Section 5000D excise tax
The Department of the Treasury and IRS issued Notice 2023-52 on Aug. 4, 2023, implementing the rules related to the new section 5000D excise tax imposed on certain drug manufacturers and importers who do not participate in the Medicare prescription drug price negotiation program. This program, enacted as part of the Inflation Reduction Act of 2022, provides for the government to negotiate maximum fair prices (MFPs) for certain single source drugs covered under Medicare. putting forth initial guidance regarding the sale of designated drugs.
The term ’designated drug’ for the purpose of the section 5000D excise tax means any negotiation eligible drug (as defined in section 1192(d) of the Social Security Act (SSA)) included on the list published under the section 1192(a) of the SSA that is manufactured or produced in the United States or entered into the United States for consumption, use, or warehousing.
The notice sets forth safe harbor rules and indicates that forthcoming proposed regulations are intended to include :
- The scope of taxable sales under section 5000D
- Rules regarding the taxable sale price of the designated drug
- Procedural rules to assist the taxpayer in reporting and paying the tax
Treasury and the IRS intend to propose these regulations and until such proposed regulations or further guidance are issued, taxpayers may rely on the guidance described in section 3 of Notice 2023-52.
Excise tax guidance on sales of designated drugs
Section 5000D: An overview
The Inflation Reduction Act passed in 2022 requires the Secretary of Health and Human Services (HHS) to establish a Medicare prescription drug price negotiation program to negotiate maximum fair prices (MFPs) for certain single source drugs covered under Medicare. Per section 1193(a)(3) of the Social Security Act (SSA), manufacturers of designated drugs that decide to enter into agreements with the Secretary of HHS and agree to an MFP agree to provide access to those designated drugs at the negotiated prices to MFP-eligible individuals, pharmacies, hospitals, and physicians, as well as other service providers.
The Inflation Reduction Act also enacted section 5000D which imposes an excise tax on designated drugs sold by the manufacturers, producers, or importers (collectively manufacturers) of these drugs during a period of noncompliance. In general, the period of noncompliance for designated drugs is the period in which the manufacturer does not have an MFP drug pricing agreement as part of the Medicare Drug Price Negotiation Program under section 1193 of the SSA. The period of noncompliance begins after the deadline for the drug manufacturer to enter or renegotiate a Medicare drug pricing agreement or MFP for the designated drugs. The noncompliance period ends once an agreement is reached or when a generic version of the specific designated drug is made available.
The amount of tax levied on a manufacturer during a day that falls within the statutory period of noncompliance is the applicable percentage equal to the ratio of the tax divided by the sum of the tax and the price for which the designated drug is sold.
The applicable percentages are defined by section 5000D as:
- 65% for sales of a designated drug during the first 90 days of the statutory period
- 75% for sales of a designated drug during the 91st through 180th day of the statutory period
- 85% for sales of a designated drug during the 181st through 270th day in a statutory period
- 95% for sales of a designated drug for any subsequent day in a statutory period
Scope of taxable sales under section 5000D
The notice states that the forthcoming regulations will provide that the section 5000D excise tax will be imposed on taxpayer sales of designated drugs dispensed, furnished, or administered to individuals under the terms of Medicare. The notice also provides that the forthcoming regulations will put forth a method for taxpayers to properly calculate their section 5000D tax liability.
Taxable sale price of designated drugs
Notice 2023-52 includes a rule setting forth that the section 5000D excise tax is not part of the designated drug price when the tax is charged separately on the invoice or records pertaining to the sale of the designated drug by the manufacturer. Therefore, if a manufacturer calculates the section 5000D tax and charges the tax as a separate item on the invoice or records relating to the sale in addition to the stated sale price, the amount of the section 5000D tax charged does not become part of the price and no section 5000D tax is due on the amount of tax charged. If the manufacturer does not separate the section 5000D tax on the invoice or related records pertaining to the sale of the designated drug, it will be presumed by the IRS that the amount charged for the designated drug includes the correct amount of 5000D tax and the price of the designated drug. The notice provides an example to assist in illustrating the proposed regulations on calculating the taxable sale price of designated drugs.
The notice addresses the application of the excise tax and how it will apply to chapter 50A of the Excise Tax Procedural Regulations. Particularly the IRS and Treasury intend to propose that taxpayers would be required to report section 5000D tax liability on Form 720, Quarterly Federal Excise Tax Return, according to the form’s applicable instructions. The IRS intends to release a new form for taxpayers to calculate and report any section 5000D excise tax liability. This form would require taxpayers to attach and file the new form along with their Form 720. The IRS proposes the deadline for filing the quarterly returns on Form 720 to report section 5000D excise tax liability would be the last day of the first calendar month following the calendar quarter for which the return is made.
The notice specifies that taxpayers would not be required to make semimonthly deposits of section their 5000D tax liability and proposes that the deadline for any payments due would be the same as the filing deadline for Form 720. Therefore, Taxpayers with section 5000D tax liability would be required to pay the section 5000D tax when they file the Form 720 for the calendar quarter in which the liability occurred.
Washington National Tax Takeaways
The notice issued by the IRS offers clarification on the new section 5000D excise tax on sales of designated drugs added by the Inflation Reduction Act. Drug manufacturers, producers, or importers should carefully consider these new regulations to determine possible liability for the excise tax on sales of designated drugs. It is important to keep in mind that the excise tax is not deductible for purposes of federal income taxes per section 275(a)(6).
In addition, the Centers for Medicare and Medicaid Services has published more information and provides further detail on the Medicare Drug Price Negotiation Program and the next steps on the implementation of the program.
The IRS and Treasury intend to propose regulations provided in the notice; until such proposed regulations or further guidance are issued, taxpayers may rely on the guidance described in section 3 of Notice 2023-52.
For more information, please consult with your RSM tax advisor.