New excise tax on medical devices included in health care legislation approved by Congress

Congress on March 25 approved a health care tax reconciliation act (H.R. 4872) that includes a new 2.3-percent excise tax on the sale of certain medical devices by a manufacturer, producer, or importer of such devices. Final passage of H.R. 4872 clears the legislation to be signed into law by President Barack Obama.

The new excise tax on medical devices will apply to sales after December 31, 2012. This excise tax is estimated by Joint Committee on Taxation staff to raise $20 billion over ten years.

Background

The new excise tax on sales of medical devices replaces a provision in the comprehensive health care reform legislation enacted March 23 ( the "Patient Protection and Affordable Care Act," P.L. 111-148) that would have imposed a direct annual fee on manufacturers and importers of certain medical devices. The annual fee would have been allocated among manufacturers and importers based on their share of covered sales for each previous year. In addition, the fee would not have been deductible. The fee was estimated to raise $19.2 billion over ten years, and would have been effective for calendar years beginning after December 31, 2010.

New excise tax

H.R. 4872 repeals the direct annual fee imposed by P.L. 111-148, and imposes instead a 2.3-percent excise tax on certain medical devices sold by a manufacturer, producer, or importer that are intended for human use, as defined by section 201(h) of the Federal Food, Drug, and Cosmetic Act.

Observation: Unlike the direct annual fee originally approved by Congress, the new medical device excise tax will be deductible in the same manner as other excise taxes.

The excise tax would not apply to the following:
  • Eyeglasses, contacts lenses, hearing aids, and any other medical device determined by the Secretary of Health and Human Services to be a type of device that is generally purchased by the general public at retail for individual use.
  • Additional specific devices as determined by the Secretary to be sold at retail establishments (including over the Internet) to individuals for personal use.

These exceptions to the excise tax are not limited by device class as defined by section 513 of the Federal Food, Drug, and Cosmetic Act. It is anticipated that the Secretary will publish a list of medical device classifications that are of a type generally purchased by the general public at retail for individual use.

A present-law excise tax exemption for further manufacture and for export would apply to the new excise tax on sales of medical devices, but this present-law exemption would not apply to sales for use on vessels or aircraft. This exemption also would not apply for sales to state and local governments, nonprofit educational organizations, and qualified blood collector organizations.

For Further Information
Text of the reconciliation tax bill (H.R. 4872)