United States

The new medical device excise tax: Part 1

The final regulations


Addressing the final medical device tax regulations, this article represents the first in a three-part series focused on the medical device tax. Part 2 in the series will address interim guidance published in Notice 2012-77, and Part 3 will address export sales, registration requirements, and exemptions for devices used in further manufacture.

On Dec. 5, 2012, the IRS and Treasury Department issued final regulations to provide taxpayers with further guidance regarding the 2.3 percent medical device excise tax (MDET) established as part of the Health Care and Education Reconciliation Act of 2010 in conjunction with the Patient Protection and Affordable Care Act, which are collectively known as the Affordable Care Act (ACA). After Dec. 31, 2012, the tax will be imposed on manufacturers and importers with respect to the sale of many medical devices. The final regulations provide clarification regarding the types of devices that are subject to the tax, as well as the types of devices and transactions that are exempt from the tax.

On Aug. 28, 2012, RSM released an article providing guidance regarding the proposed regulations that preceded the final regulations. While the preamble to the final regulations indicates that many suggestions were received from practitioners, the final regulations leave intact many of the provisions contained in the proposed regulations. The final regulations did provide important clarification in several areas. This article summarizes the final regulations and highlights provisions where the proposed and final regulations differ.

Definition of "taxable medical device"

The final regulations adopt the definition of taxable medical device contained in the proposed regulations. Generally, any device that is intended for humans and required to be listed as a device with the Food and Drug Administration (FDA) under section 510(j) of the Federal Food, Drug, and Cosmetic Act (FFDCA) is considered a taxable medical device. The preamble to the final regulations clarifies that certain devices not used in the direct treatment, diagnosis or monitoring of a patient, including sterilization process indicators, software, and containers used to hold or transport medical products and specimens, are nonetheless taxable medical devices because they are required to be listed as devices under section 510(j) of the FFDCA.

Software upgrades

The final regulations apply the section 510(j) filing standard to software and software upgrades. Software and software upgrades will be considered taxable medical devices if they are required to be separately listed with the FDA under section 510(j) of the FFDCA. If not required to be separately listed, these items will not be considered taxable medical devices.

The retail exemption

The final regulations retain the facts and circumstances approach set forth in the proposed regulations to determine whether a particular device falls within the retail exception. This approach requires a balancing of several factors, and no one factor is determinative of a device’s status. If on balance more factors point to the device falling within the retail exception, then it should qualify under the retail exemption. Unless otherwise indicated, the factors stated below remain the same as those in the proposed regulations.

  • Positive factors–regularly available for purchase and use by individual consumers
    • Whether consumers who are not medical professionals can purchase the device through retail businesses such as drug stores, supermarkets or medical supply stores–this factor is expanded to include purchases over the internet or over the telephone, as well as medical device retailers such as specialty medical stores and durable medical equipment prosthetics, orthotics and supplies (DMEPOS) suppliers
    • Whether consumers who are not medical professionals can use the device safely and effectively for its intended medical purpose with minimal or no training from a medical professional
    • Whether the device is classified by the FDA under Subpart D of 21 CFR part 890 (Physical Medical Devices)
  • Negative factors–primarily for use in a medical institution or office by a medical professional
    • Whether the device generally must be implanted, inserted, operated or otherwise administered by a medical professional
    • Whether the cost to acquire, maintain or use the device requires a large initial investment or ongoing expenditure that is not affordable to the average consumer
    • Whether the device is a Class III device under the FDA classification system
    • Whether the device is classified by the FDA as a:
      • Clinical chemistry and clinical toxicology device
      • Hematology and pathology device
      • Immunology and microbiology device
      • Anesthesiology device
      • Cardiovascular device
      • Ear, nose and throat device
      • Gastroenterology–urology device
      • General and plastic surgery device
      • Neurological device
      • Ophthalmic device
      • Orthopedic device
      • Radiology device
      • Dental device
      • Obstetrical and gynecological device
      • Physical medicine device
    • Whether the device qualifies as durable medical equipment, prosthetics, orthotics and supplies for which payment is available exclusively on a rental basis under Medicare Part B payment rules and is an item requiring frequent and substantial servicing

Safe harbor

Several devices qualify under a safe harbor and are considered a type generally purchased by the general public at retail for individual use, including:

  • Devices listed in the FDA IVD Home Use Lab Tests database
  • Over the counter (OTC) devices as described in the relevant FDA classification regulation heading, product code name, device classification name or classification name field
  • Durable medical equipment, prosthetics, orthotics and supplies for which payment is available on a purchase basis under Medicare Part B payment rules and that are:
    • Prosthetic or orthotic devices that do not require implantation or insertion by a medical professional (without regard to whether they require initial or periodic fitting or adjustment)
    • Customized items as defined in FDA regulations
    • Therapeutic shoes
    • Supplies for effective use of durable medical equipment

These safe harbor provisions include some components of prosthetic or orthotic devices. The IRS and Treasury requested further public comments to identify specific examples of components used as component parts of a device that is exempt under the safe harbor.


