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Medical device tax: opportunity amid controversy

By Katie M. Scholz | 28 December 2012

(Thomson Reuters) Though the Patient Protection and Affordable Car Act (PPACA) was enacted three years ago, some provisions have only recently become controversial.  One such provision, an excise tax on medical devices, is now an important fiscal cliff bargaining chip.

The medical device tax imposes a 2.3% tax on the sale of medical devices.  Medical devices are defined broadly, including varied products such as heart implant products, general hospital equipment and tongue depressors.  The tax was included in the PPACA as a funding source to make the bill deficit-neutral.

The administration advocates the increased cost to manufacturers will be offset by the influx of millions of new customers the PPACA promises.  Critics, however, point to a similar, and never realized, promise made to include a device tax along with a universal healthcare bill in Massachusetts.  The tax is expected to generate $29 billion in tax revenue over the next 10 years.

The impacts for manufacturers include not only an additional tax that cannot be transferred to consumers, but increased regulatory burdens as well.  Device manufacturers and importers must file quarterly federal excise tax returns on Form 720 and make semi-monthly tax payments.

The medical device tax has its share of critics, including a group of senators pushing for its delay or repeal. Besides the general complaints about new corporate taxes, there are some specific issues with this medical device tax that raise concern. One of the biggest reasons given when advocating delay is industry confusion about the tax’s implementation and coverage.  Compounded with delayed IRS guidance, issued on December 5, 2012; requiring corporate compliance on January 1, 2013 is burdensome at best.

The largest complaint, however, is the application of the tax to gross sales rather than gross profits. The Medical Device Manufacturers Association estimates this tax could consume 65% of profits. For many companies, particularly start-ups, profits are crucial for reinvesting in job creation, research, and the clinical studies required to bring devices to market.  Because the tax applies regardless of size, large manufacturers are better positioned to absorb the costs.  The burden on small and start-up firms may end up harming patients if innovative manufacturers must either relocate or delay their U.S. product launches until they can afford the tax.

The United States is home to 40% of the global market for medical devices and instruments; one of the few industries enjoying a net trade surplus. In an attempt to protect this industry, momentum is growing to delay or repeal the medical device tax altogether. The fiscal cliff negotiations, still on-going, present an opportunity for bipartisan agreement on a tax both sides agree is not the best way to fund the PPACA.

While a tax on medical devices is not inherently bad, the breadth of this tax, and its application to gross sales instead of profit are troubling issues. Congress has an opportunity to cure these problems in the fiscal cliff negotiations – they should take care not waste it.



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