Medical Device Tax Workshop - HIDA Device Tax... · automating indirect tax systems and processes....

Sheraton Crystal City

Arlington, VA

Sept. 19-20, 2012

For more information on MTLI programs, visit our website

www.advamedmtli.org

Medical Device Tax

Workshop

Medical Device Tax Workshop

Sheraton Crystal City Arlington, VA

September 19-20, 2012

Wednesday, September 19 8:30 – 9:00 BREAKFAST AND REGISTRATION 9:00 – 9:05 AdvaMed Introduction 9:05 – 9:30 Legal Update

Christopher L. White, Senior Executive Vice President, General Counsel, AdvaMed

Legislative and Regulatory update

AdvaMed participation in guidance process 9:30 – 11:00 How Does the Device Tax Work?

Lew Fernandez, Director, Tax, PricewaterhouseCoopers

Understanding the latest IRS guidance: exemptions; safe harbor; taxable medical devices

Constructive pricing

Ruling process/additional guidance 11:00 – 11:30 BREAK 11:30 – 12:30 Implementation Issues

Rosemary Becchi, Partner, Patton Boggs LLP George J. Schutzer, Partner, Patton Boggs, LLP

Taxable and non-taxable uses

Registration and certification

Reporting, payment, and penalties 12:30 – 1:30 LUNCH 1:30 – 3:00 Implementation Issues Panel: Ask the Experts

Rosemary Becchi, Partner, Patton Boggs LLP Lew Fernandez, Director, Tax, PricewaterhouseCoopers Chris Ohmes, Partner, Ernst & Young John Seabrook, Partner, Deloitte Tax LLP George J. Schutzer, Partner, Patton Boggs, LLP Michael Udell, Senior Manager, Ernst & Young

Manufacturing activities: kitting and contract management

What’s a sale and what’s the price

Leases and rentals

Accounting systems

Important Notice The information provided in this course represents the personal opinions of the instructors and does not necessarily represent the opinions of AdvaMed staff. Companies relying on the information do so at their own risk and assume the risk of any subsequent liability that results from relying on the information. The information does not constitute legal advice.

3:00 – 3:30

BREAK

3:30 – 4:30 What Leading Companies Are Doing Right Now

Chris Ohmes, Partner, Ernst & Young

Michael Udell, Senior Manager, Ernst & Young

4:30 – 5:30 RECEPTION Thursday, September 20

8:30 – 9:00

BREAKFAST

9:00 – 11:00 Overview of Implications for Industry Sectors Implantables, Wound Care, Surgical and Medical Supplies; Diagnostics and Capital Equipment

Chris Ohmes, Partner, Ernst & Young

Michael Udell, Senior Manager, Ernst & Young Software and Systems

Stephen Metoyer, Principal, Deloitte Tax LLP 11:00 ADJOURNMENT

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Faculty Biographies

Rosemary Becchi is a Partner with Patton Boggs. She advocates on behalf of companies on a broad array of regulatory and legislative issues, with an emphasis on tax and financial services matters. Using her combination of public and private sector experience, Ms. Becchi helps clients further their tax and financial services policy initiatives by providing strategic legal and business counsel, fostering critical relationships, and implementing successful long-term policy strategies. Ms. Becchi began her career in the Office of the Chief Counsel at the Internal Revenue Service, where she developed and drafted rulings and regulations on national tax policy. She then served as tax counsel on the Majority Staff of the Senate Finance Committee where she played a key role in developing legislation at the committee, including legislation on corporate and income tax accounting issues, the R&D tax credit, methods of accounting, depreciation, education savings and charitable giving. After leaving Capitol Hill, Ms. Becchi worked at Arthur Andersen’s Office of Federal Tax Services providing tax advice to corporate clients on complex tax transactions. Following that she joined Citigroup’s Federal Government Relations Division and was responsible for representing Citigroup on its federal and state corporate tax, international, corporate governance, accounting, and auditing issues. Ms. Becchi later joined Fidelity Investments where she directed all of Fidelity’s tax legislative and regulatory issues, including issues that impacted section 529 college savings plans, retirement and health savings, deferred compensation, and defined contribution plans. During her career, Ms. Becchi also served as a member of the Board of the Investment Committee for the Virginia College Savings Plan, where the committee oversaw the selection of investments options for the plan. Before joining Patton Boggs, she was president and founder of Becchi Consulting, where she advised businesses on operational, legal, legislative and regulatory matters. Lew Fernandez is a Director in PricewaterhouseCoopers LLP’s National Tax Services office in Washington, D.C. where he is a member of the Tax Controversies ands Dispute Resolution Team. Lew specializes in federal excise tax, IRS practice and procedure, and the federal income tax consequences of government settlements. Lew spent twenty nine years with the IRS Office of Chief Counsel in the national office. He has held positions of responsibility in both the litigation and technical functions of the Office of Chief Counsel and appeared before the United States Tax Court on behalf of the IRS. His last executive position with the Office of Chief Counsel was as Associate Chief Counsel (Income Tax and Accounting) where he supervised a staff of 129, including approximately 90 tax professionals. As Associate Chief Counsel, he was the chief legal officer to the IRS on matters within the jurisdiction of his office including accounting methods and periods, capitalization and deduction of costs, casualty and other losses and a myriad of other income tax issues ranging from the scope of gross income to fundamental credits, deductions, inclusions and exclusions. Prior to becoming Associate Chief Counsel, Lew served as Deputy Associate Chief Counsel (Passthroughs and Special Industries) and directed the tax controversy matters of that office and supervised the work of a number of the legal branches including Branch 7 which had jurisdiction over most federal excise taxes administered by the IRS. Lew joined PricewaterhouseCoopers LLP in September 2007.

