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Medical device excise tax prompts questions

December 18, 2012 With a new year comes new taxes, and one in particular on medical devices has drawn questions from dentists nationwide.

A new 2.3 percent federal excise tax went into effect Jan. 1 that applies to the medical devices dentists and physicians use. According to the ADA Division of Legal Affairs, the term “device” can apply to devices, instruments, products, materials and substances.

Dentists are not responsible for assessing or collecting the tax and they are not responsible for reporting it to the government. That's the responsibility of the manufacturers, suppliers or vendors who sell covered items to dentists. However, dentists can expect some modest increase in the cost of covered items because of the tax.

The Internal Revenue Service estimates that there are around 180,000 medical devices and 130 of those are specific to dentistry. These 130 devices appear on the Food and Drug Administration's list of dental devices, which the ADA has made available.

Even if a device appears on the FDA list, it is not subject to the excise tax if it's available at retail. Examples include power or manual toothbrushes, dental floss and teething rings. This retail exemption is the major exception to application of the device tax and applies to all medical devices.

Dentists have asked the ADA whether they will be responsible for assessing the tax on bridges or customized crowns they make in their dental offices. Since neither bridges nor customized crowns appear on the FDA list, the answer is no, according to the Association's legal division.

If any components that the dentist uses to fabricate the customized devices are on the FDA list, however, the manufacturer or supplier will add the tax and the dentist will pay it at the time of purchase. As another example, a restoration is not subject to the tax but the material used for the restoration—gold or amalgam, for example—will be subject to the tax and collected by the manufacturer or supplier from the dentist, since both materials appear on the FDA list.

This also means that if a dentist purchases, for example, a finished bridge from a domestic dental lab, the excise tax should not be applied to the item. Instead, any price increase in the product should only reflect the amount of excise tax the manufacturer paid when it purchased the materials it used to make the bridge or finished crown. The IRS has not yet determined how it will treat such finished items when they are purchased from offshore labs.

The examples given here are not meant to represent the whole scope of the law, but to bring to dentists' attention some of the possible real-life applications of the tax.

Some dental labs have sent the dentists they work with letters explaining their interpretation of how the tax works. At this point, there may be some differences of opinion among various stakeholders as to how the tax is to be applied. The ADA is communicating with labs concerning the importance of applying the tax correctly.

The ADA continues to urge Congress to repeal this tax. The Association will continue to track developments and relay information to members as it receives it.