Comment Letter on the Excise Tax on Medical Devices
March 28, 2011
Commissioner of Internal Revenue
Internal Revenue Service
1111 Constitution Avenue, N.W.
Washington, DC 20224
Electronic delivery via Notice.Comments@irscounsel.treas.gov
RE: Comments on the Excise Tax on Medical Devices (Notice 2010-89)
Dear Mr. Commissioner:
The Medical Imaging and Technology Alliance (MITA) appreciates this opportunity to comment, pursuant to I.R.S Notice 2010-89, regarding issues that should be addressed in regulatory guidance implementing the new excise tax on medical devices under Internal Revenue Code section 4191, as enacted by section 1405 of the Health Care and Education Reconciliation Act of 2010 (Public Law 111-152).
MITA is the leading trade association representing medical imaging and radiotherapy technology manufacturers. Medical imaging encompasses X-ray imaging, computed tomography (CT) scans, radiation therapy, related image acquisitions, diagnostic ultrasound and nuclear medical imaging (including positron emission tomography (PET)), and magnetic resonance imaging (MRI). Medical imaging is used to diagnose patients with disease, often reducing the need for costly medical services and invasive surgical procedures. In addition, medical imaging equipment often is used to select, guide, and facilitate effective treatment, for example, by using image guidance for surgical or radiotherapeutic interventions. MITA’s members also develop and manufacture innovative radiotherapy equipment used in cancer treatment.
FDA Medical Device Registration and Listing System Provides an Administrable Approach to Determining Taxable Medical Device and Manufacturer for Purposes of the Section 4191 Excise Tax Code section 4191 imposes an excise tax on “the sale of any taxable medical device by the manufacturer, producer, or importer” equal to 2.3 percent of the sales price. A “taxable medical device” is defined by reference to the Food and Drug Administration (FDA) regulatory law as “any device (as defined in section 201(h) of the Federal Food, Drug, and Cosmetic Act) intended for humans.” I.R.C. § 4191(b)(1). Exemptions from the excise tax are provided for sales (1) for use by the purchaser for further manufacture (or for resale to a second purchaser for further manufacturer), (2) for export (or for resale to a second purchaser for export), and (3) of devices generally purchased by the general public at retail for individual use. I.R.C. §§ 4221(a)(1), (2), 4191(b)(2).
“Device” is defined under this FDA regulatory law provision as “an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or similar or related article, including any component, part, or accessory, which is (1) recognized in the official National Formulary, or the United States Pharmacopeia, or any supplement to them, (2) intended for use in the diagnosis of disease or other conditions, or the cure, mitigation, treatment, or prevention of disease, in man or animals, or (3) intended to affect the structure or function of the body of man or other animals, and which does not achieve its primary intended purposes through chemical action within or on the body of man or other animals and which is not dependent upon being metabolized for the achievement of its primary intended purposes.” Section 201(h) of Federal Food, Drug, and Cosmetic Act, 21 U.S.C. § 321(h).
The FDA has a well-established system, set forth in detailed regulations, for registering medical device manufacturers and importers, and listing the medical devices they produce or import. See 21 C.F.R. Part 807. This is known as the “Establishment Registration and Device Listing for Manufacturers and Initial Importers”. As described by the FDA, “Establishments that are involved in the production and distribution of medical devices intended for commercial distribution in the United States are required to register annually with the FDA.” See FDA, “Medical Devices – Who Must Register, List and Pay the Fee”, attached as Attachment I; see also 21 C.F.R. § 807.20. This is known as establishment registration. It is our understanding that this FDA registration requirement is likely to capture all manufacturers who place taxable medical devices into commercial distribution. MITA’s members are all required to register and list the medical devices they manufacture.
More specifically, the owner or operator of an establishment who is “engaged in the manufacture, preparation, propagation, compounding, assembly, or processing of a device intended for human use shall register and submit listing information for those devices in commercial distribution. . . .” 21 C.F.R. § 807.20(a). The FDA requires that the manufacturer’slisting set forth: “The identification by classification name and number, proprietary name, and common or usual name, and common or usual name of each device being manufactured, prepared, propagated, compounded or processed for commercial distribution. . . .” Id., at § 807.25(f)(1). “Manufacture, preparation, propagation, compounding, assembly, or processing of a device” is defined by the FDA regulations for this purpose as “the making by chemical, physical, biological, or other procedures of any article that meets the definition of device in section 201(h) of the Act.” Id., at § 807.3(d). “Commercial distribution” means “distribution of a device intended for human use which is held or offered for sale”. Id., at § 807.3(b).
