On December 5, 2012, the IRS issued the much-anticipated final regulations on the new 2.3% medical device excise tax that manufacturers and importers will pay on sales of certain medical devices beginning January 1, 2013. In addition, the IRS issued Notice 2012-77, which provides interim guidance regarding the determination of sale price and other issues related to the tax.

AdvaMed’s response was quick, but focused entirely on the urgency to repeal the tax altogether. Stephen J. Ubl, president and CEO of AdvaMed, released the following statement:

“AdvaMed is carefully reviewing the regulations released today by the IRS. But regardless, Congress should act to address this $30 billion tax before it takes effect on January 1. There is strong bipartisan support for action. While Washington talks about a fiscal cliff, this tax could push us off an innovation cliff, costing as many as 43,000 jobs and hurting the ability of medical technology companies to find tomorrow’s treatments and cures. It should be repealed.

On December 10, 2012, Senators Amy Klobuchar (D-MN) and Kay Hagan (D-NC) issued a letter with 16 other senators and senators-elect to Senate Majority Leader Harry Reid urging a delay in the implementation of the medical device tax.

“As we work together to develop a long-term solution to help move our economy forward, reduce our debt and reform our tax code, we urge you to support delaying enactment of this provision in a fiscally responsible manner,” the letter says.

In the letter, they also note that with the year quickly drawing to a close, the medical device industry "has received little guidance about how to comply with the tax—causing significant uncertainty and confusion for businesses."

The IRS says it developed the final regulations in consultation with technical experts at FDA and the Centers for Medicare and Medicaid Services, and after carefully reviewing numerous public comments.

According to the IRS, generally, under the final regulations, a “taxable medical device” is a device that is listed as a device with the FDA under section 510(j) of the Federal Food, Drug and Cosmetic Act, and 21 CFR part 807, pursuant to FDA requirements. If a device is not listed as a device with the FDA but the FDA determines that the device should have been listed as a device, the device will be deemed to be listed as a device with the FDA as of the date the FDA notifies the manufacturer or importer in writing that corrective action with respect to listing is required, the IRS says.

The guidance is designed to help navigate the new regulations and offers “interim guidance” for determining price under § 4216(b) as well as guidance relating to donated taxable medical devices, the licensing of taxable medical devices and the tax treatment of medical convenience kits. In addition, the notice provides transition relief to medical device manufacturers from the failure to deposit penalties imposed by § 6656.

The new tax does not apply to sales of eyeglasses, contact lenses, and hearing aids. The new tax also does not apply to the sale of any other devices that are of a type generally purchased by the general public at retail for individual use (the retail exemption).

“In general, the final regulations provide a facts-and-circumstances approach to evaluating whether a type of device qualifies for the retail exemption,” says the IRS. “Specifically, the final regulations suggest factors to consider in evaluating whether a particular type of device qualifies for the retail exemption. The factors enumerated in the final regulations are nonexclusive; additional factors may be relevant to determining whether a given type of device qualifies for the retail exemption.”

The final regulations also identify several categories of medical devices that qualify for the retail exemption (the retail exemption safe harbor). The retail exemption safe harbor includes devices in FDA’s online in vitro diagnostics (IVD) Home Use Lab Tests (Over-the-Counter Tests) database, devices that the FDA describes as over the counter (OTC) in certain official FDA classification or product code headings or descriptors, and a number of devices that qualify as durable medical equipment, prosthetics, orthotics or supplies for which payment is available on a purchase basis under the Medicare Part B payment rules.

The medical device excise tax applies to manufacturers and importers and generally does not apply to individual consumers. Sales of taxable medical devices for further manufacture or export may be made tax free if certain registration and other requirements are met. The Form 637 Registration Program provides more information on these exemptions.

The medical device excise tax is reported on Form 720, Quarterly Federal Excise Tax Return. Payment is due with the return. The first quarterly return for the medical device excise tax is due April 30, 2013, for the months of January, February, and March 2013. Form 720 may be filed electronically or on paper.

Manufacturers and importers of taxable medical devices may also pay the tax via the free, secure Electronic Federal Tax Payment System (EFTPS). Visit EFTPS to enroll or call 800-555-4477 for information.

To pay the tax with a paper Form 720, use EFTPS or enclose a check or money order (made payable to “United States Treasury”) and Form 720-V, Payment Voucher, with the timely filed Form 720. The payment voucher and instructions are on the final page of Form 720.

Manufacturers and importers of taxable medical devices are generally required to make semimonthly deposits of tax. The first semimonthly deposit for the medical device excise tax, which covers the first 15 days of January, is due January 29, 2012. In general, manufacturers and importers must use electronic funds transfer to make excise tax deposits through EFTPS. Notice 2012-77 provides transition relief from deposit penalties during the first three calendar quarters of 2013.