United States

IRS guidance regarding the medical device excise tax: Part 3

Exemptions for export sales


This article represents the third in a three-part series of articles focused on the medical device excise tax (MDET), a new 2.3 percent tax imposed on the sale of taxable medical devices. Part 1, The new medical device excise tax - Part 1: The final regulations, summarized the final regulations, which detail the parameters under which the new tax will be imposed. Part 2, IRS guidance regarding the medical device excise tax - Part 2: Notice 2012-77, addressed interim guidance published in Notice 2012-77 dealing with constructive sale price, convenience kits and other matters. Part 3 addresses exemptions for export sales and sales for use in further manufacture and also addresses registration and filing requirements.

Manufacturers excise taxes in general

Chapter 32 of Subtitle D of the Internal Revenue Code imposes excise taxes on the sale of certain products by manufacturers, producers or importers. Absent a specific exemption, excise taxes are imposed on:

  • Gas-guzzler automobiles
  • Tires
  • Petroleum products
  • Coal
  • Vaccines
  • Sport fishing equipment
  • Bows and arrows
  • Firearms
  • Taxable medical devices

The term “manufacturer” means any business that produces a taxable article from new or raw material, or from scrap, salvage or junk material, by processing, manipulating or changing the form of an article, or by combining or assembling two or more articles. In a contract manufacturing arrangement, in which one party manufactures a product from materials furnished by another party with the other party retaining title to the product at all times, determining which party is the “manufacturer” of the product for excise tax purposes depends on the unique facts and circumstances of each case. While the Code and regulations are largely silent regarding this issue, Polaroid vs. U.S. and Revenue Rulings 58-134, 60-42 and 78-34 provide guidance. In general, several factors must be evaluated to determine the manufacturer for excise tax purposes. The party that hires the contract manufacturer will be deemed the manufacturer if the following factors weigh in the hiring party’s favor:

  • It owns the patent for the article or the intellectual property
  • It controls or specifies the manufacturing process
  • The contract manufacturer is not permitted to sell the article to anyone else

Exemptions applicable to medical devices

Section 4221 sets forth six types of transactions exempt from the excise tax. Medical devices are eligible for only two of these exemptions:

  1. Sales for use by the purchaser for further manufacture, or for resale by the purchaser to a second purchaser for use by such second purchaser in further manufacture
  2. Sales for export, or for resale by the purchaser to a second purchaser for export

Sales for further manufacture - Under section 48.4221-2(a), a manufacturer will not be liable for the MDET if it sells an article that will be used by the purchaser in further manufacture, or if the purchaser resells the article to a second purchaser that will use the article for further manufacture. An article will be treated as sold for use in further manufacture if sold for use by the buyer as material in the manufacture or production of, or as a component part of, another article subject to excise taxes by incorporating that article in, or making it a part or accessory of, the other article when the other article is sold by the manufacturer. In addition, an article is considered used as material in the manufacture of another article if consumed in whole or in part in testing such other article. However, an article consumed in the manufacturing process other than in testing, so that it is not a physical part of the manufactured article, is not treated as subject to further manufacture.

In the medical device industry, manufacturers, distributors or end users often assemble convenience kits that consist of two or more separate devices, or a combination of devices and other items packaged together, for the convenience of the end user. As noted in Part 2 of this series, until further guidance is issued, the interim rule contained in Notice 2012-77 provides that the IRS will impose the MDET on the manufacturer of the medical device and not on the subsequent assembly and sale of a convenience kit.

Sales for export - The MDET is not imposed on articles sold for export or for resale by the purchaser to a second purchaser for export, as long as the article is exported before any other use. An article may be sold tax-free by the manufacturer only if the party to which the manufacturer sells the article intends to either export the article or resell it to a party that intends to export it.

Exemption requirements

To qualify for the above-noted exemptions from the MDET, several requirements must be met:

1.    Registration: In order to claim an exemption from the MDET, the manufacturer, first purchaser, and second purchaser (in the case of resales) must apply for excise tax registration using Form 637, Application for Registration (For Certain Excise Tax Activities). The form has been updated to add (a) to Activity A, medical device manufacturers; (b) to Activity B, buyers of taxable medical devices for further manufacture or for resale to a second buyer for further manufacture; and (c) to Activity D, buyers of taxable medical devices operating in the U.S. that intend to export or resell to a second buyer for export. If the purchaser is required to register, it must give the manufacturer its registration number as well as a certification of the exempt purpose for which the article will be used.

2.    Export sales: In the case of sales or resales to a foreign purchaser for export, where the first purchaser or second purchaser is located in a foreign country or possession of the U.S., the purchaser is not required to register with the IRS. To establish the right to sell articles tax-free to unregistered foreign purchasers, the manufacturer must obtain from the purchaser at the time title to the article passes or at the time of shipment, whichever is earlier, either:

  • A written order or contract of sale showing the manufacturer is to ship the article to a foreign destination.
  • Where delivery by the manufacturer is to be made in the U.S., a statement from the purchaser showing:
    • That the article is purchased either to fill existing or future orders for delivery to a foreign destination or for resale to another party engaged in the business of exporting that will export the article
    • That such article will be transported to its foreign destination in due course prior to use or further manufacture and prior to any resale except for export

3.    Export documentation requirements: The exemption for export sales will cease unless the manufacturer receives proof of exportation within six months of the date of sale or shipment by the manufacturer. Suitable proof of exportation includes:

  • A copy of the export bill of lading issued by the delivering carrier.
  • A certificate by the agent or representative of the export carrier showing actual exportation of the article.
  • A certificate of landing signed by a customs official of the foreign country to which the article is exported.
  • Where the foreign country has no customs administration, a statement of the foreign consignee showing receipt of the article.
  • Where a department or agency of the U.S. government is unable to furnish any one of the foregoing four types of proof of exportation, a statement or certification on the department or agency stationery, executed by an authorized officer, that the listed or identified articles have in fact been exported.
  • In any case where the manufacturer is not the exporter, the manufacturer must have in its possession a statement from the vendee to which the manufacturer sold the article providing that the article was in fact exported in due course by the vendee or was sold to another party that in due course exported the article. The statement must list what evidence is available to establish that the article was in fact exported in due course prior to use or further manufacture and prior to resale in the U.S., other than for export. Such evidence must be that described in section 4221(d)(1), and the statement must show where such evidence is readily available for inspection by government officers. The form for this statement is provided in Reg. section 48.4221-3(d)(2).

4.    Sale of item to purchaser that uses the item in further manufacture: The manufacturer must inform the purchaser that the articles normally would be subject to excise tax and are being sold tax-free for an exempt purpose because the purchaser has provided the required certificate. The manufacturer must obtain a certification by the purchaser that the article will be used in further manufacture.

5.    Sale of item to purchaser that resells the item to a second purchaser for use by the second purchaser in further manufacture: The exemption will cease to exist unless the manufacturer receives proof that an article has been resold for use in further manufacturer within six months of the date of sale or shipment by the manufacturer. Suitable proof of resale includes a copy of the invoice of the manufacturer’s vendee directed to its purchaser that discloses the certificate of registry number held by each party. It must appear from such invoice that the article was in fact resold for use in further manufacture. In lieu of such an invoice, proof of resale may consist of a statement, executed and signed by the manufacturer’s vendee. The form for this statement is provided in Reg. section 48.4221-2(c)(2).

Because of the complexity of these rules and the possibility of different interpretations, it is important for manufacturers and their customers to discuss and agree on which exemptions apply and which party is responsible for reporting and paying the tax.


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