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While it is possible that the bill will be repealed, many manufacturers are taking a proactive approach and putting a sound plan in place that includes centralized technology, tax domain expertise and best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.

The Best Defense is a Good Offense

As the adage goes, the best defense is a good offense. Progressive companies that heed this advice and take the necessary steps to achieve compliance with confidence will have a leg up on their competition. To establish a world-class defense able to best cope with the new excise tax, progressive medical device manufacturers should have:

1. Centralized technology that effectively automates the tax compliance process for efficiency should integrate with a company’s finance and accounting applications for sales, purchasing, payment processing and resource planning. For example, acting as a central hub for consolidating transaction data, the ONESOURCE Indirect Tax global software suite is designed to identify, measure, calculate and record the tax and pass the associated tax liability back to a company’s finance applications for booking of the liability in real-time. In addition, domain experts can set tax rules and establish corporate tax policies and best practices within the software, which is automatically disseminated across the company from a single source. The result is improved accuracy and reduced workload, providing the company with higher degrees of compliance at a lower cost. But automation alone isn’t enough, especially if you automate errors.

2. Tax domain experts that provide the multi-disciplinary expertise in tax law, tax policy, research and auditing in regards to MDET and to ensure the highest level of service to their business. Smaller organizations especially may lack qualified tax professionals experienced in all the processes required to achieve and maintain the highest degree of compliance and often choose to outsource this function entirely. Whatever approach a company takes, whether in-house, outsource or a hybrid model, they must build a team of tax domain experts that can help navigate through changes or growth.

3. Best practices/processes to ensure that their company achieves streamlined compliance across the complete tax lifecycle — from tax determination to return preparation to rapid reconciliation and preparation of audit reports. As compliance requirements change, these changes are automatically rolled into core processes to ensure continued compliance with confidence.

There is no question that the new MDET is going to create cost, complexity and risk, but planning ahead of time and implementing a strategy that consists of technology, tax experts and best practices can minimize the risks, and will be critical to a rapid and successful MDET compliance function.

David Emmons, CPA, CMI, is a senior tax consultant for ONESOURCE Indirect Tax, Thomson Reuters, where he leverages his 22 years of indirect tax experience to identify customer business and tax functional requirements and deliver global indirect tax solutions that meet those requirements. Prior to Thomson Reuters, David was a senior level auditor with the State of Florida and at a Big 4 Firm’s SALT group. David can be reached 1-888-885-0206 Extension #1 or This email address is being protected from spambots. You need JavaScript enabled to view it.

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