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Lew is an attorney licensed in Pennsylvania, and is also licensed to practice before the United States Tax Court. He received his JD from the Seton Hall University School of Law in 1978. He also holds an MBA from the University of Pittsburgh School of Business and a BS in Management from Robert Morris University from which he graduated with honors. Stephen Metoyer is a Principal with Deloitte Tax LLP. He has over 20 years of experience in automating indirect tax systems and processes. Currently, he leads the indirect tax component of Deloitte’s Tax Management Consulting (“TMC”) practice. Stephen has significant experience designing, configuring, implementing and managing various integration projects. He has created tax technology solutions in many environments that address a wide range of transaction tax issues. He has also addressed indirect tax technology and process issues in the procure-to-pay area. Additionally, Stephen has worked extensively with tax data retention and exemption certificate management. Stephen began his career in the tax department of a Fortune 100 Company and was responsible for value added, sales, use and excise taxes. After being assigned as a tax department representative to an ERP integration team, he began his training and work in the areas of technology and process redesign. Stephen obtained his Masters in Business Administration and Bachelors of Science in Accounting from Louisiana Tech University. He speaks regularly at forums and conferences regarding indirect tax automation and process improvement. Christopher J. Ohmes is a member of Ernst & Young LLP's National Tax Department in Washington, D.C. Chris is a co-leader of the firm's research credit practice, with a particular emphasis on helping clients deal with Treasury and the Internal Revenue Service. Chris also advises clients on tax accounting issues relating to intangible assets. Prior to joining Ernst & Young LLP, Chris was a Senior Tax Specialist in the Treasury Department's Office of Tax Policy. His primary areas of concentration at Treasury included the research credit, self-created intangibles, depreciation matters, the mechanics of tax accounting method changes, licensing, and leasing issues. Prior to his Treasury experience, Chris spent 11 years in the national tax office of another international accounting firm, providing services to clients in the research credit, intangibles, and tax accounting areas and advising clients on tax policy issues in these areas and in risk management matters. Chris has been a frequent speaker on tax topics throughout his career. He also developed and taught several training classes on tax technical subjects. Prior to joining Treasury, Chris was a contributing author of the taxation chapter of the book Software Industry Accounting, dealing with the taxation of software companies. Chris received a B.B.A. in Accounting from Marquette University and an M.S. in Taxation from the University of Wisconsin-Milwaukee. He is a certified public accountant licensed in the state of Wisconsin and the District of Columbia. Chris is a member of the American Institute of Certified Public Accountants and the Wisconsin Institute of Certified Public Accountants. John Seabrook is a Partner within Deloitte’s National Federal Tax Services (NFTS) and is leading our firm’s service delivery related to the Medical Device Excise Tax (MDET). John also serves on the NFTS Management Committee, the Deloitte Tax Xchange, the Deloitte Tax Innovation Council, and the Tax Task Force for our Federal & State Government Sector Practice. John has served across a wide variety of federal tax areas and has spent the past decade forming practices around new tax legislation and has been involved with tax implications of the Affordable Care Act since its enactment in March 2010. John practices nationally and is based out of our Charlotte office. He received his Bachelor of Science and Masters Degree of Accounting from Clemson University. John holds a CPA License in North and South Carolina and has over 19 years experience with the Big 4; including 12 years at Deloitte.

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George Schutzer is chair of the Tax, Benefits and Nonprofit Organizations practice at Patton Boggs, LLP, where he has practiced tax law for the last 32 years. His practice focuses on tax components of business transactions, tax-exempt organizations and tax compliance. He has advised companies and trade associations on environmental excise taxes, exemptions from certain retail and communications excise taxes and manufacturers excises taxes, including the tax on medical devices. Mr. Schutzer is a graduate of Williams College and Yale Law School. He spoke at an AdvaMed webinar on the medical device excise tax in July 2010 and at AdvaMeds’s Medical Device Excise Tax Workshop in Irvine, California, in April. Michael Udell is a member of the Quantitative Economics and Statistics (QUEST) group at Ernst & Young LLP in Washington, D.C., where he works on federal tax policy issues. Mike assists the firm's clients with economic analysis of federal tax policy issues including the development and revenue analysis of legislative proposals. Before joining Ernst & Young LLP, Mike was an economist on the staff of the Joint Committee on Taxation for 17 years from 1991 through 2008. During that time, Mike developed models simulating the US tax system and worked on a wide range of federal tax policy issues with particular emphasis on estate and gift taxes and tax compliance proposals. He analyzed and estimated every estate and gift tax proposal considered by the Congress between 1995 and 2008 and has developed numerous tax compliance proposals that have been enacted into law. As a member of the Joint Committee on Taxation staff, he has worked closely with House Ways and Means and Senate Finance Committee tax staffs as well as Treasury and IRS personnel in the development and analysis of tax legislative proposals. Mike received his B.A. from the University of Pennsylvania and his Ph.D. from the California Institute of Technology. Christopher L. White, Esq. is Executive Vice President, General Counsel, and Secretary of the Advanced Medical Technology Association (AdvaMed). Mr. White manages AdvaMed’s Legal Committee to develop and promote positions impacting patient access to medical technology. Mr. White leads the Association’s working group developing device tax implementation, policy and comments. He testified before the Senate Aging Committee on the Physician Payment Sunshine legislation, led the drafting team substantially revising the AdvaMed Code in 2008-2009, and leads AdvaMed’s Code of Ethics related programs and activities. He led the negotiating team to draft the Kuala Lumpur Principles, harmonizing industry Codes of Ethics in Asia. As chief legal officer, he also provides counsel on commercial contracts, corporate transactions, and legislative and regulatory matters. Prior to joining AdvaMed's staff in February 2006, Mr. White was a Partner at Morgan Lewis, Counselors at Law, in the FDA/Healthcare Regulation Practice, focusing his practice on Centers for Medicare and Medicaid Services' regulatory issues affecting medical technology innovators, including device manufacturers, biotechnology companies and healthcare service providers. His work included seeking Medicare coverage, coding, and reimbursement determinations for new medical technology for device manufacturers, developers, distributors and suppliers. Before 2001, Mr. White was a partner with Gardner, Carton & Douglas, LLP national health care practice, where he concentrated on health care regulatory and fraud and abuse matters. Mr. White received his B.A. in Biology from Wake Forest University, and received his J.D. from The Catholic University of America. He serves as a frequent speaker and author on health care regulatory and fraud and abuse issues.

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Sheraton Crystal City

Arlington, VA

Sept. 19-20, 2012

List of Attendees

Andrew Beaudry

Badge Name: Andy Controller Sybron Dental Specialties

Orange, CA

Rosemary Becchi Badge Name: Rosemary Partner

Patton Boggs LLP Washington, DC

John Bergeron Badge Name: John

Vice President & Treasurer Zoll Medical Corporation

Chelmsford, MA Rachelle Bial

Badge Name: Rachelle Accounting Manager

Acumed LLC Hillsboro, OR

Victoria Blaine Badge Name: Victoria

Vice President, Commercial Operations QIAGEN Sciences

Germantown, MD Cindi Brooks

Badge Name: Cindi Manager, Meetings and Conferences

Advanced Medical Technology Association Washington, DC

Terrence Byrnes

Badge Name: Terry Tax Manager Carestream Health, Inc.

Rochester, NY

Michael Cacace Badge Name: Michael Director Federal Tax

B. Braun Medical Inc. Bethlehem, PA

Charles Carignan MD Badge Name: Chuck

President and Chief Executive Officer NinePoint Medical, Inc.

Cambridge, MA Michael Corrente

Badge Name: Michael Managing Director

CBIZ Tofias Providence, RI

Sean Darling Badge Name: Sean

Controller CFI Medical Solutions, Inc.

Fenton, MI Peter Donato

Badge Name: Peter Corporate Controller

Cyberonics, Inc. Houston, TX

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Diane Duffey Badge Name: Diane

Transaction Tax Senior Terumo BCT, Inc.

