On Dec. 18, 2015, President Barack Obama signed the Consolidated Appropriations Act, 2016, P.L. 114-113, which includes tax-related provisions in Division Q, the Protecting Americans From Tax Hikes Act of 2015 (PATH Act). The PATH Act imposes a two-year moratorium on application of the medical device excise tax. This item discusses some frequently asked questions with respect to the medical device excise tax and the current state of the law.
Overview
Before the PATH Act, Sec. 4191 imposed a medical device excise tax on the sale, use, or lease of a "taxable medical device" by its manufacturer or importer at a rate of 2.3% of the price for which each device was sold. Certain adjustments to the sale price were allowed and, in some cases, a constructive sale price was used. In addition, export sales were generally not subject to the tax, subject to certain registration requirements.
A taxable medical device is any device listed with the Food and Drug Administration (FDA) under Section 510(j) of the Federal Food, Drug, and Cosmetic Act (P.L. 75-717, as amended) and 21 C.F.R. Part 807, pursuant to FDA requirements. However, there are exemptions for eyeglasses, contact lenses, and hearing aids, and devices that are of a type that is generally purchased by the general public at retail for individual use (retail exemption).
Q: What does the moratorium mean?
A: Under the moratorium, the tax does not apply to sales of taxable medical devices between Jan. 1, 2016, and Dec. 31, 2017. Manufacturers and importers of devices sold during this period do not need to make semimonthly deposits of tax or file Forms 720, Quarterly Federal Excise Tax Return, relating to these sales.
Q: Does the moratorium provide for a refund of previously paid taxes?
A: No. Although some legislative proposals provided for a retroactive repeal of the tax, the moratorium as enacted does not provide for a refund of the medical device excise tax for sales before Jan. 1, 2016.
Q: Why should companies be thinking about issues related to the medical device excise tax during the moratorium?
A: There may be opportunities to claim a refund of tax. For example, a company can still identify exports or price readjustments, such as rebates, that occur in 2016 and 2017 with respect to taxed devices sold before enactment of the moratorium. Any exports and price readjustments may give rise to refunds.
Refund opportunities might also arise from reexamining earlier transactions on which tax was paid. For example, a company may wish to review its product listings with greater scrutiny to determine whether tax was paid on products that are not taxable medical devices, such as devices that are not listed with the FDA under 21 C.F.R. Part 807 or products that may meet the retail exemption.
Additionally, a company may wish to consider whether it properly computed the base for the tax in 2013, 2014, and 2015. Some issues to consider are whether all appropriate adjustments were taken, such as reductions in sale price for the tax, shipping expenses, and other allowable exclusions.
With respect to the tax base, another consideration is whether applied safe-harbor methods in Notice 2012-77 truly approximate the price an unrelated wholesale distributor would pay to the company for the product. In some instances, determining tax using a method other than those in the safe harbor may be supportable, potentially giving rise to a refund.
Q: What is the statute of limitation on refunds of medical device excise tax?
A: The statute of limitation is generally three years from the date the return was filed. It is important to note that the statute of limitation for sales during the first quarter of 2013 expired on May 2, 2016.
Q: Is the IRS conducting audits of the medical device excise tax?
A: The IRS continues to audit medical device excise tax returns filed between Jan. 1, 2013, and Dec. 31, 2015, as well as claims for refund and IRS registration reviews. Whether the excise tax examiners will continue to devote the same resources to the medical device excise tax is unknown. It is the authors' understanding that the IRS may be allocating its personnel and resources to focus on other areas during the moratorium.
Q: Should companies continue to track the medical device excise tax during the moratorium?
A: Whether to continue to track the medical device excise tax during the moratorium is a business decision to be made by each company. Companies that invested in medical device excise tax technology may find it useful to maintain the technology, even at a minimal level. For instance, tracking may be necessary to identify exports, price adjustments, and returns of previously taxed devices to claim refunds.
Additionally, in the event the moratorium expires and the tax is again imposed on sales in 2018, it may be prudent for the tax technology system to be in place for companies to begin making semimonthly deposits of tax and filing excise tax returns in early 2018 without a last-minute scramble to become compliant.
Q: What will Congress do in 2017 with respect to the medical device excise tax?
A: It is impossible to predict whether the medical device excise tax will be repealed or reinstated or whether the moratorium will be extended. Because much depends on the outcome of the 2016 election, including who is elected president and whether the majority party in the Senate or House of Representatives changes, it is difficult to predict today what the tax priorities of the 2017 Congress will be. Further, there is no guarantee that any legislative action would take place before late in 2017. Thus, companies should be prepared for all possible outcomes.
Q: What one thing should a company do now?
A: Now is a good time to document the processes and procedures used to report and pay the medical device excise tax in 2013, 2014, and 2015. This documentation would be a useful resource in the event of a future IRS audit, claim for refund, or reinstatement of the medical device excise tax.
EditorNotes
Mary Van Leuven is a director, Washington National Tax, at KPMG LLP in Washington.
For additional information about these items, contact Ms. Van Leuven at 202-533-4750 or mvanleuven@kpmg.com.
Unless otherwise noted, contributors are members of or associated with KPMG LLP.
The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG LLP. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. ©2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
