Medical Device Excise Tax

Claim:   Health care legislation imposes a 2.3% excise tax on the sale of medical devices as of 1 January 2013.

TRUE

Example: [Collected on Facebook, January 2013]


Origins:   One of the provisions in the reconciliation bill (HR 4872) passed in conjunction with the Patient Protection Affordable Care Act (PPACA) health care legislation, also known as "Obamacare," institutes a 2.3% tax on the first sale of medical devices as of 1 January 2013. (Technically the medical device tax is an excise tax which applies only to manufacturers, producers, or importers and is not to be paid directly by consumers, but the costs of such taxes are typically passed along to consumers through higher prices.)

The text of the legislation states that the roster of “taxable medical devices” does not include "eyeglasses, contact lenses, hearing aids, and any other medical device determined to be of a type that is generally purchased by the general public at retail for individual use."

Anticipating what constitutes a "taxable medical device" under this legislation can be rather confusing, as explained in a July 2012 tax adviser article:

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. §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 FFDCA (21 U.S.C. §360c). For example, items purchased by the general public at retail for individual use could include Class I items, such as certain bandages and tipped applicators; Class II items, such as certain pregnancy test kits and diabetes testing supplies; and Class III items, such as certain denture adhesives and snakebite kits. Such items would be exempt only if they generally are designed and sold for individual use. In this regard, Congress anticipated that Treasury will publish a list of medical device classifications that are of a type commonly purchased by the general public at retail for individual use.

According to proposed regulations issued by the Internal Revenue Service in February 2012, the medical items which would be exempt from the tax because they are "commonly purchased by the general public at retail for individual use" should be determined as:

A device will be considered to be of a type generally purchased by the general public at retail for individual use if it is regularly available for purchase and use by individual consumers who are not medical professionals, and if the design of the device demonstrates that it is not primarily intended for use in a medical institution or office or by a medical professional.

The following factors suggest that a device is of a type that is regularly available for purchase and use by individual consumers who are not medical professionals:

(A) Consumers who are not medical professionals can purchase the device through retail businesses that also sell items other than medical devices, such as drug stores, supermarkets, and similar vendors.
(B) Consumers who are not medical professionals can use the device safely and effectively for its intended medical purpose with minimal or no training from a medical professional.
(C) The device is classified by the FDA under Subpart D of 21 CFR Part 890 (Physical Medicine Devices).

Why the medical device excise tax should have been applied to all the items listed in the receipts pictured above is something of a mystery. The state of Texas (where these receipts are said to have originated) allows sellers to pass along the expense of the new medical device excise tax to customers by "separately stating a line item charge on the invoice or receipt given to their customers for 'Federal Excise Tax' or something similar," but the vendor, Cabela's, is a retailer of hunting, fishing, camping and related outdoor recreation merchandise not known for selling medical devices, and the items listed in the receipts (such as a Ruger Attache Pistol Case) would not seem by any stretch of the imagination to fit FDA definitions of medical devices. It's possible that some vendors switched over to new sales software on 1 January 2013 that was programmed to accommodate the new tax but improperly applied it to all purchases rather than just those of qualifying medical devices.

(Some Cabela's customers have since told us that they were informed the chain's cash registers did indeed manifest a glitch starting on 1 January 2013 that improperly imposed the medical device excise tax surcharge on non-qualifying merchandise and were advised to contact Cabela's customer service department and request refunds for the overcharges.)

Last updated:   2 January 2013

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