. In general, the FDA requires a device defined in section 201(h) of the FFDCA that is intended for humans to be listed as device with the FDA under section 510(j) of the FFDCA and 21 CFR part 807, subject to certain limited exceptions. The final regulations track this FDA requirement by defining a taxable medical device as a device that is listed as a device with the FDA under section 510(j) of the FFDCA and 21 CFR part 807. This provides taxpayers with greater certainty as to which devices are subject to the tax.
Several commenters requested that the final regulations clarify that the definition of a taxable medical device does not include the category of products reviewed as devices by the FDA Center for Biologics Evaluation and Research (CBER).
In general, CBER licenses biologics, such asin vitrodiagnostic tests for blood donor screening, after the filing of a Biologics License Application (BLA) under the Public Health Service Act. Biologics are listed with the FDA under 21 CFR part 607.
Under the final regulations a taxable medical device is a device that is listed as a device with the FDA under section 510(j) of the FFDCA and 21 CFR part 807, pursuant to FDA requirements. Therefore, devices that CBER regulates that are listed with the FDA under section 510(j) of the FFDCA and 21 CFR part 807 are taxable medical devices. Devices that CBER regulates that are not listed with the FDA under section 510(j) of the FFDCA and 21 CFR part 807, such as biologics that are listed under 21 CFR part 607, are not taxable medical devices.
Devices “Intended for Humans”
A number of commenters suggested that certain devices, such as sterilization process indicators, software, and containers used to hold or transport medical products and specimens, should be excluded from the definition of a taxable medical device on the basis that they are not “intended for humans.” Commenters argued that even if the FDA requires certain such devices to be listed with the FDA under section 510(j) of the FFDCA and 21 CFR part 807, the devices should not be taxable medical devices because they are not used in the direct treatment, diagnosis, or monitoring of a patient.
Section 4191 links the definition of a taxable medical device to the definition of a device in section 201(h) of the FFDCA. Section 201(h) of the FFDCA provides generally that the term “device” means an instrument, apparatus, etc., that is 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 intended to affect the structure or any function of the body of man or other animals, and that does not achieve its primary intended purposes through chemical action within or on the body of man or other animals and that is not dependent upon being metabolized for the achievement of its primary intended purposes. Section 201(h) of the FFDCA includes devices intended for “man” and devices intended for “other animals.” Thus, the phrase “intended for humans” included in section 4191(b) limits the definition of a taxable medical device to the devices defined in section 201(h) of the FFDCA that are intended for “man” (intended for humans) and excludes from the section 201(h) definition the devices that are intended for “other animals.”
There is no support in the statute, or in either the legislative history or the Joint Committee on Taxation's General Explanation (Joint Committee on Taxation General Explanation of Tax Legislation Enacted in the 111th Congress (JCS-2-11), March 2011, at 365-367) (JCT General Explanation) for the proposition that Congress included the statutory phrase “intended for humans” in section 4191(b) to distinguish between devices defined in section 201(h) of the FFDCA that are intended for use directly on patients or directly in patient care from other devices defined in section 201(h) of the FFDCA that are otherwise used in human medicine. Accordingly, the final regulations do not adopt this suggestion.
One commenter stated that the listing requirement is insufficient to distinguish medical devices for human use from those intended for use in veterinary medicine for purposes of applying the medical device excise tax. The commenter suggested that subjecting devices to the medical device excise tax because the device is listed with the FDA under section 510(j) of the FFDCA disadvantages certain manufacturers. Specifically, the commenter noted that medical device manufacturers selling devices for both human use and veterinary use must pay the excise tax on sales into the veterinary market. The commenter requested that the final regulations provide that devices that are labeled “not for human use” or “veterinary use only” are not taxable medical devices.
The definition of a device in section 201(h) of the FFDCA includes devices used in veterinary medicine. Section 4191 limits the definition of a taxable medical device to devices described in section 201(h) of the FFDCA that are intended for humans, but does not provide that the device must be intended exclusively for humans. Under existing FDA regulations, a device intended for use exclusively in veterinary medicine is not required to be listed as a device with the FDA, whereas a device intended for use in human medicine is required to be listed as a device with the FDA even if the device may also be used in veterinary medicine. Thus, the FDA's listing requirement effectively tracks those devices that are intended for humans within the meaning of section 4191. Accordingly, the final regulations retain the definition of a taxable medical device from the proposed regulations. Therefore, a device defined in section 201(h) of the FFDCA that is intended for humans means a device that is listed as a device with the FDA under section 510(j) of the FFDCA and 21 CFR part 807, pursuant to FDA requirements. Because devices that are intended for use exclusively in veterinary medicine are not listed as devices under section 510(j) of the FFDCA and 21 CFR part 807, they are not taxable medical devices within the meaning of section 4191.