The manufacturer’s listing of medical devices is done on FDA Form FDA-2892, which must be completed on-line and becomes part of a database called “FDA Unified Registration and Listing System (FURLS). This database is available to the public for inspection at the FDA’s Center for Devices and Radiological Health, Office of Compliance, in Silver Spring, Maryland and at the FDA district office for the geographical area in which the manufacturer’s facility is located. Id., at §§ 807.25, 807.37. (A copy of the paper version of the Form FDA-2892 is attached as Attachment II). A separate listing form must be prepared for each type of medical device. The listing must be updated each June and December, or, at a manufacturer’s discretion earlier at the time when a change occurs. Id., at § 807.30.
The registration and device listing requirements apply to a person who “manufactures for commercial distribution a device either for itself or for another person” (but not to a contract manufacturer who only manufactures devices according to the specifications of another person who will commercially distribute the final, finished device). 21 C.F.R. § 807.20(a)(2). The registration and listing requirements also apply to a person who “manufactures components or accessories which are ready to be used for any intended health-related purpose and are packaged or labeled for commercial distribution for such health-related purpose. . . .” Id., at § 807.20(a)(5). The FDA regulations distinguish between a manufacturer of components that are incorporated into a finished medical device who is not required to register and list (because the listing will be at the level of the finished device) (§ 807.65(a)), and a “[m]anufacturer of accessories or components that are packaged or labeled for commercial distribution for health-related purposes to an end user” who is required to register and list. See FDA “Medical Devices – Who Must Register, List and Pay the Fee”, supra, citing § 807.20(a)(5). This distinction parallels the concept under the Code section 4191 excise tax that are subject to further manufacture into a finished medical device are not subject to tax. Further, since a component incorporated into an overall finished device has no independent medical function and can only be used as part of a finished device, in addition to being exempt from FDA registration and listing, such components are not subject to FDA clearance or approval in order to be manufactured and are exempted by the FDA from its Quality System Regulation governing device manufacturing practices under § 820.1. Thus, the definition of “medical device” under section 201(h) as applied by the FDA does not include components that are subsequently used to fashion a final, finished medical device.
Initial importers of a medical device also are required to register and list their devices sold in the United States. Id., at § 807.20(a)(4). Initial importers are defined as “any importer who furthers the marketing of a device from a foreign manufacturer to the person who makes the final delivery or sale of the device to the ultimate consumer or user, but does not repackage or otherwise change the container, wrapper, or labeling of the device or package.” Id., at § 807.3(g).
Thus, the FDA Medical Device “Establishment Registration and Device Listing for Manufacturers and Initial Importers” provides an existing, well-established system for determining what is a medical device for purposes of the section 201(h) definition and for determining who is a manufacturer (or importer) of that medical device. Medical device manufacturers are very familiar with this FDA establishment registration and device listing and diligently comply with its requirements which are a key component of the FDA’s regulation of the manufacturer and its medical device products. The fundamental concepts of the FDA registration and listing system regarding what constitutes a medical device and who is treated as the manufacturer (or importer) of that device directly parallel the concepts that apply under the new medical device excise tax in Code section 4191. This publicly-available FDA database would provide I.R.S. auditors with a ready means of confirming the medical device manufacturers and the devices they produce.
Accordingly, MITA strongly urges that the I.R.S. guidance regarding implementation of the new medical device excise tax utilize the FDA Medical Device “Establishment Registration and Device Listing for Manufacturers and Initial Importers” set forth in 21 C.F.R. Part 807 as the basis for determining what is a taxable device under section 201(h) of the Federal Food, Drug, and Cosmetic Act as incorporated by reference in I.R.C. § 4191(b)(1) (subject to the exemptions in Code sections 4191(b)(2) and 4221(a)(1) and (2)) and determining who bears liability for the excise tax. More specifically, MITA proposes that a taxable medical device for purposes of the Code section 4191 excise tax on medical devices (subject to the Internal Revenue Code exemptions) shall be determined on the basis of all of the device products sold by the manufacturer (or by the person on whose behalf the device was manufactured or the importer) that are of a type that is required by the FDA to be listed in accordance with 21 C.F.R. Part 807. 1/1/
In addition, MITA recommends that the IRS guidance expressly apply the Code section 4191 excise tax on medical devices to “refurbishers”, in the FDA regulatory parlance, who refurbish used medical devices for resale and do not intend to significantly change a finished device’s performance, safety specifications, or intended use. These refurbishers who market these reconditioned devices compete with the manufacturers of the new medical device. The refurbishers should properly be treated as manufacturers for purposes of the device excise tax. To do otherwise would create an undue competitive disparity. The FDA establishment and registration system does not apply to refurbishers, and accordingly if such FDA system is to be applied for purposes of the device excise tax under the I.R.S. guidance, a specific rule would be necessary expressly applying the excise tax to sales by refurbishers.
