What Was the Medical Device Excise Tax?
An overview of the former medical device excise tax, covering its origins in the ACA, its operational mechanics, and its permanent repeal.
The medical device excise tax was a provision of the Affordable Care Act (ACA) that went into effect in January 2013. The tax’s purpose was to generate funds to help offset federal expenditures from expanded health insurance coverage, such as providing subsidies for low-income households. It was an excise tax, levied on the sale of certain medical devices by the companies that manufactured or imported them.
Taxable Medical Devices
The Internal Revenue Service (IRS) defined a taxable medical device by referencing the definition in the Federal Food, Drug, and Cosmetic Act. This definition included equipment such as X-ray machines, MRI machines, pacemakers, defibrillators, surgical instruments, and hospital beds. The tax applied to devices intended for human use that were listed with the Food and Drug Administration (FDA), unless a specific exemption applied.
A primary exemption was the “retail exemption,” which excluded devices purchased by the public at retail for individual use. Common examples of items under this retail exemption included eyeglasses, contact lenses, and hearing aids. This distinction focused the tax on professional-grade medical equipment rather than everyday health items. Simple diagnostic tools sold directly to consumers, like thermometers and pregnancy tests, were also not subject to the tax.
The tax also did not apply to devices that were manufactured domestically but destined for export. This exemption for exported goods ensured that U.S. manufacturers were not at a competitive disadvantage in global markets.
Entities Responsible for Payment
Responsibility for remitting the medical device excise tax fell on the manufacturers, producers, and importers of the taxable devices. The tax was not paid directly by hospitals, doctors, or patients, but the cost was often passed down through the supply chain, potentially leading to higher prices for healthcare providers and consumers.
The event that triggered the tax liability was the “taxable sale,” defined as the first sale of a taxable device by the manufacturer or importer. The tax was levied on the gross sales price, not on the company’s net income or profit from the sale.
This structure meant that companies were liable for the tax even if they were not profitable, which created a financial burden for many businesses, particularly smaller companies. The obligation to pay was tied directly to the revenue from the sale, irrespective of the company’s overall financial performance.
Calculating and Reporting the Tax
The tax was set at a flat rate of 2.3% of the sale price of a taxable medical device. The “sale price” was the amount for which the manufacturer or importer sold the device.
Entities responsible for the tax were required to report and pay it on a quarterly basis. The tax was reported to the IRS using Form 720, the Quarterly Federal Excise Tax Return. Companies had to calculate their total taxable sales for the quarter, compute the 2.3% tax due, and remit the payment along with the filed Form 720.
The quarterly filing requirement demanded consistent and accurate record-keeping from manufacturers and importers. They needed to track all sales of taxable devices, distinguish them from exempt sales, and maintain documentation to support their calculations. The administrative costs associated with this compliance were a notable expense for affected businesses.
Suspension and Eventual Repeal
Despite its role in funding the ACA, the medical device tax faced opposition from its inception. After being in effect for three years, from 2013 to 2015, Congress passed legislation that placed a moratorium on the tax, suspending its collection starting in January 2016. This suspension was later extended while its long-term fate was debated.
In December 2019, the tax was permanently repealed as part of a larger government funding bill, making the repeal effective at the beginning of 2020. The repeal was the result of years of lobbying and bipartisan agreement that the tax negatively impacted innovation and employment within the medical technology industry. The medical device excise tax is no longer in effect.