Devices That Have Medical and Non-Medical Applications (“Dual Use” Devices)
The IRS and the Treasury Department received public comments and several informal inquiries on dual use devices. These comments suggested that the sale of a device defined in section 201(h) of the FFDCA that is listed as a device with the FDA under 21 CFR part 807 but that is used for a non-medical purpose should not be subject to the medical device excise tax. One commenter recommended that the sale of a taxable medical device be exempt where the manufacturer or importer can provide evidence that the product was purchased specifically for use in non-medical applications.
One commenter noted that because it sells directly to the end user and installs its devices at the end user's facilities, it can easily identify when it sells a device for a non-medical purpose, as opposed to a medical purpose. The commenter also noted that it must list a device with the FDA even if it makes only some sales of that device for a medical purpose. Accordingly, all of the commenter's sales will be subject to tax, while sales of the same device by competitors who sell the device only for non-medical purposes, and thus do not have to list their devices with the FDA, will not be subject to tax.
The final regulations do not adopt the commenters' suggestions. The language of section 4191 does not limit the definition of a taxable medical device to a device that is intended exclusively for medical purposes. Whether or not a given device is a taxable medical device depends upon whether it is a device defined in section 201(h) of the FFDCA. Although section 4191 provides a number of exemptions, the statute does not provide an exemption based on whether a given end user intends to use a particular device for a medical purpose or a non-medical purpose.
One commenter asked that the final regulations clarify that Humanitarian Use Devices (HUDs) for which the FDA has approved a Humanitarian Device Exemption (HDE) are exempt from the medical device excise tax.
A HUD is a device within the meaning of section 201(h) of the FFDCA that is intended to benefit patients by treating or diagnosing a disease or condition that affects or is manifested in fewer than 4,000 individuals in the United States per year. 21 CFR 814.3(n). A manufacturer must obtain an approved HDE from the FDA to market a HUD. HUDs that are marketed under an HDE exemption are not exempt from the FDA's listing requirements.
There is no statutory basis for excluding HUDs from the definition of taxable medical device. Therefore, the final regulations do not distinguish HUDs from other taxable medical devices, and a HUD that is marketed under an HDE exemption is a taxable medical device unless it falls within one of the statutory exemptions to the tax in section 4191(b)(2), such as the retail exemption.
Two commenters asked that the final regulations provide that sales of software upgrades are not taxable. One commenter noted that software upgrades should not be subject to the medical device excise tax where the software itself is not listed but is merely a component part of a listed device. A second commenter suggested that the final regulations should differentiate between a listed software product and software updates.
Under the final regulations, a taxable medical device is a device that is listed as a device with the FDA under section 510(j) of the FFDCA and 21 CFR part 807. Accordingly, software and software updates that are not required to be separately listed with the FDA do not fall within the definition of a taxable medical device, and sales of such software and software updates are not subject to the tax.
Devices That Should Have Been Listed With the FDA
Two commenters objected to the rule in the proposed regulations that deems a device to have been listed on the date the FDA provides written notice to the manufacturer or importer that corrective action with respect to listing is required. One commenter suggested that the rule be clarified so that a device is not deemed to be listed until the FDA deliversfinalwritten notice to the manufacturer or importer that corrective action with respect to listing is required.
The final regulations do not adopt this suggestion. If the FDA initially notifies a manufacturer that corrective action with respect to listing is required but later determines that the device is not required to be listed, a credit or refund may be available for tax paid on sales of the device during the intervening period. See section 6416(a) and the regulations under section 6416(a) for rules regarding the requirements for filing a claim for credit or refund.
Devices That Are Not Required To Be Listed With the FDA
The IRS received several informal inquiries on the tax consequences of listing a product as a device with the FDA when the FDA does not require the product to be listed.
If a manufacturer lists a device with the FDA, but the device was not required to be listed, a credit or refund may be available for tax paid on sales of the device once the device has beende-listed. See section 6416(a) and the regulations under section 6416(a) for rules regarding the requirements for filing a claim for credit or refund.
The proposed regulations provide a facts and circumstances approach to evaluating whether a medical device is of a type that is generally purchased by the general public at retail for individual use. Under the proposed regulations, a device is considered to be of a type generally purchased by the general public at retail for individual use if (i) the device is regularly available for purchase and use by individual consumers who are not medical professionals, and (ii) the device's design demonstrates that it is not primarily intended for use in a medical institution or office, or by medical professionals.
The proposed regulations also provide a non-exclusive list of factors to be considered in determining whether the design of a device demonstrates that it is primarily intended for use in a medical institution or office, or by medical professionals, and therefore not intended for purchase and use by individual consumers. The factors are (i) whether the device generally must be implanted, inserted, operated, or otherwise administered by a medical professional; (ii) whether the cost to acquire, maintain, and/or use the device requires a large initial investment and/or ongoing expenditure that is not affordable for the average consumer; (iii) whether the device is a Class III device under the FDA system of classification; (iv) whether the device is classified by the FDA under certain enumerated parts or subparts of 21 CFR; and (v) whether the device qualifies as durable medical equipment (DME), prosthetics, orthotics, and supplies (collectively, DMEPOS) for which payment is available exclusively on a rental basis under the Medicare Part B payment rules and is an “item requiring frequent and substantial servicing” as defined in 42 CFR 414.222 (referred to collectively herein as the “negative factors”).
