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December 7, 2012

DEVICE CLASSIFICATION-FINAL RULE: IRS finalizes medical device excise tax regulations

By Michelle L. Oxman, JD, LLM

The Internal Revenue Service (IRS) has finalized the regulations governing the excise tax on medical devices established by section 6002 of the Patient Protection and Affordable le Care Act (PPACA) (P.L. 111-148), as modified by the Health Care and Education Reconciliation Act (HCERA) (P.L. 111-152) (Final rule, 77 FR72924, December 7, 2012). The tax applies to sales of devices on or after January 1, 2013.

Affected devices. Manufacturers must pay the 2.3 percent tax on sales or leases of "taxable devices," that is, devices as defined in Food, Drug and Cosmetic Act (FD&C Act) sec. 201(h) that are intended for human use and listed with the FDA pursuant to FDC Act sec. 510(j) and 21 CFR Part 807. However, the regulation exempts the following: (1) contact lenses, eyeglasses, and hearing aids; and (2) "retail" items commonly bought by the general public for individual use outside of a medical professional setting.

Whether the retail exemption applies to a particular item depends on a balance of factors. Exempt items are most likely (1) available for retail purchase by people who are not medical professionals; (2) used safely and effectively by nonprofessionals with little or no training; (3) usually affordable without a large or ongoing investment or frequent and substantial servicing; and (4) classification under Subpart D of 21 CFR Part 890. The regulations also describe the characteristics of devices intended for use by medical professionals and provide many examples of each.

Affected transactions. Items purchased by installments or leased between March 30, 2010, the date HCERA was enacted, and January 1, 2013, are subject to the tax. Transitional rules apply to leases or purchases that began before March 30, 2010.

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