Medical Device Taxes — Changes Ahead?

There has for some years been an excise tax on medical devices. an excise tax is not the same as sales tax, even though it is a tax on the sale price of an item. The 2.3% tax is paid by the manufacturer or importer to the IRS, not to the states. So what does this have to do with sales tax? First, it applies only to taxable medical devices — those that require the collection of sales tax. While “device” is very broadly defined here, including things like surgical gloves, it doesn’t apply to every item. Therefore, if you work for a medical device manufacturer or importer, you need to know which of your products are taxable from the point of view of sales tax in order to be able to determine which ones are subject to the medical device taxes. The medical device taxes apply only to the actual price of the product.

The price of the product must therefore be separated from any services that go with it, and that step can change everything. So for example, if the device is kitted along with other items, it is the producer of the kit and not the manufacturer of the product which is responsible for reporting and paying the excise tax on the item. Second, the excise tax may be repealed, if a replacement for the money it brings in can be found. Where is that replacement most likely to be found? In sales taxes, most likely. Sales taxes are collected from consumers and passed along to the taxing authority, while excise taxes are paid directly by (in this case) the manufacturer or importer. This might make sales taxes more appealing to manufacturers… but it could also reduce demand for the taxable goods. The third and final connection is simply that many discussions of the tax refer to it as a “sales tax.”

When you’re already confused by a complex tax situation, this can add another layer of confusion and complexity. Legislators have been trying to repeal the excise tax since it went into effect over a year ago. It was part of the Affordable Care Act, aka Obamacare, so Republicans naturally want to repeal it. Medical device manufacturers also want to appeal it, saying that the additional cost limits their ability to conduct research that could save lives in the long run. One response to this claim is that the cost of the tax is being passed on to the consumer and that it is not affecting profits, but there have been claims that manufacturers will offshore their plants and also that small medical device manufacturers will go under because of the excise tax. Industry insiders say they are “doing the best they can” under the tax, which has been in effect for a year and a half.

The Center on Budget and Policy Priorities points out that the excise tax is just one of a suite of taxes intended to take some of the profit from additional demand for health care under Obamacare and return it to the government to support national health care initiatives. Insiders suggest that President Obama would veto the repeal. Let us help you simplify sales tax. Try a free evaluation of our SalesTaxDataLINK tools today.

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