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Lorrie is the founding attorney of Orton Heath Law Firm, based in Austin, Texas.  She routinely consults with individual and corporate clients across various industry segments...

Medical Device Excise Tax - Gone for Now; Future Uncertain

January 12, 2016

 

As many have heard and/or read about, President Obama recently signed a $1.8 trillion omnibus spending and tax bill ("Omnibus"), which included several healthcare provisions related to the Affordable Care Act (ACA), or as it is known colloquially, "Obamacare."

 

Per the Omnibus, the medical device excise tax (MDET), one of the most highly publicized and debated taxes within the ACA, will be suspended for two years. Specifically, the "tax shall not apply to sales after December 31, 2015 through December 31, 2017" (Title I, Section 174, MORATORIUM ON MEDICAL DEVICE EXCISE TAX).

 

Intially, the MDET was created to offset the costs of the ACA. Federal sources estimated the MDET would net $2 billion a year from excise taxpayers. The MDET was subsequently established on the sale of "taxable medical devices" equal to 2.3% of the price of the device, beginning January 1, 2013.

 

As early as 2009, there were challenges to the rationale for creating the MDET. Opponents questioned the supposed windfall the ACA would provide the medical device industry, namely, increased device utilization leading to increased sales growth, and declared a false economy.

 

For example, in 2006, Massachusetts enacted pioneering healthcare law similar to the ACA, but did not experience any greater device sales growth. Second, the newly insured under the ACA are mostly young and healthy, with little need for healthcare services, including device utilization. Third, most uninsured were already being provided services, including the use of medical devices, prior to the enactment of the ACA. 

 

To compound matters, there was confusion within the medical device industry as to what constitutes a "medical device", as well as the point in time such a device should be taxed. Under Section 4191 of the Internal Revenue Code, a definition of "medical device" was provided, but questions remained concerning "retail exemptions", which potentially made a device non-taxable. Further, the application of the IRS' constructive sales rule was often a complex task, depending on the type and manner of transaction. 

 

Finally, some opponents claimed the increased costs of the MDET were leading to stagnant wages, employee lay-offs, and in some cases, the shuttering of company doors. In response, some device companies moved their manufacturing and/or assembly abroad. 

 

Proponents of the MDET claimed the device industry was overstating the impact of the taxation, particularly since the tax was deductible, making the overall tax around 1.5%, not 2.3%. 

 

Opponents countered that the majority of device companies have less than 20 employees, including many start-ups, leaving little room to absorb any additional costs without putting a severe strain on the company's solvency. 

 

Taken together, these uncertainties led to an overall reduction in the number of MDET filers, as well as the subsequent loss of anticipated revenues. For example, in 2013, the Internal Revenue Service collected only $1.4 billion from device taxpayers, which is 70% of the original $2 billion annual contribution the MDET was expected to generate. 

 

For now, it is a new year and the medical device industry is likely enjoying its recent reprieve from the tax. The industry is also likely working hard to ensure that the two-year suspension becomes a permanent one, whether by ongoing extension or repeal. To be sure, the MDET will likely remain a hot button for policy makers, particularly since Congress, along with an as of yet, unknown presidential administration, will determine its fate.

 

 

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