Explaining the Device Tax: Part 1

October 10, 2010

By Francis Diaz, Research & Product Strategist

I recently took a closer look at the new proposed Device Tax, which is part of the Patient Protection and Affordable Care Act, the major health care reform legislation signed into law by President Obama. This is something that is near and dear to our hearts, here at Ximedica, and I was tasked with writing up a explanation of the issues so that all of our employees could have a basic understanding. As such, we thought we might post it online for others to learn from, as well.

The landmark healthcare reform law promises to expand coverage to millions of uncovered Americans as well as address the swelling costs of medical care. Several provisions in the law were drafted to help fund this historic undertaking—not the least of which is a 2.3% excise tax on medical device manufacturers. The intent of the provision is to raise $20 billion in tax revenues over the course of ten years and takes effect on the sale of medical devices after December 31, 2012.

While medical device industry advocates generally support many aspects of the new healthcare law, introduction of this new excise tax has been met with at least some degree of consternation. The tax is levied on the manufacturer’s (or importer) gross sales price of the finished good, as opposed to net receipts or income. While the tax is significant and carries consequences that affect all industry members, smaller, mid-sized and/or startup medical device firms operating on thin margins are particularly vulnerable. They argue that the imposing the tax threatens to subdue innovation, stifle the flow of investment capital and jeopardize jobs.

In anticipation of the enforcement date of the excise tax and despite the lack of specific guidance from the IRS and the Treasury Department, companies have begun to identify their exposure and to review options that may mitigate the consequences. For example, can changes be made to a device design to reduce its exposure to a potential tax penalty? Are there costs in the manufacturing process that can be reduced, in order to accommodate the impact of the tax? Successfully navigating these issues begins with a solid understanding of the scope, applicability and limitations of the excise tax. While further legislative and regulatory developments are sure to follow, experts surmise that the key aspects of the tax will remain intact until 2013 when the tax will take effect. In a future post, I’ll explain a little more about who is responsible for the tax, and what qualifies as taxable. What could qualify may surprise you.

(Please note, none of what is included here should in any way be construed as legal advice. Please consult an attorney if you have questions about the legal implications of this topic.)