Taxpayers manufacturing or importing certain medical devices would have seen an uptick in their tax liability this year, but for legislation signed by the President on Jan. 22. In addition to ending the government shutdown (at least for a few weeks), the Federal Register Printing Savings Act of 2017 (H.R. 195) also extends the moratorium on the Medical Device Excise Tax (MDET). The MDET, originally enacted as part of the Patient Protection and Affordable Care Act (ACA) on March 23, 2010, had a moratorium put in place by the Protecting Americans from Tax Hikes (PATH) Act. The moratorium was originally set to expire Jan. 1, 2018, but now that H.R. 195 has been signed into law, the moratorium has been extend until Dec. 31, 2019.
Enacted as part of the ACA, IRC § 4191 imposes an excise tax on the sale of specified medical devices. The tax equals 2.3 percent of the price of the taxable medical device when it is sold by its manufacturer, producer or importer.
A taxable medical device is any device defined under the Federal Food, Drug, and Cosmetic Act (FFDCA), which is intended for human use. Eye glasses, contact lenses, and hearing aides are specifically excluded from the definition of taxable medical devices. There is also an exception for items that the general public would purchase at retail for their individual use, and a safe harbor including items such as certain online in vitro diagnostic (IVD) use Lab Tests, certain “over the counter” devices, and devices that qualify as durable medical equipment, prosthetics, orthotics, and supplies.
For taxpayers that would have been subject to the tax, the extension of the moratorium relieves them of a substantial burden. Had the tax gone into effect, medical device manufacturers and importers would have been required to file a Form 720 on a quarterly basis. In addition to the quarterly filing requirements, taxpayers would have had to make semimonthly deposits of tax. Failure to make these semimonthly deposits would have resulted in penalties, ranging from 2 to 15 percent depending on the number of days the deposit was delinquent. Although there are provisions providing taxpayers some relief from these burdens, including IRS Notice 2018-10 and a safe harbor for failing to make deposits, the extension of the moratorium will greatly reduce the administrative burden of taxpayers in the medical device industry.
Needless to say, many taxpayers in the medical device industry are not in favor of the reinstatement of the MDET. Although there have been several opportunities for the tax to be repealed, both during the moratorium and in last year’s tax reform, Congress has not taken action to do so. In the alternative, Congress has instead extended the moratorium on the tax for two additional years. Should you have any questions regarding the MDET or other complex tax issues please contact Steven Miller, alliantgroup, LP’s National Director of Tax, at Steven.Miller@alliantgroup.com.