To provide greater certainty, the proposed regulations also include a safe harbor provision that identifies certain categories of medical devices that the IRS and the Treasury Department have determined fall within the retail exemption. The safe harbor includes (i) devices that are identified in the FDA's IVD Home Use Lab Tests (Over-the-Counter Tests) database, available athttp://www.accessdata.fda.gov/scripts/cdrh/cfdocs/cfIVD/Search.cfm;(ii) devices described as “OTC” or “over the counter” devices in the relevant FDA classification regulation heading; and (iii) devices that are described as “OTC” or “over the counter” devices in the FDA's product code name, the FDA's device classification name, or the “classification name” field in the FDA's device registration and listing database, available athttp://www.accessdata.fda.gov/scripts/cdrh/cfdocs/cfrl/rl.cfm.The safe harbor also includes devices that qualify as DMEPOS (as described in Subpart C of 42 CFR part 414 (Parenteral and Enteral Nutrition) and Subpart D of 42 CFR part 414 (Durable Medical Equipment and Prosthetic and Orthotic Devices)) for which payment is available on a purchase basis under Medicare Part B payment rules (in accordance with the fee schedule published by Centers for Medicare and Medicaid Services (CMS)), and are (i) “prosthetic and orthotic devices,” as defined in 42 CFR 414.202, that do not require implantation or insertion by a medical professional; (ii) “parenteral and enteral nutrients, equipment, and supplies” as defined in 42 CFR 411.351 and described in 42 CFR 414.102(b); (iii) “customized items” as described in 42 CFR 414.224; (iv) “therapeutic shoes,” as described in 42 CFR 414.228(c); or (v) supplies necessary for the effective use of DME, as described in section 110.3 of chapter 15 of the Medicare Benefit Policy Manual (Centers for Medicare and Medicaid Studies Publication 100-02).
B. Public Comments and the Final Regulations 1. Sales for Use in a Professional Medical Setting
2. Facts and Circumstances Test Nonexclusivity of Factors
Several commenters suggested that Internet sales should be included in the factor described in § 48.4191-2(b)(2)(i)(A) that looks to whether consumers who are not medical professionals can purchase the device at certain retail businesses. Other commenters suggested that the fact that consumers who are not medical professionals can purchase a device over the Internet should be a factor that indicates that a device is “regularly available for purchase and use by individual consumers,” regardless of whether the Internet site is associated with a bricks and mortar store.
The final regulations do not adopt the commenter's suggestion. The IRS and the Treasury Department believe that whether more than minimal training from a medical professional is required to safely and effectively use a device is a relevant consideration. At the same time, however, the factor that considers training is only one of many factors to be considered in determining whether a device falls within the retail exemption, and it is possible that a device could qualify for the retail exemption even if it does not satisfy this factor.
One commenter requested clarification that the phrase “administered by a medical professional” in the factor described in § 48.4191-2(b)(2)(ii)(A) does not include the initial and periodic fitting or adjustment with respect to an orthotic or prosthetic device that is not implanted.
Two commenters suggested that the factor enumerated in § 48.4191-2(b)(2)(ii)(B) that considers a device's cost should not be included in the final regulations. One commenter stated that whether or not a device is affordable depends on the consumer's insurance coverage and cost alternatives.
FDA Classification Categories
Two commenters suggested that 21 CFR part 868 (Anesthesiology Devices) should not be included in the list of FDA classification categories in § 48.4191-2(b)(2)(ii)(D) that suggest that a device is primarily for use in a medical institution or office or by a medical professional. The commenters noted that certain portable oxygen systems are classified in 21 CFR part 868.
One commenter requested that 21 CFR part 876 (Gastroenterology-Urology Devices) be removed from the list of FDA classification categories in § 48.4191-2(b)(2)(ii)(D) because 21 CFR part 876 contains many devices, such as ostomy supplies, that would otherwise fall within the retail exemption.
The final regulations do not remove any FDA classification categories from those enumerated in § 48.4191-2(b)(2)(ii)(D). The IRS and the Treasury Department have determined, after consultation with the FDA, that the overwhelming majority of devices that fall within these regulatory categories are not of a type generally purchased by the general public at retail forindividual use. Further, classification in one of the enumerated parts or subparts is not determinative of whether a device falls within the retail exemption. Devices in these categories must be evaluated in light of all relevant facts and circumstances.
The final regulations include an example that weighs the facts and circumstances with respect to a portable oxygen concentrator, including the fact that it is a device under 21 CFR part 868, and concludes that the portable oxygen concentrator falls within the retail exemption. The final regulations also include an example that illustrates that a urinary ileostomy bag, which is a device under 21 CFR part 876, is included in the safe harbor set forth in § 48.4191-2(b)(2)(iii)(D)(1).