Lakewood, CO Lewis Fernandez

Badge Name: Lew Director, Tax

PricewaterhouseCoopers LLP Washington, DC

Lloyd Fort Badge Name: Lloyd

Director, Tax Planning & Special Projects Cardinal Health

Dublin, OH

Scott Froehlich Badge Name: Scott

Global Tax Director Terumo BCT, Inc. Lakewood, CO

Deborah Gangi

Badge Name: Debbie Manager, Indirect Taxes Smith & Nephew, Inc.

Andover, MA

Sharon Garber Badge Name: Sharon Controller

Spine Wave Inc. Shelton, CT

Dennis Genge Badge Name: Dennis

Vice President and Chief Financial Officer

Regenesis Biomedical, Inc. Scottsdale, AZ

Scott Gill Badge Name: Scott

Chief Financial Officer ISTO Technologies, Inc. Saint Louis, MO

Tom Guttridge Badge Name: Tom

Controller Diagnostica Stago, Inc.

Parsippany, NJ Dane Healy

Badge Name: Dane Manager, Tax Compliance

Covidien Mansfield, MA

Bruce Heugel Badge Name: Bruce

Senior Vice President & Chief Financial Officer B. Braun Medical Inc.

Bethlehem, PA

Thomas Holcombe Badge Name: Tom

Director Accounting, Financial Planning and Analysis Straumann USA LLC

Andover, MA

Lynn Hollenbeck-Konze CPA Badge Name: Lynn Senior Tax Analyst

Benco Dental Supply Company Pittston, PA

Greg Huck Badge Name: Greg

President Vitalcor, Inc.

Westmont, IL Gary Jensen

Badge Name: Gary Vice President Finance, Chief Financial

Officer ArjoHuntleigh Addison, IL

Shelly Jones

Badge Name: Shelly Assistant Controller VidaCare Corporation

Shavano Park, TX

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Mark Kebadjian Badge Name: Mark

Managing Director CBIZ Tofias

Boston, MA Lee Kim

Badge Name: Lee Chief Financial Officer

Freedom Innovations Irvine, CA

Chris Klein Badge Name: Chris

Controller Quest Medical, Inc. Allen, TX

Mark Kuhn

Badge Name: Mark Vice President Finance

Danaher Corporation Washington, DC

Richard Kurz Badge Name: Rick

Vice President, Controller & Treasurer Hitachi Medical Systems America Twinsburg, OH

Scott Larson

Badge Name: Scott Senior Vice President, Secretary & General Counsel

Terumo BCT, Inc. Lakewood, CO

Jonathan Leigh Badge Name: Jonathan

Tax Manager CareFusion Corporation

San Diego, CA YaNan Liu

Badge Name: YaNan Accounting Administrative Assistant

Baylis Medical Company Inc. Montreal, Canada

Jennifer Lynn Badge Name: Jen

Financial Controller, Corin USA Corin USA Limited

Tampa, FL Brandon Mark CPA

Badge Name: Brandon Tax Director

Cyberonics, Inc. Houston, TX

Annette Matovelle Badge Name: Annette

Controller OrthoSensor, Inc. Sunrise, FL

Catherine Matthes

Badge Name: Cathy Chief Financial Officer

Veniti Inc. Des Peres, MO

Lindsay Maxwell Badge Name: Lindsay

Senior Accountant CryoLife, Inc. Kennesaw, GA

Ronald McCarley

Badge Name: Rick President & Chief Executive Officer OPHTEC USA, Inc.

Boca Raton, FL

Nancy McCarley Badge Name: Nancy Accounting Manager

OPHTEC USA, Inc. Boca Raton, FL

Richard McEnroe Badge Name: Rich

Director, U.S. Healthcare Policy Hollister Incorporated

Libertyville, IL

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Nicole Metcho Badge Name: Nicole

Tax Director FXI

Media, PA Stephen Metoyer

Badge Name: Stephen Tax Principal, Tax Management

Consulting Practice Deloitte Tax LLP Houston, TX

Robert Milliard

Badge Name: Bob Controller Instrumentation Laboratory

Bedford, MA

Marilyn Murphy Badge Name: Marilyn

Tax Manager Hollister Incorporated Libertyville, IL

Deborah Murray

Badge Name: Debbie Director of Tax - Americas Gambro Renal Products, Inc.

Lakewood, CO

Peter Muszka Badge Name: Peter Director of Business Process Support

Straumann USA LLC Andover, MA

Heather Nazzaro Badge Name: Heather

State Tax Manager Gambro Renal Products, Inc.

Lakewood, CO Marni Nicholas

Badge Name: Marni Senior Manager, Tax Compliance

Covidien Mansfield, MA

Christopher Ohmes Badge Name: Chris

Partner Ernst & Young LLP

Washington, DC Carl Olofson

Badge Name: Carl Director, Federal Tax

Hospira, Inc. Lake Forest, IL

Jamien Payne Badge Name: Jamien

Marketing Manager Advanced Medical Technology Association

Washington, DC

Bob Pereira Badge Name: Bob

Director of Governance Zoll Medical Corporation Chelmsford, MA

Rob Phillips

Badge Name: Rob IT Manager CFI Medical Solutions, Inc.

Fenton, MI

Ronald Rice Badge Name: Ron Sr. Tax Analyst

Instrumentation Laboratory Bedford, MA

Keith Rogers Badge Name: Keith

US Tax Counsel Alcon Laboratories, Inc.

Fort Worth, TX Joseph Rolley

Badge Name: Joe Vice President, Global Government

Affairs and Health Policy ConvaTec Inc. Skillman, NJ

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Linda Rouse O'Neill Badge Name: Linda

Vice President of Government Affairs Health Industry Distributors

Association Alexandria, VA

Jennifer Sargeant Badge Name: Jen

Director, Program Development, MTLI Advanced Medical Technology Association

Washington, DC

Glenn Sasaki Badge Name: Glenn CFO

Glidewell Laboratories Newport Beach, CA

Cheryl Schramm

Badge Name: Cheryl Vice President Finance Heidelberg Engineering, Inc.

Carlsbad, CA

George Schutzer Badge Name: George Partner

Patton Boggs LLP Washington, DC

John Seabrook Badge Name: John

Tax Partner, National Federal Tax Services

Deloitte Tax LLP Charlotte, NC

Laurence Smith Badge Name: Larry

Vice President, Tax Danaher Corporation Washington, DC

Raymond Szafranski Jr

Badge Name: Ray CFO Tecan US, Inc.

