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Medical Device Excise Tax: Achieving Compliance with Confidence

Complying with indirect taxes is a legal mandate that is not core to a business, yet the operational outlay is great. On January 1, 2013, indirect tax compliance for medical device manufactures will get even more complicated, burdensome and expensive.

Passed as part of the Affordable Care Act (ACA), the Medical Device Excise Tax (MDET) will require that manufacturers of medical devices pay a 2.3% excise tax on certain medical devices. Although the tax will apply primarily to manufacturers and importers of medical devices, the tax is expected to impact the entire healthcare industry and ultimately consumers.

For businesses affected by the new medical devices tax, achieving compliance will require considerable effort and expense. For example, the penalty for failure to register by January 1, 2013 starts at $10,000, with a $1,000 penalty per day of noncompliance. Obviously, companies that fail to comply in a timely manner risk penalties, interest charges, additional transaction processing time and reconciliation costs, but beyond the tax implications alone, manufacturers need to be mindful of the overall operational impact that this new tax will have on their business.

While it is possible that the bill will be repealed, many manufacturers are taking a proactive approach and putting a sound plan in place that includes centralized technology, tax domain expertise and best practices so that whatever the government decides, they are in the best position to meet the implementation deadline. This article will explore the details of the new tax, and what you can do to ensure that you are able to achieve compliance with confidence in light of the rapidly evolving market environment.

Understanding the New Tax
The new excise tax on medical devices relies heavily on the definition of medical devices provided by Section 201(h) of the Federal Food, Drug, & Cosmetic Act to determine taxability. Generally speaking, the tax will apply to devices that are intended for human use and will include instruments, equipment and research-use-only devices, with three major categories of exemptions:

• Retail exemption or devices sold in retail for use by the general public such as eyeglasses, contact lenses and hearing aids.
• Devices to be further manufactured.
• Devices intended for export outside the U.S.

At first glance, it seems that this is just another tax that should not impact the bottom line of the medical manufacturer, but rather like any other tax that is passed on to the consumer. However, the new tax has the potential to impact manufacturers’ pricing, salaries and, ultimately, profits due to:

• Eroding profit margins for those U.S. manufacturers and/or importers who owe the tax and will absorb the added cost, as they choose not to pass it on to their customer (distributor or practitioner).
• Competitive market disadvantage for those who do not absorb the tax costs and pass it on to their customers. This is typical of many smaller manufacturers that don’t have the capital or the margins to absorb the cost.
• Costs associated with process changes from implementing pricing mechanisms and/or adjustments within operational systems.
• Compliance costs, which include both tangible new labor and technology resources to assist with compliance (filing and audits), as well as supporting potentially exempt customers and necessary documentation to support such sales.
• Cash flow management and the intangible costs associated with business processes inefficiencies, while adjusting to the new law and support of on-going maintenance and external audits.

As a result of this tax, businesses need to consider the overall operational impact on their business and set new strategies for key business functions. From process changes for implementing the pricing mechanism within their order-to-cash, procure-to-pay or inventory management systems and processes, to pricing strategies for adjusting to market receptivity of tax costs passed on to customers for those who pass the costs to their customers, to profit margin strategies for adjusting to manufacturing costs and selling costs for those who decided to absorb the cost without passing it on to their customers, the operational implications of the excise tax are far reaching and require significant planning.

4 COMMENTS

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P. Brown

11/06/2012 09:52 PM
So a decent article; however fundamentally incorrect to state that firms are required to register and "penalty for failure to register by January 1, 2013 starts at $10,000, with a $1,000 penalty per day of noncompliance". In fact, requirements to register are only to compy with exemption from the tax if the manufacturer passes on the product to another final manufacturer or will sell the devices outside the United States.

Excerpt from the Regs:
(edited by BONEZONE webmaster due to length) --- Please see http://www.irs.gov/uac/Medical-Device-Excise-Tax:-Frequently-Asked-Questions
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