Several commenters suggested that the final regulations include a factor that considers whether a device's packaging and labeling suggests that the device is intended for use by individuals who are not medical professionals. One commenter noted that product labeling that is easy for someone who is not a medical or health care professional to understand suggests that the device is regularly available for purchase and use by individual consumers who are not medical professionals.
The final regulations do not adopt this suggestion. Device manufacturers determine the packaging and labeling of a device. Manufacturers may package and label a device in a consumer-friendly manner, even if the device is of a type that is primarily intended for use in a medical institution or office, or by medical professionals. Therefore, the IRS and the Treasury Department have determined that a device's packaging and labeling are not instructive as to whether a device is generally purchased by the general public at retail for individual use.
Documents Submitted for FDA Notification or Approval
One commenter requested that the final regulations include a factor that looks to whether documents submitted to the FDA, such as a Premarket Notification (510(k)) or application for Premarket Approval (PMA), state that the device is intended for individual use.
The final regulations do not adopt this suggestion. After consultation with the FDA, the IRS and the Treasury Department have determined that documents submitted to the FDA, such as 510(k) documents and PMA applications, are not consistently reliable indicators of whether a device is of a type that is generally purchased by the general public for individual use.
3. Safe Harbor Durable Medical Equipment, Prosthetics, Orthotics and Supplies
One commenter suggested that the retail exemption safe harbor defined in § 48.4191-2(b)(2)(iii)(D) be expanded to include all devices that fall under the definition of DMEPOS in 42 CFR 414.202.
The final regulations do not adopt this suggestion. However, devices that fall within the definition of DMEPOS that are not included in the retail exemption safe harbor in § 48.4191-2(b)(2)(iii)(D), such as oxygen equipment and other rental durable medical equipment devices, may qualify for the retail exemption by application of the facts and circumstances test. The final regulations provide an example that evaluates whether a portable oxygen concentrator falls within the retail exemption based upon an evaluation of such a device under the facts and circumstances test.
Capped Rental Devices
One commenter suggested that the safe harbor defined in § 48.4191-2(b)(2)(iii)(D) be expanded to include “capped rental” devices, within the meaning of 42 CFR 414.229, for which title transfers to the individual user (the Medicare beneficiary) at the end of the rental term.
The category of capped rental DME consists of DME that is not subject to the payment provisions set forth in 42 CFR 414.220 through 42 CFR 414.228. Medicare pays for capped rental DME other than complex rehabilitation power-driven wheelchairs on a rental basis. See 42 CFR 414.229. Payment is made on a rental basis, not to exceed a period of continuous use of longer than 13 months. On the first day after 13 continuous rental months during which payment is made, the supplier must transfer title to the equipment to the Medicare beneficiary. See 42 CFR 414.229(f)(2). Medicare also pays for complex rehabilitation power-driven wheelchairs on a capped rental or lump-sum purchase basis. The supplier of the complex rehabilitation power-driven wheelchair must offer Medicare beneficiaries the option to purchase the complex rehabilitation power-driven wheelchair at the time the equipment is initially furnished. See 42 CFR 414.229(h). If the beneficiary does not elect to purchase the complex rehabilitation power-driven wheelchair, payment is made on a capped rental basis in accordance with the rules described above for other capped rental DME. See 42 CFR 414.229(f).
The IRS and the Treasury Department, in consultation with the Center for Medicare and Medicaid Services (CMS), have determined that, in most instances, the rental period of a capped rental device terminates before the transfer of title. Further, information on the capped rental devices for which title has transferred to the individual user does not suggest a pattern of title transfer for specific types of devices. Accordingly, capped rental devices cannot be categorically said to qualify as devices that are generally purchased by the general public at retail for individual use. They may, however, qualify for the retail exemption by an application of the facts and circumstances test. Therefore, safe harbor treatment is not appropriate for capped rental devices, and the final regulations do not adopt the commenter's suggestion.
One commenter noted that 42 CFR 414.202 excludes from the definition of prosthetic and orthotic devices medical supplies such as catheters, catheter supplies, ostomy bags, and supplies related to ostomy care that are furnished by a Home Health Agency (HHA) as part of home health services under 42 CFR 409.40(e). The commenter asked that the final regulations address the significance, if any, of the exclusion of products furnished by an HHA on the breadth of the safe harbor in § 48.4191-2(b)(2)(iii)(D)(1) for prosthetic and orthotic devices as defined in 42 CFR 414.202.
The IRS and the Treasury Department, in consultation with CMS, have determined that the HHA language in 42 CFR 414.202 is a provision that clarifies that when individual devices are furnished by an HHA, they are payable as home health services under 42 CFR 409 subpart E. The HHA language in 42 CFR 414.202 does not exclude any type of device from the definition of prosthetic and orthotic devices and, therefore, has no impact on the retail exemption safe harbor in § 48.4191-2(b)(2)(iii)(D).