Morrisville, NC

Manu Talwar CPA

Badge Name: Manu Chief Financial Officer

Micronics, Inc. Redmond, WA

Michael Udell Badge Name: Michael

Senior Manager Ernst & Young LLP Washington, DC

Christopher White

Badge Name: Chris Executive Vice President, General Counsel

Advanced Medical Technology Association

Washington, DC

Patricia Wilch Badge Name: Patt Vice President, Market Management &

Medical Affairs - Molecular Diagnostics QIAGEN Inc.

Germantown, MD Frank Wilton

Badge Name: Frank Senior Vice President, Membership &

Marketing Advanced Medical Technology Association

Washington, DC

John Yilling Badge Name: Louie Director of Finance

MED-EL Corporation (North America)

Durham, NC

Medical Device Tax Legal UpdateMedical Technology Learning Institute

September 19, 2012

Christopher WhiteSenior Executive Vice President,

General CounselAdvaMed

Statutory Elements of the Medical Device Excise Tax• 26 U.S.C. §4191(a) imposes “on the sale of any taxable medical device by the

manufacturer, producer, or importer a tax equal to 2.3 percent of the price for which so sold”

• “Taxable medical device” means “any device (as defined in section 201(h) of the [FFDCA]) intended for humans”

• “Retail” exemption for “eyeglasses, contact lenses, hearing aids, and any other medical device determined by the Secretary to be of a type which is generally purchased by the general public at retail for individual use”

• Statute imposes excise tax on sales to and for the exclusive use of a State or local government or nonprofit educational organization

• Statute excludes imposition of tax on exported medical devices (but requires registration under 26 U.S.C. §4222)

• Statute and legislative history does not specify whether excise tax is deductible

The Medical Device Excise Tax

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Jun‘10

• Forms Device Tax Working Group focused on Industry Guidance• Forms Device Tax Working Group focused on Industry Guidance

Oct‘10

• Meets w/ Treasury on industry/product characteristics; requests excise tax guidance as priority issue; seeks public process

• Meets w/ Treasury on industry/product characteristics; requests excise tax guidance as priority issue; seeks public process

Dec‘10

• Meets w/ IRS/Treasury officials; Treasury issues Notice requesting public comments

• Meets w/ IRS/Treasury officials; Treasury issues Notice requesting public comments

Mar‘11

• Submits initial recommendations highlighting Principles & definitions of “Medical Device,” Retail Exemption, Manufacturer, Price, Taxable “Use”

• Submits initial recommendations highlighting Principles & definitions of “Medical Device,” Retail Exemption, Manufacturer, Price, Taxable “Use”

Apr‘11

• Meets with IRS/Treasury officials to discuss written comments• Meets with IRS/Treasury officials to discuss written comments

Jul‘11

• Submits supplemental recommendations highlighting combination products, kits, leases, & rebates

• Submits supplemental recommendations highlighting combination products, kits, leases, & rebates

Sept‘11

• Meets with IRS/Treasury officials• Meets with IRS/Treasury officials

AdvaMed’s Regulatory Activity

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Oct & Nov ‘11

• Working Group defers on additional issues pending IRS guidance• Working Group defers on additional issues pending IRS guidance

Feb. 7,‘12

• IRS issues proposed regulations• IRS issues proposed regulations

May 7,‘12

• Submits public comments on proposed regulations• Submits public comments on proposed regulations

May 16,‘12

• Testifies before IRS in public hearing on proposed regulations• Testifies before IRS in public hearing on proposed regulations

Jan 1,‘13

• Effective date of medical device excise tax• Effective date of medical device excise tax

AdvaMed’s Regulatory Activity

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AdvaMed Participation in Guidance Process

May 16, 2012: AdvaMed testifies before IRS

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AdvaMed Participation in Guidance ProcessIRS (Notice 2010-89) requested comments

on the (1) retail exemption and (2) application of existing manufacturer’s excise tax rules to medical device excise tax

AdvaMed’s recommendations of March 22, July 5, and July 29, 2011 addressed the following topics, among others:▫ Definition of “taxable medical device”▫ Clarification of retail exemption ▫ Taxable “sale” or “use”▫ Price subject to tax▫ Definition of manufacturer▫ Kitting and bundling▫ Leases and rentals

AdvaMed made 21 separate technical Recommendations

Other stakeholder commenters: Members of Congress, Companies, Distributors, Hospitals, Professionals, Homecare, Dental, Law Firms

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AdvaMed Participation in Guidance Process

Final Comments: May 7, 2012

Priority Issues:• Taxable Use• Retail exemption• Rebates• Constructive Pricing

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Legislative Status

• Five repeal bills pending in House and Senate

• Rep. Paulsen’s bill with 240 co-sponsors; passed by the House in early June 2012

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QUESTIONS?

[email protected]

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� 103 Day from Effective Date

� National Federation of Independent Business et al. v.

Sebelius, Secretary of Health and Human Services, et al.,

132 S. Ct. 2566 (Jun. 28, 2012) - ACA is within the

Congress's power to lay and collect taxes.

� Effect of Election Results.

� Final regulations Expected this Fall

� I.R.C. § 4191(a) provides that there is hereby imposed on the sale of any taxable medical device by the manufacturer, producer, or importer a tax equal to 2.3 percent of the price for which so sold.

� "Pressure points" in the statute - Definitions of the terms:

Sale

Taxable Medical Device

Manufacturer

Price

� Terms of art described in section 4191(a) or in longstanding Subchapters applying Special Provisions to Chapter 32 Manufacturers Taxes

� I.R.C. § 4221(d)(1) - "Manufacturer" includes a producer or importer of an article.

� Treas. Reg. § 48.0-2(a)(4)(i) - The term manufacturer includes any person who produces a taxable article from scrap, salvage, or junk material, or from new or raw material, by processing, manipulating, or changing the form of an article or by combining or assembling two or more articles. The term also includes a “producer” and an “importer”. An “importer” of a taxable article is any person who brings such an article into the United States from a source outside the United States, or who withdraws such an article from a customs bonded warehouse for sale or use in the United States.

� Nominal manufacturer not treated as Chapter 32 manufacturer if:

� Under certain circumstances, as where a person manufactures or produces a taxable article for another person who furnishes materials under an agreement whereby the person who furnished the materials retains title thereto and to the finished article, the person for whom the taxable article is manufactured or produced, and not the person who actually manufactures or produces it, will be considered the manufacturer.

� Generally where a company not only owns the patents under which a taxable article is fabricated by another company, but also exercises control as to the amounts to be so fabricated and has exclusive rights to the output, and where the fabricator is not free to sell elsewhere, the company owning the patents is considered to be the manufacturer for purposes of the manufacturers excise tax. See Polaroid Corporation v. United States, 235 F.2d 276 (1st Cir. 1956), cert. den. 352 U.S. 953 (1956).

� Nominal importer not treated as Chapter 32 importer -

� If the nominal importer of a taxable article is not its

beneficial owner (for example, the nominal importer is a

customs broker engaged by the beneficial owner), the

beneficial owner is the “importer” of the article for

purposes of chapter 32 and is liable for tax on his sale or

use of the article in the United States.