Additional Comments on Specific Issues
1. Leasing Products to Customers; Sales to Customers with Financing
MITA members commonly offer their end-user customers the choice between purchasing or leasing the medical imaging and radiotherapy devices. Where the customer chooses to lease the device, in this industry the manufacturer often will sell the customer’s device to the manufacturer’s finance company affiliate, which will then lease the device to the customer for end-use. Such internal sale typically occurs essentially contemporaneously with the lease to the customer.
MITA strongly urges that the medical device excise tax be imposed on the lease to the end-user customer, rather than on the internal sale between the two affiliates. Under Code section 4217 governing the collection of excise tax on leases, the tax is effectively apportioned over the stream of lease payments from the customer, by applying in this case the 2.3 percent medical device excise tax to each lease payment until total tax of 2.3 of the product sales price is collected (or the lease is terminated). Such an approach appropriately matches the excise tax expense with the collection of the stream of revenue from the customer. By contrast, to impose the excise tax on the full sales price at the time of the internal sale between the two affiliates would punitively and unfairly accelerate the imposition of the full excise tax before the medical device company had received any revenue from the customer, particularly where because of the significant cost of the medical imaging or radiotherapy system, the lease is over a multi-year period.
In cases where the customer wishes to purchase the device with financing from the manufacturer’s finance affiliate, the manufacturer typically will sell the device to its finance affiliate, which will then sell the device to the customer and provide financing for that purchase. Such internal sale typically occurs essentially contemporaneously with the sale to the customer. As with the lease situation above, MITA strongly urges that the medical device excise tax be imposed on the sale to the end-user customer, rather than on the internal sale between the two affiliates. Such an approach matches the excise tax expense with the sales revenue from the customer and ensures that double tax is avoided on the related party sale and third party sale to end-user customer of the same device.
2. Service Contracts and Software Upgrades for Customers
Because of the high technology nature of the medical imaging and radiotherapy device products marketed by MITA members, their end-customers are typically offered a service contract. The service contract is voluntary and separate from the purchase of the device. Such service contracts are commonly offered on a flat fee basis. In some cases, such service contracts are on a time-and-materials basis. In the course of such servicing by the manufacturer, replacement parts may be installed in the medical imaging or radiotherapy technology system.
Under Code section 4221, no excise tax is imposed on a manufacturer of components sold to a device manufacturer for inclusion in an overall finished medical device. I.R.C. § 4221(a)(1), (c)(5). Similarly, as noted above, the FDA registration and listing requirements distinguish between a manufacturer of components that are incorporated into a finished medical device who is not required to register and list (because the listing will be at the level of the finished device) (21 C.F.R. § 807.65(a)), and a “[m]anufacturer of accessories or components that are packaged or labeled for commercial distribution for health-related purposes to an end user” who is required to register and list. See FDA “Medical Devices – Who Must Register, List and Pay the Fee”, supra, citing 21 C.F.R. § 807.20(a)(5). MITA believes that this distinction in the FDA regulatory context between components installed in an overall finished device and components marketed directly to the end-user for independent medical use should be equally applicable in the excise tax context. These parts being installed under the service contracts have no independent medical function and accordingly can only be used as part of a finished medical device to enable that device to operate. As a result, in addition to being exempt from FDA registration and listing, such components are not subject to FDA clearance or approval in order to be manufactured and are exempted by the FDA from its Quality System Regulation governing device manufacturing practices under § 820.1. Thus, the definition of “medical device” under section 201(h) as applied by the FDA does not include components that are subsequently used to fashion a final, finished medical device. Further, the full device excise tax already has been collected on the sale (or lease) of the overall finished device. Therefore, the device tax should not be collected a second time on these replacement parts that are necessary for the overall finished device to operate properly and effectively.
