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Final IRS med device tax rules apply to some parts, refurbished equipment

by Brendon Nafziger, DOTmed News Associate Editor | December 06, 2012
The upcoming medical device tax will apply to some refurbished equipment and parts, the Internal Revenue Service said in the final rules released Wednesday, while medical imaging OEMs fret they have less than a month to get their books in order before the tax goes into effect.

The IRS said in its 58-page regulations that parts registered with the Food and Drug Administration as a device, and refurbished equipment whose reprocessing or refurbishment turns it into a new "taxable article", would generally both be subject to the 2.3 percent excise tax on device sales.

Replacement parts swapped out by manufacturers for devices under warranty would be subject to the tax for the amount of money, if any, paid for the new part, while parts for products not under warranty would usually fall under the tax if listed with the FDA as a device, the IRS said in the document.

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The tax starts Jan. 1, and companies will have to begin making semi-monthly payments to the taxman beginning Jan. 29, the Medical Imaging & Technology Alliance, an OEM lobby, said. This gives them less than 27 days from the release of the final rules to the tax effect date — a short window that has device companies nervous.

"Because the final rule has come out today, there's a heavy compliance burden on our member companies and the shortness of time between this final rule and when the tax goes into effect Jan. 1 is pretty burdensome," David Cooling, director of state and federal policy with MITA, told DOTmed News. "Companies have to determine what products are taxed, have to update their compliance software (and) have to train people on collecting the tax."

The IRS rejected many requests by manufacturers to change or modify the proposed rules, first floated in February. One was to scrap or alter semi-monthly payments because manufacturers and importers don't have much experience with excise taxes, as they generally pay quarterly corporate taxes, Cooling said.

Under the final rules, manufacturers would be responsible for semi-monthly payments. Cooling said that appears to mean payments made on the 15th and 29th of most months.

The rules do allow some leased equipment contracts to be grandfathered into the new tax regimen, however. Payments made to items leased or sold on installment prior to the passage of the Affordable Care Act on March 30, 2010, which instituted the tax, are apparently exempt from the tax unless the leasing contract has been modified. But equipment leased or installed after the ACA but before Jan. 1 will not be exempt, as was originally requested by manufacturers.

So ultimately what do the final rules mean for consumers, manufacturers and refurbishers? Cooling said his group is still analyzing the regulations and will be able to respond more fully later this week or early next.

"As you know it's complex so we want to make sure we get everything right," he said.

DOTmed News will provide an update when we get more clarity on the rules.

In the meantime, MITA and allied manufacturers lobbies such as AdvaMed continue to push for a repeal, or at least a delay, of the tax ahead of its implementation next month.

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