United States

Medical devices provided free of charge for temporary use are taxable

IRS memo advises that temporary provision of devices are leases


The IRS recently issued a memorandum addressing the taxability of medical device instruments that are temporarily provided to purchasers of taxable medical devices free of charge, for use in the implantation of the taxable device. The Program Manager Technical Assistance (PMTA 2016-14) memorandum found that the temporary provision of such an instrument is taxable as a lease of a medical device and a portion of the sales price for the taxable medical device should be considered to be a lease payment for the medical device instrument even though it is not separately stated.

The memorandum, which may not be used or cited as precedent, offers advice on the following specific set of facts at issue. A manufacturer who manufactures taxable medical devices under section 4191 also manufactures surgical instruments, which are also defined as taxable medical devices under section 4191. The surgical instruments are necessary to implant the medical devices but have no other medical uses and, in fact, are not sold in the ordinary course of the manufacturer’s trade. The manufacturer sells its medical devices to hospitals and surgical facilities, providing them with the temporary use of the surgical instrument for implanting the medical devices. The purchasers have exclusive possession and use of the surgical instrument for a period of time, however, title to the instrument remains with the manufacturer. The invoice for the medical device does not include a separate charge for the use of the surgical instrument, nor is a separate invoice provided for use of the instrument.

Under section 4191, manufacturers, producers or importers of medical devices must pay an excise tax on the sale of the devices equal to 2.3 percent of its sales price. Section 4216(c) requires manufactures to pay excise taxes, at the current excise tax rate, on any lease payments received for their taxable articles. Under section 4217(a), the lease of a taxable article by a manufacturer, producer or importer, is considered a sale of that item for purposes of determining the excise tax. Thus, the memorandum aims to answer whether the temporary provision of the surgical instruments, at no charge, is a lease under sections 4216 and 4217, and as such, is taxable.

Reg. section 48.4217-1 defines a lease as a contract or agreement, “which gives the lessee an exclusive, continuous right to the possession or use of a particular article for a period of time. The term includes any renewal or extension of a lease or any subsequent lease of the article.” Reg. section 48.4216(c)-1(a) provides that a tax is due on each lease payment made, except as provided by section 4217(b) and Reg. section 48.4217-2, and upon a subsequent sale of the item without regard to any tax paid during the lease.

The exception provided under section 4217(b) provides for a limitation on the amount of tax that applies to a lease but only applies if the item being leased is also sold by the manufacture at arm’s-length in the ordinary course of business at the time the lease is made. Otherwise, tax is computed and paid as described above.


The memorandum articulates that the facts, as described above, constitute a lease because the manufacturer is providing the medical device purchasers with the exclusive right to possess and use the surgical instrument for a period of time before it is returned to the manufacturer. The surgical instrument is provided to the device purchasers as part of the consideration for the device’s purchase price, therefore, a portion of the device’s purchase price is attributable to the purchaser’s possession of the surgical instrument. This portion of the sales price is considered a lease payment and is taxable at the rate the payment is due pursuant to section 4216(c) and Reg. section 48.4216(c)-1(a). The limitation provided under section 4217(b) does not apply to the facts at issue as the manufacturer is not in the business of selling the surgical instrument.

Although there is a current moratorium on the medical device excise tax for 2016 and 2017, taxpayers that manufacture, produce or import medical devices should be aware of the rules that effect the taxability of their products and review activity in 2013 through 2015 to identify and manage any exposure related to similar fact patterns. Manufacturers should consult their excise tax specialist to see what laws effect this taxability.


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