Referencing S. O’Shea, R. Ricchio's Law360 article “Mixing Agency Rules May Mean More Taxable Medical Devices" , our McGuireWoods colleagues Melissa Gilmore and Mary DeBartolo recently queried which medical devices are taxable and noted conflicting agency interpretations.
As our colleagues note, amid conflicting agency regulations, contract manufacturers of device components and finished devices may be subject to the new medical device excise tax. The Health Care and Education Reconciliation Act (Act), part of the March 2010 healthcare reform legislation, imposed a 2.3 percent excise tax on the sale of any “taxable medical device.” However, the definition of “taxable medical device” remains unclear. Under the Act, a “taxable medical device” is defined according to Section 201(h) of the Federal Food, Drug and Cosmetic Act (FFDCA), but specifically excludes products generally purchased by the public at retail outlets for individual use. The general understanding was that the tax applied to manufacturers, producers and importing manufacturers, but would not apply to contract manufacturers of device components and finished products.
The IRS attempted to clarify the definition of a “taxable medical device” in its proposed regulations by narrowing Section 201(h)’s applicability to Section 510(j) of the FFDCA and specific FDA regulations (21 CFR 807 et seq.). However, a recent amendment to the relevant FDA regulations may broaden the definition of “taxable medical device” to apply to contract manufacturers of device components and finished devices. Beginning Oct. 1, 2012, contract manufacturers of device components and finished devices must list with the FDA the devices they manufacture. This amendment broadens the range of manufacturers needing to list their products with the FDA. Crucially, this amendment would include contract manufactures and device components under the IRS’s proposed definition of a “taxable medical device.”
Until the release of the IRS’s final regulations, expected at the end of 2012, contract manufacturers of device components and finalized devices should consult with professionals on tax and FDA regulatory matters to discuss specifically how they are impacted by the medical device tax.
As investors consider opportunities in the medical device space, understanding the impact of the various applicable taxes, and proposed taxes, is critical to both understanding the future earning potential and also assessing historical compliance of the target.