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The Medical Device Excise Tax was Finally Taken Off Life Support

The Further Consolidated Appropriations Act, 2020 (Pub. L. 116-94), signed into law on December 20, 2019, has repealed the medical device excise tax (“the tax”) previously imposed by the Internal Revenue Service (IRS).

Originally enacted under the provisions of the Affordable Care Act (ACA) in 2013, the tax imposes a 2.3% tax on the gross sale of any taxable medical devices by the manufacturer, producer, or importer. The tax was intended to serve as a funding mechanism to balance out an increased demand for medical devices due to the ACA’s expanded health insurance coverage. Prior to a four-year moratorium placed on the collection, the IRS collected over three billion dollars from 2013 – 2015. However, this figure was about half of what was originally projected according to data from the Joint Committee on Taxation and the Office of Management and Budget.

What is a Taxable Medical Device?

A taxable “medical device” is defined in Section 201(h) of the Federal Food, Drug, and Cosmetic Act. Some examples include:

  • X-ray machines
  • Hospital beds
  • MRI Machines

Although the definition is equally broad, several exemptions apply, such as:

  • Eyeglasses
  • Contact lenses
  • Hearing aids
  • Pregnancy test
  • Thermometers
  • Tongue depressors
For more information or questions on how the excise tax might affect your organization, contact a member of the Tax Services Group.

What Does it Mean to Manufacturers, Producers and Importers?

The tax had a significant negative impact on medical device manufacturers, producers and importers since the tax was levied on gross sales and not net income. Many companies, including small and emerging companies, had to pay the tax even when they did not show a profit. According to the Congressional Research Service (CRS), most medical device companies weren’t able to bear the tax itself, as well as, the high compliance and administrative burden which left many companies with little or no cushion for Research and Development (R&D) type activities. It resulted in a decline of roughly 21,000 jobs and kept many companies on a hiring freeze. Many companies had a tax liability nearly double their R&D budgets. The companies also cut their compensation and employee raise budgets to cover the additional tax burden. Repeal of the medical device tax will help companies retain the earnings instead of paying it to the government which, in turn, will help them invest back into R&D activities to make the most reliable products. The repeal of this tax was a much-needed change for the medical technology and device industries.

Author: Hiten Patel, CPA | hpatel@withum.com

Tax Services

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