On December 7, 2012, the Department of the Treasury (Treasury) issued its final regulations that provide guidance on both who must pay the excise tax and the scope of products encompassed by the excise tax. This report provides a brief overview of the regulations, discusses the extent to which the rules have clarified the excise tax imposed on the sale of medical devices, and answers frequently asked questions about the medical device tax. Treasury, in the newly released regulations on the medical device excise tax, states that the "existing chapter 32 rules," including the definitions for "manufacturer," "producer," and "importer," apply with respect to the medical device excise tax. As such, the Health Care and Education Reconciliation Act of 2010 (HCERA) casts a wide net with the term "taxable medical device." Moreover, the statute empowers the Secretary of the Treasury under the "retail exemption" to exempt "any other medical device" which is determined to be of a "type which is generally purchased by the general public at retail for individual use" from the 2.3% excise tax. The Retail Exemption

The regulations issued by Treasury on December 7, 2012, provide a broad framework as to which medical devices fall within the "retail exemption" to the excise tax under IRC §4191(b)(2)(d). Specifically, the new Treasury regulations provide a two-prong test to resolve whether a device should fall within the residual exception to the excise tax. Factors implicating the question of whether a device is regularly available for purchase by individual consumers include (1) the ability of end consumers to purchase the device in person through a drug store or other retailer that primarily sells a particular device; (2) the need of a consumer to seek help from a medical professional to use the device safely and effectively; and (3) whether the device has been classified by the Food and Drug Administration as a "physical medicine device" for human use. Notably, Treasury explained in issuing the medical device excise tax regulations that two potential factors—the packaging or labeling of a medical device and the nature of documents submitted to the FDA in obtaining approval of a device—are irrelevant in assessing whether a device should fall within the retail exemption to the excise tax. The purpose of the safe harbor provisions is to "provide greater certainty" with respect to which devices are subject to the retail exemption. However, the safe harbor provisions are narrow, and the regulations open-ended two-part test defining the limits of the retail exemption, while providing flexibility as to the scope of the exemption, naturally creates ambiguity with respect to which products are exposed to the excise tax, save those specifically exempted under the regulations. The statute imposing the medical device tax lists three specific devices that are not subject to the tax: eyeglasses, contact lenses, and hearing aids. Generally under section 6656 of the Internal Revenue Code, failure to deposit the requisite tax subjects delinquent taxpayers to certain penalties. However, the Internal Revenue Service has waived such penalties for the first three quarters of 2013.
On December 7, 2012, the Department of the Treasury and the Internal Revenue Service issued final regulations explaining the scope of the medical device excise tax created by the Health Care and Education Reconciliation Act of 2010 (HCERA), which modified the Patient Protection and Affordable Care Act of 2010. The new regulations were issued less than a month before the 2.3% excise tax took effect on January 1, 2013. This report provides a brief overview of the recently enacted Treasury regulations, analyzes the legal implications of the regulations, and answers frequently asked questions about the medical device tax.
The Treasury regulations on the medical device excise tax explain both who is subject to the excise tax and the scope of the statutory exemptions provided for the tax. Specifically, the regulations incorporate by reference the general definitions for a "manufacturer, producer, or importer" outlined in the Internal Revenue Code, meaning that the excise tax will be directly paid by manufacturers, as opposed to consumers or others that use a given medical device.
Furthermore, the regulations attempt to clarify the limits to the medical device excise tax. Beyond the statutory exemptions created for eyeglasses, contact lenses, and hearing aids, the law created a "retail exemption" to the excise tax, excluding from the tax medical devices that are "generally purchased by the general public at retail for individual use." The Treasury regulations attempt to simultaneously provide certainty to potential taxpayers as to which devices are subject to the retail exemption, while allowing the government the flexibility to properly apply the retail exemption to the variety of devices that could be exposed to the excise tax. The regulations provide a flexible two-prong test to determine whether a device should fall within the retail exemption, applying the exemption when the device is (1) regularly available for purchase by non-professional consumers and (2) not primarily intended for use by medical professionals. The regulations provide several factors to consider when applying the two-prong test. To provide some certainty to the scope of the retail exemption, the regulations also included several "safe harbor" provisions, explicitly acknowledging that certain devices, such as "over-the-counter" devices, fall within the retail exemption.
The new Treasury regulations on the medical device excise tax, while providing some certainty with respect to what devices will be exempt from the tax, generally favor a more flexible approach to defining the scope of the central exemption to the tax. As a consequence, uncertainty remains as to which medical devices will be subject to the tax. Indeed, Treasury, in releasing the medical device excise tax regulations, notes that further clarification on various issues implicated by the tax is still needed. As such, the regulations constitute only the first step in defining the limits of the medical device excise tax.