� First purchaser in U.S. who arranges as principal and not as

agent for, or is the inducing and efficient cause of, goods

being brought into the United States for use or sale.

� Treas. Reg. § 48.0-2(a)(5) - The term sale means an

agreement whereby the seller transfers the property (that

is, the title or the substantial incidents of ownership) in

goods to the buyer for a consideration called the price,

which may consist of money, services, or other things.

� I.R.C. § 4217 Leases - the lease of an article (including any

renewal or any extension of a lease or any subsequent

lease of such article) by the manufacturer, producer, or

importer shall be considered a sale of such article.

� "Total tax" limitation and coordination with § 4216(c)(1)

� Effect of rule in preamble to proposed regulations

� I.R.C. § 4218 Uses - If any person manufactures, produces, or imports an article and uses it (otherwise than as material in the manufacture or production of, or as a component part of, another article taxable under this chapter to be manufactured or produced by him), then he shall be liable for tax under this chapter in the same manner as if such article were sold by him.

� Rev. Rul. 60-290, 1960-2 CB 331 - The manufacturer of a taxable article is liable for the manufacturers excise tax when he first uses the taxable article as a demonstrator in his showroom. No manufacturers excise tax is incurred on a later sale of the used taxable article.

� Contrast position taken by IRS Counsel in case specific guidance - demonstration of a new taxable article to the person who buys the article is not a section 4218 taxable use. General v. Specific demonstration purposes make a difference?

� Samples, bonus or free articles - No section 4218 use

because of title transfer. But, can be viewed as purchase

price adjustment in appropriate circumstances or a sale

for consideration other than money.

� Tax Free Sales

� I.R.C § 4221(a)(1) - for use by the purchaser for further manufacture, or for resale by the purchaser to a second purchaser for use by such second purchaser in further manufacture.

� I.R.C. § 4221(a)(2) - for export, or for resale by the purchaser to a second purchaser for export.

� Registration requirements - Form 637 Application for Registration (For Certain Excise Tax Activities)

� Substantiation requirements

� A taxable medical device is statutorily defined as "any device (as defined in section 201(h) of the [FFDCA] intended for humans."

� The proposed regulations state that a taxable medical device means "a device that is listed as a device with the [FDA] under section 510(j) of the [FFDCA] and 21 CFR Part 807, pursuant to FDA requirements."

� Statute specifically exempts eyeglasses, contact lenses, and hearing aids.

� Statute also authorizes the Secretary to determine other exempt devices “of a type which is generally purchased by the general public at retail for individual use” - primary purpose of the proposed regulations

� When statutory exemptions, the preamble to the proposed regulations and the proposed substantive rules are taken together, the following principles emerge:

� FDA listed devices are presumptively taxable, but the following devices are exempt:

� Devices that are not FDA listed

� Devices intended for use exclusively in veterinary medicine (but devices with dual human /veterinary are not exempt if listed with the FDA)

� "Research Use Only" Devices meeting the requirements of 21 CFR 807.65(f)

� Devices subject to an Investigational Device Exemption under 21 CFR Part 812.

� Eyeglasses, contact lenses and hearing aids

� Devices falling into the Retail Exemption

� The proposed regulations provide a two-pronged facts and circumstances test and a "Safe Harbor for determining whether a device is exempt under the retail exemption

� "Safe Harbor" - Examine this test first. Devices that fall within the safe harbor are automatically exempt with no further examination.

� “Safe Harbor” - The following devices will be considered to be of a type generally purchased by the general public at retail for individual use:

(A) Devices that are included in the FDA’s online IVD Home Use Lab Tests (Over-the-Counter Tests) database, available at http://www.accessdata.fda.gov/scripts/cdrh/cfdocs/cfIVD/Search.cfm.

(B) Devices that are described as “OTC” or “over the counter” devices in the relevant FDA classification regulation heading.

(C) Devices that 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, available at http://www.accessdata.fda.gov/scripts/cdrh/cfdocs/cfrl/rl.cfm.

(D) Devices that qualify as durable medical equipment, prosthetics, orthotics, and supplies, as described in Subpart C of 42 CFR Part 414 (Parenteral and Enteral Nutrition) and Subpart D of 42 CFR Part 414 (Durable Medical Equipment and Prosthetic and Orthotic Devices), for which payment is available on a purchase basis under Medicare Part B payment rules, and are--

(1) “Prosthetic and orthotic devices,” as defined in 42 CFR 414.202, that do not require implantation or insertion by a medical professional;

(2) “Parenteral and enteral nutrients, equipment, and supplies” as defined in 42 CFR 411.351 and described in 42 CFR 414.102(b);

(3) “Customized items” as described in 42 CFR

414.224;

(4) “Therapeutic shoes,” as described in 42 CFR

414.228(c); or

(5) Supplies necessary for the effective use of DME,

as described in section 110.3 of chapter 15 of the

Medicare Benefit Policy Manual (Centers for Medicare

and Medicaid Studies Publication 100-02).

� The Two-Pronged Facts and Circumstances test. Objective is to fall into the first prong and out of the second prong in order to achieve exemption.

� First Prong - Regularly available for purchase and use by individual consumers.

(A) Consumers who are not medical professionals can purchase the device through retail businesses that also sell items other than medical devices, such as drug stores, supermarkets, and similar vendors.

(B) Consumers who are not medical professionals can use the device safely and effectively for its intended medical purpose with minimal or no training from a medical professional.

(C) The device is classified by the FDA under Subpart D of 21 CFR Part 890 (Physical Medicine Devices).

� Second Prong - Primarily for use in a medical

institution or office by a medical professional.

(A) The device generally must be implanted,

inserted, operated, or otherwise administered

by a medical professional.

(B) The cost to acquire, maintain, and/or use

the device requires a large initial investment and/or

ongoing expenditure that is not affordable for

the average consumer.

(C) The device is a Class III device under the FDA

system of classification.

(D) The device is classified by the FDA under parts,

subparts and section of 21 CFR (FDA regulations).

(E) The device qualifies as durable medical

equipment, prosthetics, orthotics, and supplies for

which payment is available exclusively on a rental

basis under the Medicare Part B payment rules, and is

an “item requiring frequent and substantial

servicing” as defined in 42 CFR 414.222.

� List of factors is non-exclusive

� IRS and Treasury have asked for additional

factors (e.g., labeling, internet sales), examples

of safe harbors the industry would like to be

considered for inclusion in the final regulations.

� IRS Office of Chief Counsel may be willing to

issue private letter rulings to address the Retail

Exemption as it applies to specific medical

devices.