The final regulations provide 15 examples of specific devices and the facts and circumstances considered in determining whether a device falls within the retail exemption.

Device Qualifies for retail exemption Does not qualify for retail exemption
1. Non-sterile absorbent tipped applicators

2. Adhesive bandages

3. Snake-bite suction

4. Denture adhesives

5. Mobile X-ray systems/td>  

6. Pregnancy test kits

7. Blood glucose monitors

8. Single axis endoskeletal knee shin systems and prosthetic legs

9. Mechanical and powered wheelchairs

10. Portable oxygen concentrators

11. Urinary ileostomy bags

12. Nonabsorbable silk sutures  

13. Nuclear magnetic resonance imaging (NMRI) systems  

14. Therapeutic, AC-powered adjustable home use beds

15. Powered flotation therapy beds  


Dental devices

There is no specific rule governing whether individually customized dental devices such as bridges, crowns and braces qualify for the retail exemption. The overall facts and circumstances must be evaluated to determine whether a customized dental device qualifies for the retail exemption.


The broader manufacturer’s excise tax rules also impose tax on certain uses of a product by the product’s manufacturer. In general, if the manufacturer of a product uses the product for any purpose other than in the manufacture of another taxable product, the manufacturer is liable for tax on the product as if the manufacturer had sold it. It is not clear how this taxable use rule applies in the context of products and devices used for certain activities that are common in the medical device industry, including:

  • Demonstration products used for health care professionals and product awareness
  • Evaluation products provided to help health care professionals determine whether and when to use, order, purchase or recommend a device
  • Loaned devices to facilitate procedures utilizing a sold taxable medical device, such as instruments specifically designed to implant a particular orthopedic joint
  • Testing and development products
  • Product donations and charitable contributions

The preamble to the final regulations clarifies that if a manufacturer uses a taxable article in the testing of another article of its own manufacture, the use of the taxable article is not a taxable use.

Software sold together with services

When a combination of software and services is sold by a manufacturer as a unit, it is possible that the software and service bundle will not be listed with the FDA under section 510(j) (i.e., the entire bundle is not a taxable medical device). In such cases, the MDET attaches only to the sale of the devices (including software) within the bundle that are listed with the FDA under section 510(j) of the FFDCA.

Refurbished and remanufactured medical devices

The final regulations provide that refurbishing and remanufacturing constitutes manufacture subject to the MDET if the manufacturing or refurbishing process produces a new and different taxable article. Whether a new and different taxable article is produced is a facts and circumstances determination. The preamble cited five revenue rulings that dealt with other manufactured articles and illustrated different circumstances that could result in the production of a new and different taxable article. Generally, the more refurbishing and remanufacturing work performed on a product, the more likely the product will be considered a new and different article. Examples from the rulings appear below.

  • An unusable truck chassis underwent such substantial restoration that the process constituted the manufacture of a new chassis, which was subject to tax
  • Fabricating 45-foot trailers from used 40-foot trailers constituted the manufacture of a new and different article subject to tax
  • Overhauling a truck tractor with a glider kit constituted an act of manufacturing subject to tax
  • A gunsmith buying surplus military firearms and extensively restoring them resulted in new and different articles subject to tax
  • A gunsmith installing a sight on a completely new or used firearm did not constitute further manufacture and was therefore not subject to tax

Replacement parts

The final regulations provide that if a taxable article is returned under warranty to a manufacturer and the manufacturer replaces a part for free or at a reduced price, the tax on the replacement part is computed based on the actual amount paid to the manufacturer for the replacement part. For articles not under warranty, if a replacement part is required to be listed with the FDA under section 510(j) of the FFDCA, it will be considered a taxable medical device subject to tax.

No consolidated filing of Forms 720 or 637

Each business unit with a medical device tax liability must register using Form 637 and file quarterly excise tax returns (Forms 720) reflecting medical device excise tax due. Unlike with a consolidated income tax return, there is no option for an affiliated group of corporations to file a consolidated quarterly excise tax return (Form 720) or registration form (Form 637) in lieu of filing separate returns. For excise tax purposes, each business unit with a separate employer identification number stands on its own and must file a separate Form 637 to register and separate Forms 720 (including disregarded entities).

Interim guidance

The IRS and Treasury believe several issues that were not addressed in the final regulations need to undergo further study. Interim guidance regarding these issues was released in the form of Notice 2012-77. These issues include:

  • Constructive sale price
  • Sale to a hospital or doctor’s office treated as a sale at retail for purposes of determining price
  • Software licenses treated as leases
  • Donations of taxable medical devices to charitable organizations
  • Treatment of convenience kits
  • Deposit penalty relief

The interim guidance regarding these issues will be addressed in part 2 of this three-part article series.


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