Excise Tax on Medical Devices

Excise Tax on Medical Devices

By David DuWaldt

June 14, 2011


Who Really Pays?

Pursuant to the federal health care legislation of March 2010, a new section 4191 was added to the Internal Revenue Code.  This new code section provides for an excise tax of 2.3% on sales of medical devices other than eyeglasses, contact lenses, hearing aids, and other medical devices purchased, at retail, by the general public for individual use.  In other words, Class I medical devices sold to the public are generally excluded from the excise tax.  The application of this new excise tax takes effect for sales by the manufacturer, producer, or importer of medical devices after December 31, 2012.

Medical Device

An earlier version of the health care bill that was introduced by the Senate had a starting date in 2010 and it would have cost the medical device industry approximately $40 billion in excise tax over ten years.  Several large medical device manufacturers and industry groups were able to influence members of Congress so that the final version of the law begins with medical device sales in 2013.  Starting in 2013, the final version of this excise tax provision is expected to cost the medical device industry approximately $20 billion over ten years.

The federal excise tax has been around for a long period of time and it applies to items such as tobacco products, alcohol, gasoline and other fuels, telephone charges and airline tickets.  It is interesting to note that a federal excise tax was first imposed on telephone services back in 1898 to help finance the cost of the Spanish-American War.

The general view of opponents to this new medical device excise tax is that it will harm innovation and send more manufacturing jobs abroad.  Like other federal excise taxes, this new tax will most likely lead to higher costs to consumers.  It is kind of ironic when you think about it – recent health care reform has the objective of providing insurance coverage for all, and decreasing the costs of insurance coverage and health care services.  So how does the imposition of an excise tax on medical devices that will ultimately pass through to consumers in the form of higher health care costs meet the objectives of health care reform?

In January of this year, Representative Erik Paulsen of Minnesota, along with some other members in the House, introduced new legislation that includes the repeal of the medical device excise tax.  Also last January, Senator Orrin Hatch of Utah introduced a companion piece of legislation with the same intent as the House bill.

Since there is plenty of time left until the effective date of the medical device excise tax (January 1, 2013), it will be interesting to observe what takes place in Washington, D.C. over the next few years.

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Posted by David DuWaldt.