� Final regulations expected this fall

� Manufacturers excise taxes from their inception in 1932

were intended to apply as a percentage of the price at

which manufacturers sold to volume purchasers,

traditionally at the wholesaler level. Shakespeare Co. v.

U.S., 419 F.2d 839 (Ct. Cl. 1969), cert. denied, 400 U.S.

820 (1970).

� Congress early recognized, however, that competitive

inequities were created among manufacturers of like goods

who sold at different levels of distribution, e.g., a

manufacturer which sold at retail rather than to

wholesalers charged a higher price for its goods because of

increased expenses of distribution at retail.

� The constructive price rules are designed to

result in a downward adjustment of price when

taxable articles are sold directly a retail. S.

Rep. No. 2090, 85TH Cong., 2ND Sess. (1958).

� The constructive price rules are also designed to

result in an upward adjustment when taxable

articles are sold in transactions that are not at

arm's length for a price that is less than fair

market price. Id.

� I.R.C. § 4216(b)(1) - In general, construct a sale

price when a taxable articles is:

(A) Sold at retail,

(B) Sold on consignment, or

(C) Sold (otherwise than through an arm's length

transaction) at less than the fair market price.

� Retail sale = sale of an article to a purchaser

who intends to use or lease the article rather

than resell it. Treas. Reg. § 48.4216(b)-1(c).

� Consignment sale = it is sold while it is on

consignment to a person that has the right to

sell, and does sell, such article in its own name,

but never receives title to the article from the

manufacturer. Treas. Reg. § 48.4216(b)-2(d).

� Sales otherwise than at arm’s length =

(1) One of the parties is controlled (in law or in

fact) by the other, or there is common control,

whether or not such control is actually exercised

to influence the sale price, or

(2) The sale is made pursuant to special

arrangements between a manufacturer and a

purchaser.

� Inter-company sales between related entities are per se not at arm’s length.

� At less than fair market price = IRS will generally use the constructive price to determine the "floor" fair market price unless the taxpayer can show that a different, lower fair market price is "clearly applicable." S. Rep. No. 91-1444, 91st Cong., 2d Sess. (1971); IRS and Treasury published and case specific guidance.

� IRS constructive price can be rebutted by expert testimony; market data etc. Storm Plastics, Inc. v. U.S., 770 F.2d 148 (10th Cir. 1985), acq. Rev. Rul. 89-47, 1989-1 CB 295.

� Any inter-company sales pricing methodology that yields a substantially lower result than would result under the constructive pricing rules is likely to be challenged.

� I.R.C. § 4216(b)(1) General Rule - the tax under this chapter shall

be computed on the price for which such articles are sold, in the

ordinary course of trade, by manufacturers or producers thereof,

as determined by the Secretary.

� I.R.C. § 4216(b)(1) General Rule for Retail Sales - In the case of

an article sold at retail, the computation shall be on whichever

of the following prices is the lower: (i) the price for which such

article is sold, or (ii) the highest price for which such articles are

sold to wholesale distributors, in the ordinary course of trade, by

manufacturers or producers thereof, as determined by the

Secretary.

� I.R.C. § 4216(b)(2) - Special Rule for sales at retail or to retailers:

- If special rule applies, then general rule above is not applicable.

- If an article is sold at retail or to a retailer, and if--

(A) the manufacturer, producer, or importer of such article regularly sells such articles at retail or to retailers, as the case may be,

(B) the manufacturer, producer, or importer of such article regularly sells such articles to one or more wholesale distributors in arm's length transactions and he establishes that his prices in such cases are determined without regard to any tax benefit under this paragraph, and

(C) the transaction is an arm's length transaction

the tax under this chapter shall (if based on the price for which the article is sold) be computed on whichever of the following prices is the lower: (i) the price for which such article is sold, or (ii) the highest price for which such articles are sold by such manufacturer, producer, or importer to wholesale distributors.

� Retailer = a person engaged in the business of selling

taxable articles at retail. Treas. Reg. § 48.4216(b)-1(c).

� Wholesale distributor = A person engaged in the business of

selling taxable articles to persons engaged in the business

of reselling such articles. Id.

� Treas. Reg. § 48.4216(b)-2(d) General Rule for Consignment

Sales - Ordinarily, the constructive sale price of an article

sold on consignment is the net price received by the

manufacturer from the consignee.

� What about intercompany sales that are not at fair market price?

� I.R.C. § 4216(b)(3) - for purposes of the general rule under section 4216(b)(1), if—

(A) the manufacturer, producer, or importer of an article regularly sells such article to a distributor which is a member of the same affiliated group of corporations (as defined in section 1504(a)) as the manufacturer, producer, or importer, and

(B) such distributor regularly sells such article to one or more independent retailers, but does not regularly sell to wholesale distributors,

� The constructive sale price of such article shall be 90 percent of the lowest price for which such distributor regularly sells such article in arm's-length transactions to such independent retailers. The price determined under this paragraph shall not be adjusted for any exclusion (except for the tax imposed on such article) or readjustments under subsections (a) and (e) and under section 6416(b)(1).

� If both the (b)(3) rule and the (b)(4) rule described below apply with respect to an article, the constructive sale price for such article shall be the lower of the constructive sale price determined under (b)(3) or (b) 4.

� I.R.C. § 4216(b)(4) statute presents a complicated rule.

� Stated as simply as possible, for purposes of the general rule under section 4216(b)(1), if --

(A) the manufacturer, producer, or importer of an article regularly sells (except for tax-free sales) only to a distributor which is a member of the same affiliated group of corporations (as defined in section 1504(a)) as the manufacturer, producer, or importer,

(B) the distributor regularly sells (except for tax-free sales) such article only to retailers, and

(C) the normal method of sales for such articles within the industry by manufacturers, producers, or importers is to sell such articles in arm's-length transactions to distributors,

the constructive sale price for such article shall be the price at which such article is sold to retailers by the distributor, reduced by a percentage equal to the mark-up used by independent distributors in that industry.

� IRS and Treasury guidance provide that the (b)(3) and (b)(4) rules are applicable even if the related entities are not section 1504 affiliates.

� Secretary's delegate, the Commissioner, will construct a price under the general power in section 4216(b)(1).

� Rules can be found in various pieces of published guidance and case specific guidance (PLRs; TAMs; CCAs)

� Examine a few scenarios -

Scenario 1: Manufacturer sells a taxable medical device directly to a hospital (assume theory in HCA applies). No sales of the identical article to wholesale distributors.

Scenario 2: Manufacturer sells a taxable article to a related distributor that sells to a hospital. No sales of the identical article to wholesale distributors by the selling company.

Scenario 3: Manufacturer sells a taxable article directly to a retailer. No sales of the identical article to wholesale distributors.

Scenario 4: Manufacturer sells a taxable article to a related distributor that sells to a wholesale distributor.

