By Ken Berry
Just a few heartbeats away from the New Year, the IRS has issued final regulations governing the imposition of a new excise tax on "medical devices", such as pacemakers and implantable defibrillators (TD 9604, Notice 2012-77 ).
Under the Patient Protection and Affordable Care Act of 2010 – the massive health care legislation commonly referred to as "Obamacare" – a 2.3 percent excise tax will be levied on sales of certain medical devices beginning January 1, 2013. The tax applies to manufacturers and importers, but generally doesn't affect individual consumers, at least not directly.
The Obamacare provision essentially follows the Food and Drug (FDA) definition of a medical device intended for use by humans. This includes devices ranging from X-ray and MRI machines all the way down to tongue depressors, but excludes certain items under FDA rules. For instance, biologics, devices intended solely for use by animals, software updates or sales of software, and most home medical equipment devices aren't subject to the tax.
A key exception to the tax applies to certain "retail items" purchased by the general public for individual use, such as eyeglasses, contact lenses, and hearing aids. Under the final regulations, a device is treated as an exempt retail item if it's regularly available for purchase and use by individual consumers who aren't medical professionals, and if the device's design shows that it's not primarily intended for use in a medical institution or by a medical professional.
The final regulations also clarify the "facts and circumstances" test to be used in determining if a medical device is exempt from the 2.3 percent excise tax because it's intended primarily for retail use. No one factor of the test is determinative. A device may qualify even if it doesn't meet all the factors or if it meets one or more of the negative factors.
Devices that are purchased by telephone or online requiring minimal or no training from a medical professional are exempt. The IRS also issued interim guidance on "convenience kits." Although the excise tax will not apply to the sale of a domestically produced convenience kit that includes a taxable medical device, the tax will be assessed against a manufacturer or importer when that device is sold.
Finally, the new regulations address various other issues, including a "safe harbor" for certain prosthetic or orthotic devices falling under the retail exemption; transitional relief for installment sales, leases, and long-term contracts entered into prior to March 30, 2010; and the semimonthly requirement for manufacturers to deposit the tax.