4. “Of a Type”
Section 4191(b)(2) provides that the term taxable medical device does not include eyeglasses, contact lenses, hearing aids, and any other medical device determined by the Secretary to be of a type that is generally purchased by the general public at retail for individual use. Several commenters requested that final regulations define a “type” of device to include all devicesthat are categorized in the same FDA product code.
The final regulations do not adopt this suggestion. In consultation with the FDA, the IRS and the Treasury Department determined that the breadth and variety of devices within a particular product code and across product codes can vary greatly. Therefore, the product code designation is generally too broad to be useful in determining which devices fall within the retail exemption.
5. Components of Exempt Devices
One commenter noted that the FDA requires some components of devices to be separately listed as devices. The commenter suggested that the final regulations exempt listed components that are ultimately used as component parts of a device that is exempt under section 4191(b) and § 48.4191-2(b), such as component parts of certain completed prosthetic or orthotic devices.
The safe harbor provision in § 48.4191-2(b)(2)(iii)(D) includes some components of prosthetic and orthotic devices. The IRS and the Treasury Department request public comments to help identify listed components of devices that are exempt under section 4191(b) and § 48.4191-2(b) that are not included in a safe harbor or that do not otherwise fall within the retail exemption by an application of the facts and circumstances test.
Several commenters suggested that dental devices that are customized for an individual patient, such as crowns, bridges, and braces, should qualify for the retail exemption because they are sold directly to individual consumers. Further, one commenter noted that the factor described in § 48.4191-2(b)(2)(ii)(A), which considers whether a device “generally must be implanted, inserted, operated, or otherwise administered by a medical professional,” creates an unnecessary distinction between devices that an individual can insert and remove, and devices that a dentist must embed or affix within the patient's mouth.
The final regulations do not create a special rule for dental devices. The final regulations take a facts and circumstances approach to the retail exemption. The facts and circumstances test is comprised of a number of non-exclusive factors. A customized dental device will qualify for the retail exemption if, based on the totality of the facts and circumstances, the device is of a type that is generally purchased by the general public at retail for individual use.
III. Combination Products A. Proposed Regulations
Combination products are therapeutic and diagnostic products that combine drugs, devices, and/or biological products. See 21 CFR 3.2(e). The proposed regulations tie the definition of taxable medical device to the FDA's listing requirements for devices. Therefore, under the proposed regulations, a combination product that is listed as a device with the FDA under section 510(j) of the FFDCA and 21 CFR part 807 and that does not fall under a statutory exemption, such as the retail exemption, is subject to the medical device excise tax.
Several commenters requested that the final regulations provide that a manufacturer will not be required to pay the medical device excise tax on a combination product that is taken into account in computing the branded prescription drug (BPD) fee enacted under section 9008 of the ACA.
The final regulations do not adopt this suggestion. The ACA enacted both the medical device excise tax and the BPD fee, but provided no coordination between the provisions. Therefore, there is no statutory basis for providing an exclusion from the tax under section 4191 for a combination product with both a device component and a drug component, even if the combination product is taken into account for purposes of computing the BPD fee. Moreover, the comments did not raise any likely scenarios in which both the BPD fee and the medical device excise tax apply to the same product. Based on consultation with the FDA, the IRS and the Treasury Department anticipate that few, if any, combination products will be subject to both the medical device excise tax and the BPD fee. Accordingly, under the final regulations, a combination product that is listed as a device with the FDA under section 510(j) of the FFDCA and 21 CFR part 807 is a taxable medical device.
IV. Manufacturers Excise Taxes
The ACA added section 4191 to chapter 32, subtitle D of the Code, which relates to taxes imposed on the sales of taxable articles by manufacturers, producers, and importers (commonly referred to as “manufacturers excise taxes”). Accordingly, the preamble to the proposed regulations states that the existing chapter 32 rules apply to the medical device excise tax.
Definition of a “Manufacturer”
One commenter requested that the final regulations include a presumption that a manufacturer who lists a device with the FDA is the manufacturer of the device for excise tax purposes.
The final regulations do not adopt this suggestion. There are longstanding rules with respect to the definition of “manufacturer” or “importer” for chapter 32 purposes. These rules are contained in statutory and regulatory provisions, and they have been developed further through other published guidance and case law. Therefore, the definitions of manufacturer and importer under chapter 32 apply to section 4191; whether a person is considered a manufacturer or importer for FDA purposes is not relevant.
Numerous commenters requested that the final regulations extend the principle of Revenue Ruling 80-273 (1980-2 CB 315) to taxable medical devices. Rev. Rul. 80-273 holds that when a manufacturer or importer sells a taxable article directly to an unrelated end user at retail, the excise tax may be based on a sale price of 75 percent of the retail sale price, after any adjustments under section 4216(a), such as for containers, packing, and transportation charges. The holding applies only to the excise taxes imposed under the Code sections explicitly listed in the revenue ruling. Commenters also requested that the final regulations clarify that sales “at retail” in the medical device context include sales to hospitals and other medical service providers. Although the final regulations do not adopt this suggestion, the IRS and the Treasury Department will issue separate interim guidance along with these regulations to address sale price issues and have considered these comments in the context of such guidance.