� Timing of final regulations on Taxable Medical Device

�

� Published guidance on additional MDET issues?

� Private letter rulings

- Proper Constructive Price - Section 5.13 of Rev. Proc. 2012-1.

- Whether a medical device is a taxable medical device.

- Other issues

� Agreements through Compliance Assurance Process

� Technical Advice

Implementation Issues

• Taxable and Nontaxable Sales and Uses

• Registration and Certification Requirements and Procedures

• Reporting, Payment and Penalties

• Manufacturing Activities

• What is the “Price”

• Leases and Rentals

• Accounting Systems and Procedure

• Ruling Process/Additional Guidance

2

3

Taxable and Nontaxable Sales and Uses

Taxable Sales and Uses

• Section 4191 of the Internal Revenue Code imposes a 2.3 percent excise tax on the sale of taxable medical devices by a manufacturer, producer , or importer.

• What is a Sale?

− The rules generally provide that a sale occurs when title to the taxable article passes from the manufacturer to a purchaser.

� When title passes is dependent upon the intention of the parties as gathered from the contract of sale and the circumstances.

− What if the medical device is computer software that is licensed?

4


• Who is a Manufacturer? A producer or importer− Producer: Any person who produces a taxable article from new

or raw material, or from scrap, salvage or junk material by:

� Processing or changing the form of the article, or

� Combining or assembling 2 or more articles

− Importer: Any person who brings a taxable item into U.S. (or withdraws from a customs bonded warehouse) for sale or use in the U.S.

• Manufacturer is liable for payment of tax

5


• Taxable event: Tax attaches when title passes from manufacturer to purchaser. − Look to intent of parties as expressed in sales contract.

− In the case of a sale on credit, the tax attaches whether or not the purchase price is actually paid.

− If no expressed intent, look to legal rules of presumption in jurisdiction where sale occurs.

6


• Partial payments: Tax attaches at time each partial payment is received when taxable articles are:− Leased;

− Sold conditionally;

− Sold on installment with chattel mortgage (i.e., transfer of rights in tangible personal property as security for payment of money or performance of some other act), or

− Sold on installment with title passing in future

− Licenses?

7

Taxable Sales and Uses – Exemptions?

• Sales to State and local governments—NOT exempt

• Sales to nonprofit educational organizations—NOT exempt.

• Sales to qualified blood collector organizations—NOT exempt.

• Sales to affiliated company—TAXABLE. Special rules apply for determining the sales price.

• Use by manufacturer—generally TAXABLE

− Lease of medical device by manufacturer is considered a sale

8

Taxable Sales and Uses – Special Issues

• Demonstration products

− e.g. medical device that is provided “free of charge” for promotional purposes

• Evaluation projects

• Free samples

• Loaned equipment

• Free products as a bonus for selling/buying a certain quantity

9

Nontaxable Sales and Uses – Further Manufacture• Sales for use by the purchaser for further manufacture, or

for resale by the purchaser to a second purchaser for use by such second purchaser in further manufacture, are exempt

• Manufacturer may be relieved of liability. Reg. §48.4221-1(b)(1)

• If purchaser buys articles tax free and resells them or uses them other than in the manufacture of another article, the purchaser is liable for the tax.

10

Nontaxable Sales and Uses – Further Manufacture (cont’d)• If sold for resale for further manufacture — Within 6

months of date of sale by the manufacturer, the manufacturer must receive proof that the device has been sold for further manufacture. Reg. § 48.4221-2(c)

• Consequences of failure to receive proof.

11

Nontaxable Sales and Uses – Export

• Sales for export, or for resale by the purchaser to a second purchaser for export, are exempt.

• Product must be exported within six months of sale and evidence of export provided to manufacturer. See Reg. § 48.4221-3(d) for evidence that qualifies.

• If manufacturer does not receive proof of export, the manufacturer is liable for the tax.

12

Nontaxable Sales and Uses – Additional Requirements• Manufacturer, first purchaser and second purchaser (in

the case of resales) must be registered . IRC §4222(a)

− Does not apply to foreign purchasers of articles sold or resold for export. But see Reg. §48.4221-3(b)

• If the purchaser is required to be registered, the purchaser must give the manufacturer its registration # and certify the exempt purpose. Certification must be in writing and may be noted on the purchase order

• Manufacturer must indicate to purchaser that the articles normally would be subject to tax.

13

Nontaxable Sales and Uses – Failure to Claim Exemption• A credit or refund of the manufacturers excise tax may be

available if a tax-paid article is exported or used for an exempt purpose, such as further manufacture.

14

Registration and Certification

15

Registration with the U.S. Food and Drug Administration• Who must register?

− The FDA generally requires owners or operators of business that manufacture, prepare, propagate, compound, assemble, process, repackage or re-label medical devices intended for human use (“Manufacturers”) to register their establishments and list their devices upon first entering into operation.

� Applies to businesses located in the United States, or in a foreign country that export devices to the United States

� Information must be updated with U.S. Food and Drug Administration annually

16

Registration with the IRS

• Who must register?

− In general, manufacturers and importers must register their (i) businesses and (ii) medical devices with IRS on Form 637, “Application for Registration (For Certain Excise Tax Activities ).”

− Status of revised form

− The application must be reviewed and approved before person is registered for any activity. The review may include inspection of the applicant’s premises.

− If an application is approved, the IRS will issue a Letter of Registration. The letter will include the activities for which the applicant is registered, the effective date of the registration, and a registration number.

17

Registration of Purchaser Seeking Exemption• Who must register?

– Tax-free sale of taxable medical device generally may be made only if manufacturer, first purchaser and second purchaser (if any) have been registered by the IRS.

– Exception: Persons whose principal place of business is not in the U.S. not required to register to purchase tax free for export

• Generally, the purchaser of a taxable article must provide the purchaser’s registration number to the manufacturer and certify the exempt purpose for which the article will be used. Information must be in writing and may be noted on the purchase order furnished by the purchaser

18

Registration of Purchaser Seeking Exemption – Next Steps(cont’d)• When new Form 637 is issued, complete and submit the

form to the IRS.• Remember that excise tax law does not allow for

consolidated returns. Thus all affiliates that manufacture or import and then sell taxable medical devices must register. “Disregarded entities” must register separately from their owners.

• If you manufacture or import taxable medical devices and expect to sell for further manufacture, contact customers to whom you expect to make exempt sales and encourage them to complete the form immediately.

19

Reporting, Payment and Penalties

20

Form and Schedules for Reporting

• Who Must File?

– The party incurring liability for federal excise taxes or responsible for collecting federal excise taxes must file Form 720 (Quarterly Federal Excise Tax Return). Thus, manufacturers and importers must file.

– The excise tax rules do not include procedures for consolidated returns. Each corporate affiliate that manufactures or imports and sells taxable medical devices must file.

