Understanding the Medical Device Excise Tax (updated for 2020)
On December 20, 2019, Congress passed and signed the Further Consolidated Appropriations Act, 2020 (HR 1865), which includes a full repeal of the 2.3% federal excise tax on medical devices.
Defining the Medical Device Excise Tax
The Medical Device Excise Tax (hereafter, medical device tax) went into effect in January 2013, despite persistent efforts to repeal it during heated federal budget negotiations. The medical device tax represents a significant change to the tax requirements facing U.S. medical device manufacturers, distributors, and importers. When taken in combination with already complicated sales and use tax rules and requirements, the burden of tax compliance is now considerably greater for many companies.
The medical device tax is not as easy to understand as one might think. And for many companies, it likely represents big changes to accounting and financial management processes.
This Q&A gives an overview of the medical device tax, highlighting which devices are taxable and which are not, and explains what you need to consider as you comply with this new tax. As noted above, the Medical Device Excise Tax was repealed with the signing of the Further Consolidated Appropriations Act, 2020 (HR 1865) on December 20, 2019.
1. What is the Medical Device Excise Tax?
The medical device tax is a 2.3% excise tax on sales of specific medical devices, generally not sold for individual use, and is paid and remitted by importers, manufacturers, and distributors of medical devices. The medical device tax is a funding source for the Health Care and Education Reconciliation Act of 2010.
The tax went into effect January 1, 2013 and was repealed on December 20, 2019.
2. Which medical devices are taxable under the law?
In order to be considered taxable, the medical device must be listed with the Food and Drug Administration, as part of the Federal Food, Drug, and Cosmetic Act. Additionally, the device must be:
- Recognized in the official National Formulary, or the United States Pharmacopeia, or any supplement to them;
- Intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment, or prevention of disease in man or other animals; or
- Intended to affect the structure or any function of the body of man or other animals.
Examples of devices that are generally taxable under the new law include but are not limited to:
- MRI machines
- Infusion pumps
- Hospital beds
- Surgical equipment
3. Which medical devices are NOT taxable under the law?
The tax does not apply to items sold at retail for individual use or devices sold for export or those intended for further manufacture. Additionally, these include over-the-counter diagnostics, durable medical equipment, and supplies payable under Medicare Part B rules, and include but are not limited to:
- Contact lenses
- Hearing aids
- Over-the-counter pregnancy tests and other home use lab tests
4. Who pays the tax and how do they report it?
The medical device excise tax applies to manufacturers and importers and generally does not apply to individual consumers. If the manufacturer or importer meets certain registration and other requirements, a further exemption may be granted.
Beginning in 2013, the importer or manufacturer reported on the tax for every quarter of 2013. The first full reporting year will be 2014. In most cases, the tax must be remitted and reported using IRS Form 720 which is used to report liability and remit excise tax owed to the IRS.
5. What can your business do to comply with the medical device tax?
Medical device tax regulations do not need to be a burden on your business, as there are affordable end-to-end sales tax solutions available that simplify compliance. Avalara, offers cloud-based sales tax solutions, including calculation, filing, and exemption certificate management that seamlessly integrates within your solutions.
Avalara AvaTax allows your company to calculate medical device excise taxes and generates a report to file the appropriate federal IRS tax forms, based on product codes entered. It also calculates and reports medical device excise tax using specific entity/use codes, which helps:
- Estimate tax liability
- Evaluate any exceptions or expected business changes impacting the tax
- Configure financial systems to enable accurate and timely compliance
For more information about how the medical device excise tax potentially affects your business, visit the IRS Medical Device Excise Tax frequently asked questions page and consult with a tax professional.