One commenter requested that the final regulations provide that taxpayers can use transfer pricing under section 482 to determine the taxable sale price of a taxable medical device.
The final regulations do not adopt the commenter's suggestion. Because the standards are not the same under the section 482 regulations and section 4216, an arm's length result determined under section 482 is not an appropriate proxy for the constructive sale price or fair market price under section 4216. While in certain circumstances facts used to support a transfer price for purposes of section 482 may be relevant to determining the sale price under section 4216, transfer pricing documentation or studies developed for purposes of section 482 or section 6662(e) will not be conclusive.
Finally, the IRS received several informal inquiries about whether the 2.3% medical device excise tax may be excluded from the sale price upon which the medical device excise tax is imposed. Section 4216(a) provides that in determining the price for which an article is sold there should be excluded the amount of tax imposed, whether or not stated as a separate charge. See section 4216(a) and § 48.4216(a)-2(a) of the Manufacturers and Retailers Excise Tax Regulations for the rules regarding the exclusion of tax from sale price.
Installment Sales, Leases, and Long-Term Contracts
Several commenters requested transition relief for installment sales and leases of taxable medical devices where the contract is entered into prior to the effective date of the tax on January 1, 2013.
The final regulations do not provide transition relief for all contracts entered into prior to January 1, 2013. However, the final regulations do provide transition relief for contracts entered into prior to March 30, 2010, the date the ACA was enacted. More specifically, the final regulations provide that payments made on or after January 1, 2013, pursuant to a written binding contract for the lease, installment sale, or sale on credit of a taxable medical device that was in effect prior to March 30, 2010, are not subject to tax under section 4191 unless the contract is materially modified on or after March 30, 2010. For purposes of this transition relief, a material modification includes only a modification that materially affects the property to be provided under the contract, the terms of payment under the contract, or the amount payable under the contract. A material modification does not include a modification to the contract required by applicable Federal, State, or local law.
Payments made pursuant to a contract that was entered into on or after March 30, 2010, are subject to tax under section 4191 and the existing provisions of sections 4216(c) and 4217, and §§ 48.4216(c)-1 and 48.4217-2 apply.
Several commenters requested that the final regulations specifically provide that the following are not taxable uses where the manufacturer receives no direct benefit in the form of money, services, or other property: (i) Demonstration products used for health care professionals and product awareness, such as samples used to demonstrate the type of device to be implanted in a patient; (ii) evaluation products provided to help health care professionals determine whether and when to use, order, purchase, or recommend the device; (iii) loaned devices to facilitate procedures utilizing a sold taxable medical device, such as instruments specifically designed to implant a particular orthopedic joint; (iv) testing and development products; and (v) product donations and charitable contributions.
The final regulations do not adopt this suggestion because it is necessary to have consistent rules for all manufacturers excise taxes. Section 4218 generally imposes a tax on certain uses of an article by the article's manufacturer. In general, under § 48.4218-1(b), if the manufacturer of a taxable article uses the article for any purpose other than in the manufacture of another taxable article, then the manufacturer is liable for tax on the article as if the manufacturer had sold it.
With regard to demonstration products, the provision or use of a taxable medical device as a demonstration product may constitute a taxable use, depending on the facts and circumstances of the arrangement. See Rev. Rul. 60-290 (160-2 CB 331) and Rev. Rul. 72-563 (1972-1 CB 568).
With regard to evaluation and testing products, Rev. Rul. 76-119 (1976-1 CB 345) holds that if a manufacturer uses a taxable article in the testing of another article of its own manufacture, the use of the taxable article is not a taxable use.
The existing chapter 32 rules do not specifically address whether a donation of a taxable article to charity constitutes a taxable use under section 4218. However, the IRS and the Treasury Department will issue separate interim guidance along with these regulations to address donations of taxable medical devices.
Several commenters requested that the final regulations provide manufacturers with the option of excluding from the sale price a reasonable estimate of purchase price adjustments for rebates, with a later true-up based on the actual rebate amounts. These commenters suggest that manufacturers have reliable historical data on past rebate performance, so they are able to project rebate amounts with reasonable certainty.
The final regulations do not adopt this suggestion. Section 48.4216(a)-3(c) provides that a manufacturer may take a rebate into account in determining sale price only to the extent the rebate is made prior to the close of the quarter during which the sale associated with the rebate is made. In addition, if the manufacturer subsequently allows a rebate for taxable articles on which tax has been paid, the manufacturer may make a claim for credit or refund of that portion of the tax that is proportionate to the part of the price that is rebated.
Software Sold Together With Services
One commenter requested clarification with respect to the taxability of software that is sold together with services and/or maintenance contracts.
