1. June 3, 2011 Medical Excise Tax: Avoid Surprises, Seek Answers Now
TAX POLICY CLIENT ALERT
This Alert provides only Beginning January 1, 2013, manufacturers, producers and importers of certain medical
general information and devices will be subject to an excise tax equal to 2.3 percent of the price for which the
should not be relied upon as product is sold. The statutory language for the tax leaves open a variety of important
legal advice. We would be questions, such as the breadth of the definition of “taxable medical device,” the scope of
pleased to discuss our
the exemption for products generally sold to the public at retail, the deductibility of the tax
experience and the issues
and the tax base when the producer or importer is also the wholesaler or retailer.
Therefore, it is imperative for manufacturers, importers, distributors and retailers of
presented in this Alert with
products potentially subject to the excise tax to become involved in the regulatory process.
those contemplating
investments in these markets.
The excise tax, which is codified in section 4191 of the Internal Revenue Code, was added
For more information, contact by the 2010 health care legislation (The Patient Protection and Affordable Care Act [Pub.
your Patton Boggs LLP L. No. 111-148] as amended by the Health Care and Reconciliation Act of 2010 [Pub. L.
attorney or the authors listed No. 111-152]) to help pay for the legislation’s cost. Section 4191(b) defines “taxable
below. medical device” using a reference to the Federal Food, Drug, and Cosmetic Act. The term
“taxable medical device” includes only devices intended for humans. Section 4191(b)(2)
George Schutzer exempts eyeglasses, contact lenses, hearing aids and any “other medical device
202-457-5273 determined by the Secretary [of the Treasury] to be of a type which is generally purchased
gschutzer@pattonboggs.com by the general public at retail for individual use.” Thus, an exemption is available only if the
Treasury Secretary determines that a product is exempt.
WWW.PATTONBOGGS.COM Although the term “device” as used in the Federal Food, Drug and Cosmetic Act is often
clear-cut, significant ambiguities exist for many classes of products. Laboratory developed
tests (LDTs), dual-use products, combination products, mobile electronics used for
wireless health-related purposes and device components and accessories, are just a few
examples of products for which clarification may be required.
In Notice 2010-89, the Treasury Department and the Internal Revenue Service (IRS)
invited written public comments on the medical device excise tax. The Notice generally
requested comments regarding issues that “should be” addressed in guidance
implementing the tax, presumably allowing stakeholders to submit comments on a broad
array of issues. The Notice specifically requested comments on the exemption in section
4191(b)(2)(D) for any medical device “determined by the Secretary to be of a type which is
generally purchased by the general public at retail for individual use.” The Notice also
specifically requested comments on issues pertaining to the application of the existing
Internal Revenue Code Chapter 32 manufacturers excise tax rules to the new excise tax.
While the deadline for submitting comments was in March, the IRS received comments
after the deadline.

