Medical Device Tax: Is It Still in Effect?

The medical device tax, an excise tax from the Affordable Care Act (ACA), was a tax on the sale of certain medical devices by the manufacturer or importer. The tax has been fully repealed. After a period of suspensions, the tax was permanently eliminated, concluding a period of uncertainty for device makers and importers.

Defining a Taxable Medical Device

When the tax was active, the definition of a “taxable medical device” was directly linked to federal regulatory standards. Internal Revenue Code Section 4191 specified that a taxable device was one defined in section 201 of the Federal Food, Drug, and Cosmetic Act (FFDCA) and intended for human use. This definition encompasses any apparatus, implement, machine, or similar article intended for diagnosing, curing, treating, or preventing disease, and also includes items intended to affect the structure or function of the body.

The IRS further clarified that a device was considered taxable if it was required to be listed with the Food and Drug Administration (FDA) under section 510 of the FFDCA. If a product had to be on the FDA’s registry of medical devices, its sale was subject to the tax. This applied to a wide array of products used primarily by medical professionals and institutions.

Examples of items that fell under this definition included diagnostic equipment like MRI and X-ray machines, pacemakers, surgical instruments, and hospital beds. The tax also applied to certain components or parts if they were themselves listed as devices with the FDA.

Common Exemptions from the Tax

The law included several exemptions. The most significant of these was the “retail exemption,” which excluded any device that was of a type generally purchased by the general public at retail for individual use. The IRS established a “facts and circumstances” test to determine if a device qualified for this exemption, looking at whether it was regularly available to and could be used safely by individual consumers who are not medical professionals.

This retail exemption covered many familiar items that people might buy at a pharmacy or supermarket. Common examples include adhesive bandages, non-prescription pregnancy tests, and thermometers. Blood pressure monitors designed for home use also qualified under this exemption.

Beyond the broad retail exemption, the statute explicitly named three specific categories of devices that were not taxable. These statutory exemptions covered eyeglasses, contact lenses, and hearing aids. These items, although meeting the technical definition of a medical device, were specifically carved out of the tax base by Congress.

Tax Calculation and Payment Procedures

For the period the tax was in effect, the compliance process involved specific calculations and reporting requirements. The tax was set at a rate of 2.3% and was applied to the sale price of a taxable medical device by the manufacturer, producer, or importer. The “sale price” was defined to include charges for packaging and any other costs incident to preparing the device for shipment, but it excluded the excise tax itself, transportation charges, and certain discounts or rebates.

Manufacturers and importers were responsible for reporting and remitting the tax to the IRS. This was done using Form 720, the Quarterly Federal Excise Tax Return. As the form’s name suggests, these returns were due on a quarterly basis, with deadlines falling on the last day of the month following the end of a quarter, such as April 30 for the first quarter.

While the return was filed quarterly, tax payments were often required more frequently. Businesses were required to make semimonthly deposits of the tax via electronic funds transfer, particularly if their tax liability exceeded $2,500 for the quarter. The entire process placed the administrative burden directly on the seller of the device.

The Repeal and Its Current Status

The medical device tax had a contentious history, marked by multiple suspensions before its final elimination. Congress passed moratoriums that suspended the collection of the tax, first in late 2015 and again in 2018. These suspensions provided temporary relief to the industry but created long-term uncertainty about whether the tax would be reinstated.

This uncertainty ended on December 20, 2019, when the Further Consolidated Appropriations Act, 2020 was signed into law. This legislation included a permanent repeal of the medical device excise tax, effective for sales made after December 31, 2019.

As a result, manufacturers and importers are no longer required to collect, report, or pay the 2.3% excise tax. The repeal means that the tax is not merely suspended but is permanently off the books, providing certainty to the medical technology industry.