Passed as part of the recent overhaul to the American healthcare industry popularly known as “Obamacare”, the Medical Excise Tax is a 2.3% tax on the sales price of eligible medical devices. The tax is distinct in that it is not a tax on company profits, but on the initial sales price of the devices. This considerably magnifies the actual impact of the tax because it is calculated on the top line and so has greater impact on the bottom line.
Why People Care
While 2.3% does not sound like a significant amount of money, many medical devices have price tags that run in the tens of thousands of dollars or more. Even a small percent lost can result in the loss of an employee’s annual salary due to the small number of sales made. Opinions are currently divided on the ultimate effect this will have on the number of workers the medical device industry employs, but the dispute is primarily over the size of the losses, not whether or not they will occur. Current estimates vary between 14,000 and 47,100 jobs lost. At minimum estimates, this can be expected to result in over twenty-nine million work-hours lost annually as a result of the tax, weakening each company’s ability to research, innovate, and otherwise work to be successful as a company.
For these and other reasons, most medical companies are sharply opposed to the overall tax and are working to repeal it.
Affected Devices and Special Circumstances
Certain medical devices are exempt from the medical excise tax, including corrective lenses and hearing aids. Other devices that are typically sold as retail products to the general public may also qualify for an exemption, though it is recommended that a company thoroughly study the regulations to determine exactly which products qualify.
Beyond this, certain sales are permitted to be tax-free; these are focused on selling devices to another company for further manufacturing work or for export outside of the country; the tax can be waived even if the customer is not the one manufacturing or exporting as long as the device is sold with the intent of either circumstance coming about.
When the Tax Applies
The medical excise tax is applicable to all sales of non-exempt medical devices made on or after January 1, 2013. The IRS has released finalized regulations as of December 5, 2012 on the subject of medical devices and how companies should go about reporting sales and paying the excise tax once it begins. Notice 2012-77, published by the IRS and the United States Treasury Department, is intended to provide further guidance and information as necessary to all companies affected by the tax.
The device tax is to be reported using Form 720, which current regulations require filing quarterly. The first form for which the medical excise tax applies will be due April 30, 2013, with the regular pattern being established as the last day of the month after the end of the sales period being the deadline for Form 720 to be filed.
For Additional Information
Further information on the medical excise tax, including definitions of all terms applicable to the tax and an expanded explanation of which devices are exempt or otherwise not taxable, is available on the official website of the IRS.
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