CFO Studio Magazine with David Huber

CFO CFO 2 18 WWW.CFOSTUDIO.COM 4th QUARTER 2012 By Emmalee MacDonald, CPA Senior Tax Manager, EisnerAmper, LLP Michael Hadjiloucas, CPA Partner, EisnerAmper, LLP O ne of the provisions of the Affordable Care Act is an excise tax on sales of medical devices. This tax becomes effective January 1, 2013, and will be imposed upon the manufacturer, producer, or importer of the medical devices. The tax will be charged at a rate of 2.3 percent of the sales price, and the IRS has issued proposed regulations (IRC 4191) to identify which medical devices will be subject to tax and which are exempt. Definitions Per the announced regulations, a medical device includes any device defined in the Federal Food, Drug & Cosmetic Act that is intended for humans. This section explains that the term “device” means an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article used for health-care purposes. The trigger for the tax is the passage of title from the manufacturer to the purchaser. The sales price subject to tax includes charges for packaging as well as charges incident to plac- ing the device in a condition to be packed and ready for shipment. Specifically excluded from the sales price are: • Manufacturer’s excise tax. • Cost of transportation, delivery, insurance, installation. • Discounts, rebates, and similar allowances actually granted to the purchaser. • Local advertising charges. • Charges for warranty paid at the purchaser’s option. If a rebate is offered, the tax must be levied on the original sales price, unless the rebate has been made prior to the close of the pe- riod for which the return is due. If a rebate is subsequently allowed for a device on which tax has already been paid, the manufacturer is entitled to a credit or refund. Exemptions Tax-free sales include sales for use in further manufacture, export, or by purchaser for export by a second purchaser. In order to qualify for the exemption, registration must first be completed with the IRS on Form 637. In addition, IRC Section 4191 specifically exempts eyeglasses, contact lenses, hearing aids, and any other medical devices that are generally purchased by the general public at retail for individual use. In order to qualify for the retail exemption the device must be regularly available for purchase and use by individual consumers who are not medical professionals, which is determined by reviewing whether: • Consumers who are not medical profes- sionals can purchase the device through retail businesses that also sell items other than medical devices, including drug stores, supermarkets, and similar vendors; • Consumers who are not medical profession- als can safely and effectively use the device for its intended medical purposes with minimal or no training from a medical professional; and • The device is classified by the FDA under Subpart D of 21 CFR Part 890 (Physical Medicine Devices). It also must have a design that demon- strates that it is not primarily intended for use in a medical institution or office, or by medi- cal professionals. This can be determined by reviewing whether: • The device generally must be implanted, in- serted, operated, or otherwise administered by a medical professional; • The cost to acquire, maintain, and/or use the device requires a large initial investment and/or ongoing expenditure that is not affordable for the average consumer; • The device is a Class III device under the FDA system of classification; • The device is classified by the FDA under certain parts or subparts of 21 CFR; or • The device qualifies as durable medical equipment, prosthetics, orthotics, and sup- plies for which payment is available exclu- sively on a rental basis. The regulations provide a safe-harbor provision for qualification under the retail exemption, for medical devices listed on the FDA’s IVD Home Use Lab Tests (over- the-counter tests) database at http://www. accessdata.fda.gov/scripts/cdrh/cfdocs/ cf IVD/Search.cfm. This also includes those described as “OTC” or over-the-counter de- How to prepare for the new sales tax, effective January 1, 2013 THEMEDICAL DEVICE MANAGING TAX