Section 48.4216(a)-1(e) provides that where a taxable article and a nontaxable article are sold by the manufacturer as a unit, the tax attaches to that portion of the manufacturer's sale price of the unit that is properly allocable to the taxable article. Because the definition of a taxable medical device is tied to the FDA's device listing requirements, if the software and service bundle is not listed with the FDA under section 510(j) of the FFDCA and 21 CFR part 807 (in other words, if the entire bundle is not a taxable medical device), the medical device excise tax attaches only to the sale of the devices within the bundle that are listed with the FDA under section 510(j) of the FFDCA and 21 CFR part 807.
Refurbished and Remanufactured Medical Devices
Several commenters requested guidance on how the medical device excise tax will apply to sales of refurbished and remanufactured medical devices. One commenter requested that the definition of manufacturer in § 48.0-2(a)(4) be clarified to ensure that repairing, refurbishing, or rebuilding an already taxed medical device does not create another taxable medical device and is not considered manufacturing.
The final regulations do not adopt these suggestions. Under existing chapter 32 rules, remanufacturing or refurbishing constitutes manufacture ifthe remanufacturing or refurbishing process produces a new and different taxable article. See Rev. Rul. 86-130 (1986-2 CB 179), Rev. Rul. 83-149 (1983-2 CB 186), Rev. Rul. 68-40 (1968-1 CB 452), Rev. Rul. 64-202 (1964-2 CB 431), and Rev. Rul. 58-586 (1958-2 CB 806). If a remanufacturer or refurbisher produces a new and different taxable article, the tax is imposed upon the sale or use of the remanufactured or refurbished article.
Two commenters suggested that parts used to replace an existing part or component in a taxable medical device should not be subject to the tax, even if the part or component is listed separately as a device with the FDA.
The final regulations do not adopt this suggestion. Under existing law, if a taxable article is returned to the manufacturer under a warranty and the manufacturer provides a replacement article free or at a reduced price, the tax on the replacement article is computed on the actual amount, if any, paid to the manufacturer for the replacement article. See § 48.4216(a)-3(b) and Rev. Rul. 75-272 (1975-2 CB 421).
With regard to replacements that are not made under warranty, replacement parts that are listed with the FDA under section 510(j) of the FFDCA and 21 CFR part 807 are taxable medical devices, and their sale by the manufacturer is generally subject to tax.
One commenter requested clarification on whether the licensing of software that is a taxable medical device is a taxable event.
Under existing chapter 32 rules, the manufacturers excise tax generally attaches upon the sale or use of a taxable article by the manufacturer. The lease of a taxable article by the manufacturer is considered a sale. Neither the existing chapter 32 rules nor the final regulations address the issue of whether the licensing of a taxable article is a taxable event. However, the IRS and the Treasury Department will issue separate interim guidance along with these regulations to address this issue.
Consolidated Filing of Form 720
The medical device excise tax is reported on Form 720, Quarterly Federal Excise Tax Return. Several commenters requested that the IRS and the Treasury Department permit manufacturers and importers of taxable medical devices who are members of a affiliated group for income tax purposes to file Form 720 on a consolidated basis.
The final regulations do not adopt this suggestion. Section 1501 provides generally that an affiliated group of corporations shall have the privilege of making a consolidated return with respect to the income tax imposed by chapter 1 for the taxable year in lieu of separate returns. There is no similar provision that applies to excise tax. Thus, the privilege to file consolidated returns applies only to income tax returns and not to excise tax returns. Accordingly, for excise tax purposes, each business unit that has or is required to have a separate employer identification number is treated as a separate person with separate tax liability, and each such business unit must file a separate Form 720.
Consolidated Form 637 Registration
Registration through the Form 637 application process is necessary to effectuate tax-free sales. Several commenters requested that final regulations allow one entity in an affiliated group to register on behalf of the group with respect to intra-group sales.
The final regulations do not adopt this suggestion. The IRS and the Treasury Department have determined that it is necessary in the interest of effective tax administration to require each entity with a separate employer identification number to apply for registration under Application for Registration (For Certain Excise Tax Activities) (Form 637) to verify the activity for which the entity seeks registration. Once an entity is registered for a particular activity, the registration does not expire. Therefore, for most entities, the initial application process is the extent of the entity's obligation with respect to registration.
Form 720 Filing Requirements
One commenter suggested that the quarterly reporting requirement is unduly burdensome on small medical device manufacturers. The commenter suggested that the final regulations initially require only annual reporting for small medical device manufacturers to enable those taxpayers to become familiar with the excise tax rules and implement the proper accounting practices and procedures.
The final regulations do not adopt this suggestion. The ACA added section 4191 to chapter 32. Therefore, the existing rules governing chapter 32 apply. Manufacturers excise taxes, including the medical device excise tax, are reported on Form 720. In general, Form 720 must be filed on a quarterly basis. For more information about reporting requirements, see § 40.6011(a)-1(a).
