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Medical Device Excise Tax Update

Medical Device Excise Tax

On Dec. 5, 2012, the IRS issued final regulations on the new 2.3 percent medical device excise tax that manufacturers and importers will pay on sales of certain medical devices beginning January 1, 2013.  In addition, the IRS issued Notice 2012-77, which provides interim guidance regarding the determination of sale price and other issues related to the tax. 

The IRS developed the final regulations in consultation with technical experts at the Food and Drug Administration (FDA) and the Centers for Medicare and Medicaid Services, and after carefully reviewing numerous public comments.

Generally, under the final regulations, a “taxable medical device” is a device that is listed as a device with the FDA under section 510(j) of the Federal Food, Drug and Cosmetic Act, and 21 CFR part 807, pursuant to FDA requirements.  If a device is not listed as a device with the FDA but the FDA determines that the device should have been listed as a device, the device will be deemed to be listed as a device with the FDA as of the date the FDA notifies the manufacturer or importer in writing that corrective action with respect to listing is required.

The new tax does not apply to sales of eyeglasses, contact lenses, and hearing aids. The new tax also does not apply to the sale of any other devices that are of a type generally purchased by the general public at retail for individual use (the retail exemption).  

In general, the final regulations provide a facts-and-circumstances approach to evaluating whether a type of device qualifies for the retail exemption. Specifically, the final regulations suggest factors to consider in evaluating whether a particular type of device qualifies for the retail exemption.  The factors enumerated in the final regulations are non-exclusive; additional factors may be relevant to determining whether a given type of device qualifies for the retail exemption. 

The final regulations also identify several categories of medical devices that qualify for the retail exemption (the retail exemption safe harbor). The retail exemption safe harbor includes devices in the FDA’s online in vitro diagnostics (IVD) Home Use Lab Tests (Over-the-Counter Tests) database, devices that the FDA describes as “OTC” or “over the counter” in certain official FDA classification or product code headings or descriptors, and a number of devices that qualify as durable medical equipment, prosthetics, orthotics or supplies for which payment is available on a purchase basis under the Medicare Part B payment rules.

The medical device excise tax applies to manufacturers and importers and generally does not apply to individual consumers.

Sales of taxable medical devices for further manufacture or export may be made tax free if certain registration and other requirements are met. Click on the Form 637 Registration Program link below for more information.

The medical device excise tax is reported on Form 720, Quarterly Federal Excise Tax Return. Payment is due with the return. The first quarterly return for the medical device excise tax is due April 30, 2013, for the months of January, February, and March 2013.  Form 720 may be filed electronically or on paper. 

Manufacturers and importers of taxable medical devices may also pay the tax via the free, secure Electronic Federal Tax Payment System (EFTPS). Visit EFTPS to enroll or call 800-555-4477 for information.

To pay the tax with a paper Form 720, use EFTPS or enclose a check or money order (made payable to “United States Treasury”) and Form 720-V, Payment Voucher, with the timely filed Form 720.  The payment voucher and instructions are on the final page of Form 720.

Manufacturers and importers of taxable medical devices are generally required to make semi-monthly deposits of tax.  The first semimonthly deposit for the medical device excise tax, which covers the first 15 days of January, is due January 29, 2012.  In general, manufacturers and importers must use electronic funds transfer to make excise tax deposits through EFTPS. Notice 2012-77 provides transition relief from deposit penalties during the first three calendar quarters of 2013.

For more information, call the toll-free Business and Specialty Tax Line (800-829-4933), available Monday – Friday from 7 a.m. to 10 p.m. local time, or visit the resources shown below.

References/Related Topics

California Amazon Reach A Deal

Online retailer Amazon.com in California takes on a role it has fought against for years: tax collection conduit.

The change, which took effect September 2012, comes after years of battling between the world's largest online mall and the State of California over whether Internet retailers should have to charge sales tax. The two sides reached a deal in 2011 that included a one-year grace period.

Lawmakers have watched the increasingly popular e-retailer was depriving the state of millions of dollars by refusing to charge taxes, which were protected by a U.S. Supreme Court ruling that prohibits states from forcing businesses without a physical presence in the area to collect sales tax.

