A device that must be implemented, inserted, operated, or administered by a dental professional would not meet the retail exemption by current definition.
Update: FDA Rules Exempt Most Dentists and Dental Labs From Medical Device Excise Tax
(Updated 11/21/12) Since the original publication of this article, CliftonLarsonAllen has learned of an exception in Food and Drug Administration (FDA) regulations that makes most dentists and dental laboratories exempt from the new excise tax on medical devices. More
Dental Industry: Prepare for New Medical Device Excise Tax in 2013
The IRS has issued proposed regulations on a new medical device excise tax that would be applied beginning January 1, 2013. The proposed IRS regulation 4191(a) imposes a tax on the manufacturer, producer, or importer of the device at 2.3 percent of the sale price.
“The proposal includes a retail exemption on items that can be purchased by the general public, such as glasses and hearing aids, that do not require implementation or insertion by a medical professional,” says Tim Bergin, a health care partner with CliftonLarsonAllen. “Under the information currently available, it appears that retainers, bridges, and crowns self-constructed at the dental practice would be subject to the new excise tax.”
Defining a taxable medical device
Defining a taxable medical device and who is subject to the excise tax is still under consideration, but right now, some of the proposed provisions include:
- A taxable medical device is any device intended for humans that is defined under the Federal Food, Drug and Cosmetic Act. Taxable devices range from simple tongue depressors to complex, highly technical pacemakers.
- The proposed regulations include a retail exemption, which would exclude items that can be purchased by the general public at retail stores for individual use, including eyeglasses, contacts, hearing aids, and other devices.
- A safe harbor would exempt over-the-counter testing devices and durable medical equipment, including prosthetics, orthotics, and other supplies that do not require implementation or insertion by a medical professional. These are treated as available to the general public.
The proposed regulations include examples of specific items that would qualify for the retail exemption. However, the design of the device must demonstrate that it is not primarily intended for use in a dental or medical office or for use by a dental professional.
- For example a device would likely be exempt if a consumer (who is not a medical professional) can purchase it through a retail outlet that also sells items besides medical devices, such as a drug store or supermarket.
- A device that must be implemented, inserted, operated, or administered by a dental professional would not meet the retail exemption by current definition.
“This suggests that dental providers who frequently self-construct retainers, bridges, and crowns in their office, versus purchasing these items from a dental lab, would be subject to the new excise tax,” says Bergin. “If purchased by the dentist, the lab would be responsible for this additional tax, most likely increasing its sales price due to the new overhead cost.”
The proposed regulations include a list of classified devices that are designed primarily for use by a medical professional and are therefore subject to the tax.
The IRS, in drafting these proposed regulations, rejected a suggestion to provide a blanket exclusion for dental instruments and equipment. They noted there is not a statutory basis for treating dental devices (which are subject to FDA regulations) different from any other taxable medical devices. Therefore, dental devices are taxable medical devices unless they fall under the retail exemption.
“The regulations are only proposed at this point,” says Bergin. “No further guidance is available. However, we expect the IRS to issue more guidance which may reveal additional exemptions, as the IRS learns the practical aspects associated with imposing and collecting this tax.”
Professional dental associations are reviewing the tax to see if it is hitting the intended target (e.g., device manufacturers versus dental practitioners) and you can participate in these bodies to share your input, says Bergin. While it is possible that changes could be made, you should plan on the tax until further notice.
Making excise tax payments
Currently, most excise taxes, including sales tax, are self-assessed on a monthly or quarterly basis. Deposits are made throughout the year, and a final reconciliation tax return is filed at year end. Under the proposed regulations, this new tax would be reported by the “manufacturer” on Form 720 Quarterly Federal Excise Tax Return. The 2013 first quarter return is due April 30, 2013. The tax may be paid with the return or may need to be paid in semi-monthly installments, beginning on January 15, 2013, if your taxable amount meets a certain threshold (not yet defined).
Bergin notes that this tax is assessed on the sale price of the device versus the profit after overhead expenses. It includes all packaging costs, but excludes transportation and delivery costs.
How we can help
If the tax moves forward, we can review your financial records and assist with capturing only the appropriate revenue. We can also assist in the preparation of the excise tax form and any estimated tax payment requirements.
We are working closely with state and national dental associations to clarify the application of this tax. We will continue to monitor the progress on the exceptions and alert you of further developments.
Tim Bergin, Health Care Partner
email@example.com or 218-825-2902