Semimonthly Deposits
Several commenters suggested that the semimonthly deposit requirements under section 6302 are burdensome to medical device manufacturers because device manufacturers have little or no experience with returning and paying federal excise taxes and because manufacturers need time to develop their systems to implement these final regulations. Some of those commenters requested that final regulations specifically carve out taxable medical devices from the deposit rules set forth in section 6302 and the regulations thereunder. Other commenters requested that the IRS and the Treasury Department waive on a reasonable cause basis any tax penalty applicable to the failure to deposit the correct amount of tax.
The final regulations do not carve taxable medical devices out of the semimonthly deposit rules. Therefore, medical device manufacturers will generally be required to make semimonthly deposits of tax unless the manufacturer's net tax liability does not exceed $2,500 for the quarter. See section 6302 and the regulations thereunder for the rules regarding semimonthly deposits.
The IRS and the Treasury Department recognize that the application of the manufacturers excise tax rules, particularly with regard to sale price, may present certain challenges. The IRS and the Treasury Department further recognize that manufacturers and importers in the medical device industry may not have prior experience complying with the rules regarding semimonthly deposits. Given that the tax goes into effect on January 1, 2013, the IRS and the Treasury Department will issue separate interim guidance along with these regulations that addresses penalties under section 6656.
One commenter requested that the IRS and the Treasury Department amend the regulations under section 7701 to allow entities that are disregarded as separate from their owners for income tax purposes to be similarly disregarded for excise tax purposes.
The final regulations do not adopt this suggestion because it is necessary to have a consistent rule for all excise taxes. Specifically, § 1.1361-4(a)(8) and § 301.7701-2(c)(2)(v) treat a qualified subchapter S subsidiary and a single-owner eligible entity that is disregarded as an entity separate from its owner under § 301.7701-2 as a separate entity for purposes of excise taxes imposed bychapter 32 of the Code. These rules were adopted because of the difficulties that arise from the interaction of the disregarded entity rules and the federal excise tax rules. For example, the manufacturers excise tax rules rely on state law, rather than Federal law, to determine attachment of a tax. See § 48.0-2(b) (providing that excise taxes attach when title to an article passes to the purchaser, which is based on the laws of the local jurisdiction where the sale is made in the absence of express intention of the parties to the sale). Accordingly, a Form 720 reporting the medical device excise tax imposed on sales of taxable medical devices by the manufacturer or importer after December 31, 2012, must be filed under the name and employer identification number of the entity rather than under the name and EIN of the disregarded entity's owner.
Penalties for Failure To File and Failure To Pay Tax; Accuracy-Related Penalties
Several commenters highlighted the compliance challenges associated with implementation of the medical device excise tax. These commenters requested that the IRS and the Treasury Department temporarily waive all tax penalties relating to the filing of Form 720.
The final regulations do not adopt this suggestion. Section 6651(a) imposes penalties for failure to file any return required under subchapter A of chapter 61 and for failure to pay the amount shown as tax on any such return, unless it is shown that the failure is due to reasonable cause and not willful neglect. Under § 301.6651-1(c), a taxpayer may avoid penalties under section 6651 for the failure to file a tax return or pay tax if the taxpayer makes an affirmative showing of all facts necessary to establish a reasonable cause for the taxpayer's failure to file a return or pay tax on time. If the taxpayer exercised ordinary business care and prudence but was nevertheless unable to file the return within the prescribed time, then the delay is due to a reasonable cause. A failure to pay will be considered to be due to a reasonable cause to the extent the taxpayer has made a satisfactory showing that the taxpayer exercised ordinary business care and prudence in providing for payment of the taxpayer's tax liability and was nevertheless either unable to pay the tax or would suffer an undue hardship (as described in § 1.6161-1(b)) if the taxpayer paid on the due date.
Section 6662 imposes an accuracy-related penalty for, among other things, negligence or disregard of the rules or regulations. Under section 6662(c), the term “negligence” includes any failure to make a reasonable attempt to comply with the provisions of the Code, and the term “disregard” includes any careless, reckless, or intentional disregard.
The IRS and the Treasury Department recognize that the application of the manufacturers excise tax rules may present certain implementation challenges. The IRS and the Treasury Department also recognize that manufacturers and importers in the medical device industry may not have prior experience with filing a Form 720. However, the IRS and the Treasury Department believe that the existing reasonable cause provisions under section 6651(a) and § 301.6651-1(c) and the negligence standard in section 6662 provide taxpayers with an appropriate mechanism for relief. If a penalty is assessed under section 6651 or section 6662, the IRS encourages taxpayers to call the telephone number on the penalty notice to discuss abatement options.
Under the proposed regulations, a taxable medical device is a device that is listed as a device with the FDA under section 510(j) of the FFDCA and 21 CFR part 807. Therefore, under the proposed regulations, a listed kit is a taxable medical device. The proposed regulations define a “kit” as a set of two or more articles packaged in a single bag, tray, or box for the convenience of the end user. In addition, the proposed regulations provide that if a kit is a taxable medical