Now Amazon enters treaties across the country, paving the way to start opening warehouses and offering faster shipping in areas where tax disputes had previously prevented it from putting down roots.

The resolution of Amazon's tax fight in California has allowed the company to start building a network of distribution centers. Soon, customers in the nation's most populous state will receive shipments from warehouses in San Bernardino, which is near Los Angeles, and Patterson, near the San Francisco Bay Area – instead of from Reno, Nev. or Phoenix. Each new center is expected to bring hundreds of jobs to California.

The brick-and-mortar stores that pushed for the "Amazon tax" to level the business playing field hope the changes will end the dispiriting practice of "show-rooming," when people browse electronics or books in a store but make their purchases online.

Amazon has been tax-free for nearly two decades.

 

 

Nortel Software Case

On January 18th, 2011, the Superior Court of Los Angeles 2nd Appellate District issued its decisions in the Nortel Networks, Inc. v. State Board of Equalization.   In summary, the decision ruled that most sales of prewritten software are subject to a copyright or patent, meeting the definition of a Technology Transfer Agreement (TTA) and are exempt from CA sales and use tax.  The Judge ruled against the BOE's Regulation where they attempted to exclude prewritten software from the definition of a TTA' s saying that such an interpretation is not supported by the original statute as written by the Legislator.  The BOE attempted to take this case up to the Supreme Court of California, but on April 27th  2011, that request was denied.  Therefore this case has been closed and settled in the California Court System in favor of Nortel.

 

This Nortel case has huge implications for the taxation of prewritten software in California. The BOE has always taken the position that all sales of prewritten software are subject to the sales tax. However, the BOE must now review every software license on a case-by-case basis to determine whether the software is subject to a patent or copyright and exempt under the TTA exemption.


Customers who have paid California sales or use tax on purchases or licenses of prewritten software should work with vendors to file claims for refund, immediately to maximize refund periods and also take a proactive stand under the laws as they are currently written.  Even though this Nortel case is now completed in the courts, we expect that the BOE, the California Legislature and Governor to continue to fight the TTA exemption to prewritten software.   At a minimum, we expect that the BOE will set high standards for documentation and support for taxpayers to establish that their software is subject to a patent or copyright.  Also, based on another high profile case, it has been our experience that the laws could be changed limiting your options in the future.

 

Accordingly, we are recommending that our clients file protective claims to hold open the maximum periods while the dust settles.  We spoke with the BOE Refund Section and they indicated that they plan to hold these claims in abeyance until a final decision is reached.  As background, a claim for refund must be specific to the area of overpayment and be filed within 3 years of the due date of the return.  Previous claims we filed did not have any language that directly included TTA's as an area of overpayment.  So a new claim with TTA as the basis is required.  No support is required with the claim, it is one page.  

 

We are available to discuss if you would like or let us know and we will send the claim for your review.  

California Proposition 30

Proposition 30, a Sales and Income Tax Increase Initiative

 

November 6, 2012 ballot in California Provisions include:

  • Raises California’s sales tax to 7.5% from 7.25%
  • Creates four high-income tax brackets for taxpayers with taxable incomes exceeding $250,000, $300,000, $500,000 and $1,000,000. This increased tax will be in effect for 7 years.
  • Imposes a 10.3% tax rate on taxable income over $250,000 but less than $300,000
  • Imposes an 11.3% tax rate on taxable income over $300,000 but less than $500,000
  • Imposes a 12.3% tax rate on taxable income over $500,000 up to $1,000,000
  • Imposes a 13.3% tax rate on taxable income over $1,000,000
  • If this proposition is passed in November, 2012, the income tax will apply retroactively to all income earned or received since the first of the year (1 January, 2012).

The 10.3% income tax rate is currently only paid by taxpayers with over $1,000,000 in taxable income

Estimated revenue from Proposition 30 varies from Jerry Brown's $9 billion estimate to the $6.8 billion estimated by the non-partisan Legislative Analyst’s Office (LAO).  The difference stem for the volatility caused by capital gains income from high-income earners, an issue in California's tax system previously identified by the Legislative Analyst’s Office (LAO).

 

 

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