2. The comments received by the IRS are indicative of the range of significant issues that
need to be addressed. A sampling of those issues includes the following:
• Many commenters sought exemptions for products that they produce or sell as a
“type generally purchased by the general public at retail for individual use.” These
include, among others, orthotic and prosthetic devices, bandages, pregnancy kits,
diabetes testing kits and supplies, components of eyeglasses, canes and crutches,
wheelchairs, snake bite kits, remote patient monitoring devices, incontinence
products, feminine hygiene products, ostomy products, asthma inhalers, electronic
hand sanitizers, bath safety items, portable oxygen systems, home care beds and
other medical equipment and supplies for home use.
• A law firm asked for definitions of “generally purchased,” “general public,” “at retail”
and “individual use.”
• A trade association for the medical device industry asked that the general
exemption apply to all devices approved by the FDA as nonprescription, over-the-
counter devices and all home use devices whether or not they require
prescriptions.
• One commenter objected to the taxation of any dental care devices because the
health care legislation does not promote dental care.
• Another commenter asked that the IRS clarify that the term “taxable medical
devices” only includes those “articles that are marketed with claims of medical,
diagnostic, or therapeutic utility,” thereby excluding devices such as nail files and
razors.
• A commenter asked that sales of devices of a type intended for humans be exempt
from tax if they are sold for use in veterinary medicine.
• Several commenters raised questions about the base price for the tax if the
manufacturer is a distributor; they suggested that a base price should be imputed.
Commenters also suggested procedures for determining the tax base (the imputed
price for which the device is sold) in the case of taxable transactions for which
there is not an arm’s length selling price.
• At least one commenter sought guidance on how to treat price adjustments after
the tax had been paid.
• One commenter sought confirmation that the tax could be deducted as an ordinary
or necessary business expense.
• The Federation of American Hospitals, the American Hospital Association, the
Catholic Health Association of the United States and the Health Industry Group
Purchasing Association submitted combined comments that focused on the shared
responsibility commitment from a broad group of key health care stakeholders. The
group wants the IRS to prohibit manufacturers and importers from passing the tax
through to health care providers or to employers and patients through the cost of
insurance. The comments state that if manufacturers claim deductions for the
excise tax paid, and pass the tax on to purchasers through higher prices, there
would be an instance of double dipping. The comments seek an exemption for
devices sold to hospitals and health care providers if they are of a type often
purchased at retail for personal use.
• Several commenters noted the need to address kits, which may consist of multiple
devices prepared by different manufacturers. Questions included whether the
manufacturers should pay the tax or whether the assembler of the kit is the taxable
producer.
• Commenters noted the need to address “combination products,” such as those that
include both a drug and a device.

3. • Two commenters sought guidance on dual use devices—devices marketed to
customers who uses them for both medical and non-medical uses.
• A trade association recommended that no excise tax be imposed on free samples,
demonstration products, evaluation products, loaned surgical equipment and
articles used in the testing of the manufacturer’s products.
• A commenter requested that sales of inventory as part of the sale of a company or
business not be subject to tax.
• One medical device company provided comments on the identity of the
manufacturer for purposes of the tax (e.g., is it manufacturer of the device that is
included in a kit or the assembler of the kit? In the case of contract manufacturing,
is it the company that contracts with another to the manufacturing or is it the actual
manufacturer?).
Although the deadline for comments on the notice has passed, the IRS and Treasury are
likely to continue to accept comments until they have prepared draft guidance. It seems
likely that the IRS and Treasury will begin a formal rulemaking process by publishing
proposed regulations for comment, or will begin a less formal process by publishing a draft
notice, ruling or revenue procedure for comment
Interested parties that produce, import or sell products that may fall within the definition of
“taxable medical device,” or for which there is some doubt as to whether they will qualify
for an exemption, should, if they have not already done so, develop a strategy for
presenting their position to the IRS and Treasury. Manufacturers, wholesalers, retailers
and purchasers of medical devices should consider supplementing comments provided by
their trade associations. Companies can both reinforce comments of their trade
associations and address nuances or issues of special importance with a sharper focus
than association comments.
By the time the tax is effective, producers, manufacturers and importers will need to
understand its full scope if they want to attempt to pass on all or a portion of the tax to the
purchaser. A producer who invoices for an excise tax that is not due could be subject to
penalties.
*****
To assist clients on matters relating to the excise tax on medical devices, Patton Boggs
has assembled a team of attorneys experienced in tax, FDA regulatory matters and public
policy, including attorneys who are actively involved in health care lobbying (including
lobbying with regard to the medical excise tax). When necessary, we supplement the team
with patent attorneys who have a deep understanding of medical device intellectual
property and related issues.
Legislation has been introduced to repeal the tax. In addition to advising and assisting on
technical issues relating to the implementation of the excise tax, our team can assist in
assessing whether the tax is likely to be repealed, cut back or amended before its effective
date.
Our team consists of:
Rosemary Becchi
202-457-5255
rbecchi@pattonboggs.com

4. Martha Kendrick
202-457-6520
mkendrick@pattonboggs.com
Darryl Nirenberg
202-457-6022
dnirenberg@pattonboggs.com
Paul Rubin
202-457-5646
prubin@pattonboggs.com
George Schutzer
202-457-5273
gschutzer@pattonboggs.com
For additional information, please feel free to contact us.
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