Excise Tax Alert
Washington – There are still many unanswered questions about how the medical device excise tax, which is part of the Affordable Care Act, will be applied. But based on current information obtained by the ADA there are a number of things that can be said that will help dentists and their patients navigate the quagmire:
- First, dentists will not be responsible for collecting, reporting, or paying the new 2.3 percent tax.
- Second, the tax on “devices” specific to dentistry will in many cases be applied to the materials from which dental devices are manufactured rather than to the customized items supplied by a dental laboratory, whether or not a device is ultimately adjusted and adapted by the dentist for a patient. “Device” is used as a term-of-art since many “devices” would be more commonly described as “products,” “materials,” or “substances.”
- Third, the tax will result in some increased costs for dentists and dental patients.
- Fourth, dentists should be alert in reviewing manufacturer and vendor price lists and invoices to make sure that the 2.3% tax is not being applied as a general cost increase with respect to all items, but is only being applied in cases where the law so requires.
The points listed above are derived from the new IRS regulations that “affect manufacturers, importers and producers of taxable medical devices,” as well as from informal conversations about them that the ADA has had with the IRS.
Final regulations published in the Dec. 7 Federal Register apply to sales of taxable medical devices after Dec. 31, 2012. There are some 180,000 taxable devices by IRS estimates, including dental devices approved by the Food and Drug Administration for human use. Of course, the tax will apply to all non-excluded “medical devices” a dental practices uses, but to put things in perspective, the total number of devices that are specific to dentistry based on IRS definitions, is approximately 130.
The regulations do not create a special rule or carve-out for dental devices. Dental devices subject to the tax are those listed by the FDA in the Code of Federal Regulations at 21 CFR 872—DENTAL DEVICES. This is the FDA list that places dental devices into Class I, Class II, or Class III. The ADA compiled list includes each of the items designated a “Dental Device” by the FDA and the FDA subcategory into which the device falls. Subcategories include, for example, “Surgical Devices,” and “Therapeutic Devices.” All devices listed are subject to the excise tax unless they fall under an exclusion.
The major exclusion from the device tax is provided by the “retail exemption,” which is a simple test to apply in many cases, but which may be a little more difficult to apply in others. For example, any device/product that appears in the FDA list with the letters “OTC” in front of its name is clearly excluded from imposition of the tax. This “safe harbor” for items explicitly designated as being “over-the-counter” products or devices is easy to understand and apply.
It can also be safely assumed that certain other listed devices, such as power toothbrushes, manual toothbrushes, dental floss, and teething rings are not subject to the tax. In yet other instances, the IRS itself may not be quite sure whether a product is entitled to the retail exemption. Dentists and patients may be the best source of information about such products that might include, for example, intraoral dental wax or mechanical denture cleaners or sleep apnea devices.
When it comes to determining in a closer case whether the retail exemption should apply the IRS has said that it will take a “facts and circumstances” approach. It has designated a number of factors that will go into its evaluative process, but there is no history as yet as to how these factors will be weighted or applied. How long it may take the IRS to do this generally or in a particular situation is anybody’s guess, but given the number of medical devices the IRS estimates there are and considering the many other things that are on the IRS’s plate it’s probably safe to say that it won’t be anytime soon.
Unless contrary guidance is issued in the future, it appears that so long as such “devices” can be purchased at retail the tax will not apply even if they are also sometimes supplied, or even are primarily supplied, by dental laboratories or dental practices.
In reviewing the list of FDA dental devices and applying the retail exclusion, it may seem quite arbitrary as to which devices will and will not be subject to the tax. In fact, certain distinctions may appear downright illogical. This results from the fact that the FDA list was compiled for reasons wholly unrelated to any sort of taxation, but it is now being used by a taxing body for tax determination purposes.
With respect to the “materials” versus “completed device” distinction mentioned earlier, it is perhaps easiest to understand by referring to the items listed under the “Prosthetic Devices” subcategory of the FDA list. Materials used to make prosthetic devices, such as noble metals, or materials used in restorations, such as dental amalgam, appear on the list. But prosthetic devices themselves, such as dentures, are not listed, and the restorations made from restorative materials are not listed either. Closely related to this subject is that, according to what the ADA has heard from the IRS to this point, dentists will not be considered “manufacturers” of dental devices merely because they perform restorations or assemble and adjust prosthetic devices. These means dentists will not be responsible for applying, collecting, or reporting the device excise tax in connection with the work they do, or otherwise.
The Association has urged Congress to repeal this Affordable Care Act tax. Support for delayed implementation appears to be growing in the “lame duck” session of the 112th Congress, and the IRS and Treasury Department “continue to study” such issues as the tax treatment of medical software licenses and the taxability of donated medical devices and medical convenience kits. In fact, the IRS has continued to call for public comments on some of these matters. There is uncertainty, as well, on how the tax may be applied to dental prosthetics and appliances manufactured overseas.
But unless something changes, the first device excise tax deposit from manufacturers and importers, covering the first 15 days of January, is due Jan. 29 under the current rules. However, the IRS offered temporary relief to device manufacturers from timely deposits for the first three calendar quarters of 2013 “in consideration of the short time frame between the effective date of the tax and the due date of the first deposit, and in the interest of sound tax administration.”
Some dentists have received letters from dental laboratories attempting to explain the tax and how it will be applied. At this point, there may be some differences of opinion between various stake holders as to how the tax will work. Bear in mind that dental labs and dental supply companies will likely pass the cost of the tax along to their dentist customers. The ADA plans to reach out to manufacturers and vendors in order to express dentistry’s view of the limits on the device tax and to come to a unified position as to how the tax should be applied and collected. The Association will continue to track the new medical device excise tax and will provide information through Association media including the ADA News.