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The Medical Device Excise Tax: It's Complicated

by Michael Tasselmyer / /

As President Obama's health care reform bill is gradually implemented, there are growing concerns over new taxes required to pay for it. In particular, a tax on medical devices has sparked protest from some legislators and professionals within the health care industry.

The 2.3 percent excise tax went into effect on January 1, 2013. The provision is important for financing benefits under Obamacare: the Joint Committee on Taxation estimates that the tax could raise $29 billion over the next ten years, and medical device manufacturers have paid some $388 million to the IRS since the beginning of the year.

Since the law took effect, there's been some confusion over how and when to pay the tax. Not only does it factor into sales of complex medical devices such as CT scanners, X-ray machines, and pacemakers, it's also enacted on sales of other, more basic products, such as tongue depressors and possibly even latex gloves. The IRS lists certain devices that are exempt from the tax, including eye glasses, contact lenses, and other retail or over-the-counter items designed for individual use. Devices used exclusively for veterinary purposes are exempt -- but devices that are designed for both human and animal use are taxed. However, the details on how to make the distinction, when to apply the tax, and how much it could affect consumers and pet owners are still uncertain.

The complexity of the tax may lead to some manufacturers overpaying to comply with the law. As the Tax Foundation notes, an important component of the law is its "constructive sales pricing." That portion of the tax code is designed to allow firms that don't usually sell their products to outside companies to derive a market value for any medical devices they do sell. It presents an additional layer of compliance that manufacturers must navigate in order to avoid trouble with the IRS. Smaller firms are typically less able to hire advisors to guide them through the compliance procedures, which could exacerbate the problem. The IRS has now issued guidelines twice to medical device manufacturers.

On the other hand, there are some who believe the negative effects of the law have been overstated. The Center on Budget and Policy Priorities (CBPP) published a study suggesting that as the Affordable Care Act expands medical coverage to more people, the increased demand for medical devices will lead to higher sales of medical devices, offsetting the additional cost of the tax. CBPP also argues that any increased production costs that manufacturers have to pay to comply with the tax are unlikely to be passed on to the consumer.

In February, NTUF examined a bill sponsored by Congressman Erik Paulsen (R-MN) designed to repeal the 2.3 percent tax. It picked up over 212 cosponsors in the House, and the Senate version of the bill had 30 cosponsors as of this post's publication. Because NTUF estimated that the bill would likely only have regulatory- and revenue-related effects, under BillTally rules, we scored the legislation as a "No Cost" revenue bill. Last week, the Senate approved an amendment during budget votes that would repeal the tax altogether; that amendment passed by a bipartisan 79-20 vote.