IRS issues proposed regulations on 5000D excise tax

Executive summary: Section 5000D excise tax proposed regulations

On Sept. 27, 2023, the Department of the Treasury and IRS issued proposed regulations, REG-15559-23. These regulations offer guidance to manufacturers, producers and importers of certain prescription drugs on the filing process and procedural requirements related to the section 5000D tax. This tax, enacted under the Inflation Reduction Act of 2022, focuses on the sale of designated drugs and is imposed on certain drug manufacturers and importers who do not participate in the Medicare prescription drug price negotiation program. The Medicare prescription drug price negotiation program provides for the government to negotiate maximum fair prices (MFPs) for certain single-source drugs covered under Medicare.

IRS issues proposed regulations on 5000D excise tax

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. Pursuant to Section 1193(a)(3) of the Social Security Act (SSA), manufacturers of designated drugs opting 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 added 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 concludes 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 91^st through 180^th day of the statutory period
• 85% for sales of a designated drug during the 181^st through 270^th day in a statutory period
• 95% for sales of a designated drug for any subsequent day in a statutory period

This means that the excise tax rate would range from 185.71% to 1,900% of the designated drugs price depending on the duration of non-compliance. The 5000D provision does not specifically state these rates, however, it defines an applicable percentage that equals the share of the post tax sale price attributable to the excise tax. Specifically, using the applicable percentages above, the corresponding tax rates would be calculated as:

and equal to 185.71%, 300%, 566.66%, and 1,900% respectively depending on the period of non-compliance. As an example, if a designated drug was subject to the highest tax rate of 1,900% and cost $10 pre-tax, the drug would cost $200 post tax with $190 of the total being attributable to the section 5000D excise tax.

The Centers for Medicare and Medicaid Services (CMS) has released a list of the initial 10 designated drugs covered under the Medicare Part D that were selected for negotiation. These include:

• Eliquis
• Jardiance
• Xarelto
• Januvia
• Farxiga
• Entresto
• Enbrel
• Imbruvica
• Stelara
• Fiasp; Fiasp FlexTouch; Fiasp PenFill; NovoLog FlexPen; NovoLog PenFill

Manufacturers of the aforementioned drugs must formally commit to engaging in price negotiations by Oct. 1, 2023. Per section 5000D, manufacturers declining to participate in negotiations are subject to the 500D excise tax. Manufacturers that do not comply with the negotiation process must either withdraw their products from the Medicare and Medicaid programs or pay the excise tax. As stated above, the applicable percentages of the tax begin at 65% for sales of a designated drug during the first 90 days of the statutory period and increase by 10% each quarter up to 95% of sales. Given the steep penalty, the Congressional Budget Office has stated it expects drug manufacturers will comply with the negotiation process as the costs of not doing so are greater than the revenue loss from lower, negotiated prices.

Procedural rules

The proposed regulations address the filing process and procedural requirements regarding chapter 50A of the Excise Tax Procedural Regulations and therefore the section 5000D excise tax. Particularly, the IRS and Treasury 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 proposes that a return reporting liability imposed by section 5000D must be made for a period of one calendar quarter, and that a return must be filed for each calendar quarter in which liability for the section 5000D tax is incurred. Therefore, under the proposed regulations, taxpayers would be required to report any section 5000D tax liability on Form 720. However, taxpayers would not be required to file subsequent returns for quarters in which they do not incur section 5000D tax liability. The proposed regulations also specify that taxpayers would not be required to make semimonthly deposits of their section 5000D tax liability.

The deadline for filing the quarterly returns on Form 720 to report section 5000D excise tax, is the last day of the first calendar month following the calendar quarter the liability occurred in.

These proposed regulations, once adopted as final regulations and published in the Federal Register, are proposed to apply to calendar quarters beginning on or after Oct. 1, 2023. Per the IRS, taxpayers may rely on these proposed regulations for returns beginning on or after Oct. 1, 2023, and before the date that the Treasury Department adopts these regulations as final.

Requests for public comment

Since enactment of the Inflation Reduction Act, the Treasury Department has been gathering public input for forthcoming guidance necessary to assist taxpayers in meeting their tax reporting obligations. The proposed regulations also requests public comments on the possible burden of the information collection related to the proposed regulations including the following:

• Whether the proposed collections of information are necessary for the proper performance of the functions of the IRS, including whether the information will have practical utility.
• The accuracy of the estimated burden associated with the proposed collections of information.
• How the quality, utility, and clarity of the information to be collected may be enhanced.
• How the burden of complying with the proposed collections of information may be minimized, including through the application of automated collection techniques or other forms of information technology.
• Estimates of capital or start-up costs and costs of operation, maintenance, and purchase of services to provide information.

The IRS and Treasury strongly encourage comments to be submitted electronically. Comments on the collection of information or requests for public hearings must be received no later than 60 days after the date the proposed regulations are published in the Federal Register. The proposed regulations are currently scheduled to be published on Oct. 2, 2023. Requests for a public hearing are also encouraged to be made electronically. If a public hearing is requested and subsequently scheduled, notice of the date and time for the public hearing will be published in the Federal Register.

Washington National Tax Takeaways

The proposed regulations issued by the IRS offers additional clarification of the new section 5000D excise tax filing and procedural requirements. Drug manufacturers, producers, or importers should carefully consider these proposed rules to ensure proper compliance. Affected stakeholders are encouraged to provide comments prior to the deadline, to help Treasury identify areas where clarification or further guidance is needed. The IRS and Treasury intend to propose further regulations addressing substantive issues related to the section 5000D tax and will issue a separate notice of proposed rulemaking. Additionally, the CMS has published and provided more information about the program.

For more information, please consult with your RSM US tax advisor.