Starting January 1, 2013, the 2.3% excise tax on medical devices in the U.S. will come into effect. The tax, which was imposed as part of the Affordable Care Act (ACA), will effect the medical device industry in numerous ways. With four months left to prepare for this industry game-changer, here are five things medical device companies need to understand:
1. Which Devices Will Be Taxed?
The priority for medical device companies is to determine if a product is subject to this new excise tax, either through manufacture and sale or import. The definition of medical devices provided by Section 201 of the Federal Food, Drug & Cosmetic Act determines which devices are taxable. This definition states that devices intended for human use including dental instruments, dental equipment and research-use-only devices will be taxed with the exception of the three categories of exemptions that follow:
- Devices to be further manufactured.
- Devices manufactured that are ultimately destined for export outside theUnited States.
- Devices intended to be sold at retail for use by the general public (referred to as the “retail exemption”).
Devices that fall under the retail exemption include products such as eyeglasses, hearing aids, certain bandages, pregnancy test kits, and denture adhesives. It is advisable for businesses to budget and plan for this new cost, regardless of the chance that the device may be subject to exemption.
2. How Much Will It Cost?
So, just how will each unit sold be taxed? Below are two things to consider when preparing for how much tax you will owe:
- Discounts, rebates and other price-differing initiatives of that nature will not be considered when the tax amount is calculated. For example, a medical device that is priced at $1800 with a $200 rebate will still be taxed on the full $1800.
- Other overhead costs that will be subject to taxation include additional warranties, packaging and shipping.
3. How Should You Price Your Product?
When adapting a new pricing strategy with regards to the excise tax, here are some things to keep in mind:
- The medical device tax will come into effect at the point of sale from the manufacturer to the distributor, where distributors will be taxed on their gross profit. This additional cost will be 2.3% of the selling price, regardless of whether the excise tax can be passed on to the distributor.
- Businesses will have to pay tax on existing inventory on December 31, 2012, as it will be sold in 2013 when the tax is in effect. This has been an oversight by many medical device companies in their current pricing model.
- The sale of a business will also be subject to the tax. Regardless of whether assets or stock is sold, all inventory transferred in a sale will be taxed.
4. Are You Going To Encounter Any Problems With Compliance?
Ways to evade any problems once the tax is implemented:
- Be sure to register: Companies that are exempt from the excise tax will still be responsible for registering with the IRS. Fines for failing to do so begin at $10,000, and increase at a rate of $1,000 per day.
- Document transactions: Make sure to obtain a copy of the purchaser’s registration number, certification of exceptions, and proof of resale within six months of the date of sale. Sales leading to further export will also need a registration number, proof of export and an exemption statement from the purchaser. Finally, companies will need to adapt accounting to track and remit the tax.
5 . When Should You Start Preparing?
Now. The 2.3% tax is set to come into effect in four months. Now is the time to reevaluate a variety of different aspects of your business, such as pricing and most importantly market research. To ensure a successful transition into the excise tax, it is important to know where your industry is headed and the opportunities that lie ahead. Let us provide you with the resources to make the best decisions for your company.
For any comments or questions you may have, please contact us at [email protected]. We’re here to help.