In addition, the manufacturer may periodically provide upgrades to the software used in the medical imaging or radiotherapy devices. These software upgrades may be provided under a service contract or separately for a fee. As with the replacement parts above, these upgrades to the original software in the device have no independent medical function and accordingly can only be used as part of a finished medical device to enable that device to operate properly. The full device excise tax already has been collected on the sale (or lease) of the overall finished device. Accordingly, as in the case of replacement parts, the device tax should not be collected a second time (or third, fourth, fifth, or more times) on a periodic upgrade to the device’s original software to enable the overall finished device to operate properly and effectively.
3. Components Transferred Between the Manufacturer’s Various Production Facilities
The medical imaging and radiotherapy technology marketplace is worldwide in scope, and accordingly many of MITA’s members have production facilities located both in the United States and overseas to serve these markets around the world. In order to maximize production efficiencies and meet varying levels of customer demand in different markets, the manufacturer will sometimes transfer components between its various production facilities for subsequent manufacture into the overall finished medical device. Thus, the U.S. manufacturer may both export from the U.S. and import into the U.S. various components during the year.
In the case of exports of components from the U.S., no excise tax should be due by reason of the export exemption in Code section 4221(a)(2). Imports of components into the U.S. for incorporation by the U.S. manufacturer into an overall finished medical device should be exempt under the “further manufacture” exemption in Code section 4221(a)(1). However, because the medical device excise tax is imposed on importers as well as manufacturers, it would be helpful in the I.R.S. guidance to clarify that where the U.S. manufacturer imports components for incorporation into a finished medical device being manufactured in the U.S., the “further manufacture” exemption will apply. This would ensure that the component is not taxed at the border and then again as part of the overall finished device sold to the customer.
4. Prototype Device Products for Display and Clinical Investigation Purposes
MITA members manufacture (or import from foreign affiliates) prototypes of finished medical devices for demonstration purposes, displays at trade shows, or for purposes of clinical investigation. In some cases, the FDA has not yet granted regulatory clearance or approval for the device.
In instances where a medical research sponsor seeks to gather clinical data with such an uncleared or unapproved device, these products must be distributed in accordance with the Investigational Device Regulations found at 21 C.F.R. Part 812. Investigational devices distributed in accordance with 21 C.F.R. Part 812 are not considered to be legally marketed, are prohibited from being introduced into commercial distribution, and can only be provided to investigational sites for use under an approved protocol. Further, investigational devices are not subject to the FDA’s Registration and Listing Requirements at 21 C.F.R Part 807, or the Quality System Regulation at Part 820. Based on the data collected in these studies, FDA may clear or approve the device for commercial sale. Thus, payments associated with the distribution of an investigational device in accordance with Part 812 are not considered a commercial sale of the product.
If an investigational device, display device, or demonstration device is ultimately found by the FDA to satisfy all of the FDA’s regulatory requirements and specifications, the FDA may grant clearance or approval of the device, as applicable. Only then can devices previously used for investigational, display, or demonstration purposes be subsequently commercially sold to customers. Conversely, without this FDA clearance or approval, an investigational device, display device, or demonstration device cannot be sold to customers or introduced into commercial distribution. Indeed, in many instances, some updates to the device will be needed to bring it to the requirements of the commercially cleared or approved device.
MITA’s concern here is to avoid double taxation at the time of both investigational, display, or demonstration use and the subsequent commercial sale. MITA believes that the medical device excise tax is most appropriately imposed at the time of subsequent sale. Such an approach matches the excise tax expense with the collection of the sales revenue from the customer. Moreover, as noted above, at the time of the investigational, display, or demonstration activities, the device may not yet have received FDA clearance or approval.
5. Charitable Donations of Device Products
MITA members periodically make charitable donations of their medical imaging and radiotherapy device products, along with service contracts and replacement parts. One example would be short-term disaster use. In other cases, the donation may be permanent. The I.R.S. guidance should clarify that such a charitable donation does not trigger the device excise tax on the donor manufacturer. If the manufacturer later receives a return of the device and subsequently sells the device to a customer, the excise tax can be imposed at that point.
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MITA appreciates the opportunity to submit these comments. If you have any questions or would like to discuss these matters further, please contact me at 703-841-3279.