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Highlights of the proposed regulations on medical device excise tax

February 6, 2012 | No. 2012-72

The Treasury Department and IRS on Friday, February 3, released for publication in the Federal Register proposed regulations (REG-113770-10) providing guidance on the excise tax on medical devices imposed by section 4191. The proposed regulations are set for publication on February 7, 2012.

The following discussion is a follow-up to the summary provided in TaxNewsFlash 2012-66 and provides highlights of the proposed regulations.


The Health Care and Education Reconciliation Act of 2010 amended chapter 32 of the Internal Revenue Code by adding section 4191, which imposes an excise tax on the sale of certain medical devices by their manufacturer or importer. The tax takes effect on January 1, 2013.

Section 4191 provides that a “medical device” is any “device” (as defined in Federal Food, Drug, and Cosmetic Act (FFDCA) section 201(h)) that is intended for humans. “Device” includes any product recognized in the official National Formulary or the United States Pharmacopeia, for use in diagnosis or treatment of human disease, and intended to affect the structure or any function of the body, that does not achieve its primary intended purposes through chemical action within or on the body and is not dependent upon being metabolized for the achievement of its primary intended purposes.

Section 4191 provides an exception to the term “medical device” for eyeglasses, contact lenses, and hearing aids. An exception is also provided for any medical device determined by the Treasury Secretary to be of a type that is generally purchased by the general public at retail for individual use (the “retail exemption”).

The Health Care and Education Reconciliation Act of 2010 also amended section 4221 of the Code to provide for tax-free sales of taxable medical devices for “use in further manufacture” and for “export” if registration and paperwork requirements are met. Other manufacturers excise tax exemptions are not applicable to this tax. In addition, section 6416 was amended to provide for credit or refund of the excise tax if the medical device was not sold tax-free for use in further manufacture or for export, and also in the case of certain price readjustments.


Provisions in the proposed regulations

Definition of “taxable medical device”

The proposed regulations define “taxable medical device” as any “device,” as defined in FFDCA section 201(h), that is intended for humans.

Under the proposed regulations, “device defined in section 201(h) that is intended for humans” means a device that is listed as a device with the Food and Drug Administration (FDA) under FFDCA section 510(j) and 21 CFR Part 807, pursuant to FDA requirements.

Retail exemption

Under the proposed regulations, a medical device meets the retail exemption if it is regularly available for purchase and use by individual consumers who are not medical professionals, and if the design of the device demonstrates that it is not primarily intended for use in a medical institution or office or by a medical professional. Whether a device qualifies for the retail exemption is evaluated based on all the relevant facts and circumstances. The proposed regulations provide a set of non-exclusive factors to be considered.

The proposed regulations also provide a safe harbor provision that identifies certain categories of taxable medical devices that Treasury and the IRS have determined fall within the retail exemption.

The safe harbor categories are devices that:

  • Are included in the FDA’s online IVD Home Use Lab Tests (Over-the-Counter Tests) database
  • Are described as “OTC” or “over the counter” devices in the relevant FDA classification regulation heading
  • Are described as “OTC” or “over the counter” devices in the FDA’s product code name, the FDA’s device classification name, or the “classification name” field in the FDA’s device registration and listing database
  • Qualify as durable medical equipment, prosthetics, orthotics, and supplies, as described in the proposed regulations, for which payment is available on a purchase basis under Medicare Part B payment rules

Dual use devices

A dual use device is a device that has both medical and non-medical uses, such as latex gloves. There is no exception for a dual use device that is listed with the FDA pursuant to FDA requirements, unless it falls within an exemption under section 4191(b)(2), such as the retail exemption.

Devices used in research

A “research use only” device that is exempt from the FDA’s registration and listing requirements is not a taxable medical device under the proposed regulations.

A device under an FDA Investigational Device Exemption is not a taxable medical device under the proposed regulations because it is exempt from the FDA’s listing requirements.

Dental instruments and equipment

Dental instruments and equipment that are listed as devices with the FDA pursuant to FDA requirements are taxable medical devices under the proposed regulations, unless they fall within an exemption under section 4191(b)(2), such as the retail exemption.


The proposed regulations define “kit” as a set of two or more articles packaged in a single bag, tray, or box for the convenience of a medical or health care professional or the end user. A kit is a taxable medical device under the proposed regulations if the kit is listed as a device with the FDA pursuant to FDA requirements. Under the proposed regulations, if the kit is a taxable medical device, the entire sale price of the kit is subject to tax.

Associated devices and components of devices

Associated devices and components of devices that are listed as devices with the FDA pursuant to FDA requirements are taxable medical devices under the proposed regulations, unless they fall within an exemption under section 4191(b)(2), such as the retail exemption.

KPMG observation

With respect to a “taxable medical device,” the proposed regulations look to the definitions and classifications used by FDA. As the preamble to the proposed regulations points out, FDA listing requirements are longstanding; device manufacturers must comply with these requirements as part of the FDA device regulation process; and device manufacturers can be expected to know which devices fall within the definition. Accordingly, in most cases, manufacturers and importers have been provided with a method for determining which products will be subject to tax.

With respect to the “retail exemption,” the proposed regulations provide a general framework for manufacturers and importers to use in determining whether a particular medical device will be exempt. However, because the proposed regulations provide only a facts-and-circumstances approach, uncertainty will still remain for some devices. It will be necessary to evaluate each device to determine whether that device is exempt.

An important open issue Treasury and the IRS need to address before the January 1, 2013 effective date is the application of the constructive sale price rules to sales of medical devices. There is a wide variety of medical devices and distribution chains. The price for those medical devices also varies widely. Some devices are sold directly to end users. Some are sold to independent wholesale distributors. Still others are only sold to related selling companies. The proposed regulations do not address situations for which a constructed sale price would be required, and do not discuss the meaning of “sale not at arm’s length and at less than fair market price.”


For more information, contact a tax professional with KPMG’s Excise Tax Practice group:

Deborah Karet Gordon, (202) 533 5965

Taylor Cortright, (202) 533 6188

Ruth Hoffman, (202) 533 6196 

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The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

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