United States

IRS provides temporary relief for medical device tax deposits

TAX ALERT  | 

On Jan. 17, 2018, the IRS issued Notice 2018-10, providing temporary relief to medical device manufacturers who are required to make deposits for the medical device excise tax under section 4191.

Section 4191 imposes a 2.3 percent excise tax on the sale of medical devices by their manufacturer. Previously, there was a moratorium on the medical device excise tax and no taxes were due for sales that occurred between Jan. 1, 2016 and Dec. 31, 2017. This moratorium expired, making manufacturer’s sales of certain medical devices taxable beginning Jan. 1, 2018.

Taxpayers with a medical device excise tax liability are required to make semimonthly tax deposits on a Form 720, “Quarterly Federal Excise Tax Return.” The deposit amount cannot be less than 95 percent of net liability incurred during the semimonthly period unless the taxpayer meets a safe harbor. The safe harbor under Treas. Reg. section 40.6302(c)-1(b)(2)(ii) provides that any person who filed a Form 720 for the second preceding calendar quarter (the look-back quarter) is considered to have met the semimonthly deposit requirement for the current quarter if:

  • the deposit for each semimonthly period in the current calendar quarter is at least 1/6 of the net tax liability reported for the look-back quarter;
  • all deposits are made on time;
  • any underpayment is paid by the due date of the return; and
  • the liability does not include a tax that was not imposed during the look-back quarter.

A taxpayer that fails to make a timely deposit of the medical device excise tax is subject to a failure to deposit penalty under section 6656. Such penalties may be avoided if the taxpayer can demonstrate that the failure is due to reasonable cause and not willful neglect.

With the moratorium on the medical device excise tax ending for sales after Dec. 31, 2017, taxpayers are required to resume making semimonthly deposits of the tax. The first deposit, for the first 15 days of January, is due Jan. 29, 2018. The IRS issued Notice 2018-10 in “consideration of the short time frame between the end of the moratorium period and the due date of the first deposit and in the interest of sound tax administration.” The temporary relief suspends the failure to deposit penalty of section 6656 for the first three calendar quarters of 2018 for a taxpayer who failed to make timely deposits if the taxpayer demonstrates a good faith attempt to comply with the requirements and that the failure was not due to willful neglect. After the temporary relief period, the normal rules under section 6656 will apply.

Although this notice does provide temporary relief from the failure to deposit penalty, taxpayers must demonstrate that they attempted to comply with the deposit requirement. Taxpayers who manufacture medical devices should consult with their tax advisors to determine if they are liable for excise tax and how to comply with the deposit requirement in a timely fashion.

In another related development, House leaders have introduced a continuing resolution (H.J. Res. 125) to keep the government operating through Feb. 16. Included in the continuing resolution is a provision that would delay the medical device excise tax by an additional two years, retroactive to Jan. 1, 2018. If the continuing resolution becomes law, then the penalty relief would become a moot point.

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