– Each “disregarded entity,” such as a wholly owned LLC, that manufactures or imports and sells taxable medical devices must file separately.

21

Form and Schedules for Reporting

• When to file?– The party must file on a quarterly basis or, upon a failure in

compliance, possibly on a monthly or semi-monthly basis (due last day of month after quarter end)

• Purpose of the filing– Look back filing to “true up” the net excise tax liability paid through

the semimonthly payments made throughout the quarter

• Recordkeeping– Filers must maintain tax return, records, and accounts of all

transactions supporting all claims and exemptions for at least 4 years

22

Procedures for Payment

• General

− Semi-monthly deposits (twice a month) of excise tax estimates are required unless the net liability for excise taxes does not exceed $2,500 for quarter.

23


• How and when to make deposits

− Must use electronic funds transfers (ETF) to make excise tax deposits (via Electronic Federal Tax Payment System).

− Due on the 29th of the month (for the first semimonthly period) and the 14th day of the following month (for the second semimonthly period).

− Transaction must be initiated one day before the deposit is due.

24


• Amount of Deposit

− Deposit must be 95% of the net tax liability for the period unless safe harbor applies.

− Can elect to determine semimonthly liability by dividing monthly liability by two

− Safe Harbor — If each deposit equals 16.67% (or 1/6) of the total net tax liability for the entire look-back quarter (the 2nd calendar quarter preceding the current quarter). Underpayment must be made with return for quarter

25

Penalties and Interest

• Penalties and interest may result from:

− Failure to keep adequate records

− Failure to file returns (Form 720)

− Failure to pay taxes (or make deposits)

− Filing returns late

− Filing false or fraudulent returns or making false statements

− Paying taxes late (or making deposits late)

− Failing to register

− Misrepresenting that tax is excluded from the price of an article

26

Penalties and Interest

• Claims

− Criminal penalties for false or fraudulent claims

� Including refund claims for excessive amounts (penalty is the greater of two times the excessive amount or $10)

• Failure to Register

− Penalty for failure to register if required to register, unless due to reasonable cause, is $10,000 for the initial failure and $1,000 each day thereafter.

27

Overpayment, Refunds and Credits

• Form 8849, Claim for Refund of Excise Taxes

• Form 720, Quarterly Federal Excise Returns (for credits)

• Product used for exempt purpose (exported or used in further manufacture)

• Price adjustment by reason of return or repossession of the article or bona fide discount or rebate.

• No interest on refunds

28

Overpayment, Refunds and Credits

• Credit or refund can be claimed by manufacturer.

• If tax-paid device is exported, the exporter or shipper may claim a credit or refund if the manufacturer waives its right. Claim must include proof of export and other information

• If tax-paid device is used in subsequent manufacture, the subsequent manufacturer may claim the credit or refund.

29

Overpayment, Refunds and Credits Exports – Claim by Manufacturer• To claim a credit or refund in the case of an export,

manufacturer must certify that one of the following applies:

− Claimant sold the article at a tax-excluded price.

− Claimant has repaid or agreed to repay the ultimate vendor for the product.

− Claimant has obtained the written consent of the ultimate vendor to make the claim.

− Claimant has repaid the amount of the tax to the ultimate purchaser or has filed the consent of the ultimate purchaser to the allowance of the credit or refund.

• Evidence must be submitted. Reg. §48.6416(b)(2)-3

30

Overpayment, Refunds and Credits Exports – By Exporter• Exporter or shipper may claim refund or credit if

manufacturer waives claim and other conditions satisfied (supporting evidence). See Reg. §48.6416(e)-1

31

Overpayment, Refunds and Credits Further Manufacture – Claim by Subsequent Manufacturer

• To claim a credit or refund of tax paid on a device for a price adjustment, the manufacturer must include a statement that contains the following:

− Description of circumstances that gave rise to price adjustment

− Identification of device

− Price at which device was sold, amount of tax paid, and date on which it was paid

− Name and address of the purchaser

− Amount repaid to purchaser or credited to purchaser’s account. Reg. §48.6416(b)(1)-4.

32

Overpayment, Refunds and Credits Price Adjustment by Manufacturer• To claim a credit or refund of tax paid on a device for a

price adjustment, the manufacturer must include a statement that contains the following:

− Description of circumstances that gave rise to price adjustment

− Identification of device

− Price at which device was sold, amount of tax paid, and date on which it was paid

− Name and address of the purchaser

− Amount repaid to purchaser or credited to purchaser’s account. Reg. §48.6416(b)(1)-4

33

Manufacturing Activities

34

Manufacturing Activities – Kitting and Contract Manufacturing• Definition of manufacturer

− any person who produces a taxable article from scrap, salvage, or junk materials, or from new or raw material, by processing, manipulating, or changing the form of an article or by combining or assembling two or more articles

35

Manufacturing Activities - Kitting

• Proposed regulations’ position on kitting

− Kits are treated as taxable medical devices if the kit is listed with the FDA as a device pursuant to FDA requirements

− For such kits, kitting is considered to be a manufacturing activity and the kitter is the manufacturer liable for the tax

− If the kitter pays the tax but a manufacturer of a device that is part of the kit also paid tax on that device and sold the device to the kitter at the tax-included price, then the kitter is entitled to a refund or credit for that overpayment of tax

− If the kit includes taxable and nontaxable devices, the price of the kit is subject to the tax without reduction for the price of nontaxable devices, on the basis that the individual devices in the kit “have lost their identity as separate articles”

36

Manufacturing Activities – Contract Manufacturing• Rules on contract manufacturing

− The determination of who is the manufacturer is based on facts and circumstances

− Substance rather than form controls

− See Rev. Rul. 58-134, Rev. Rul. 60-42, and Polaroid v. US, 235 F.2d 276 (1st Cir. 1956)

• Proposed regulations’ position on use of income tax rules on contract manufacturing (e.g., §954) - NO

37

What Is the “Price” Subject to Tax?

38

What is the “Price” Subject to Tax?

• The price for which sold is the “total consideration paid for the article, whether that consideration is paid in the form of money, services, or other things” [Reg. §4216(1)-1(a)]

• Included Charges:− Separate charges for tools and dies

− Charges for coverings, containers and packing, whether or not identified on the invoice or separately billed

− Commissions to manufacturers’ agents or allowances, payments or adjustments made to or for the benefit of anyone other than the purchaser

• Excluded Charges: − Excise tax

− Transportation, delivery, insurance, or installation charges

39

Rebates and Discounts

• Readjustments to sales price such as allowable discounts, rebates, bonuses, etc. are treated as not being anticipated.

• The sales price thus must be based on the original price unless the readjustments have actually been made prior to the close of the period for which the tax upon the sale arises

• If the price is subsequently readjusted, credit can be taken against the tax due on a subsequent return

40

Items Furnished Under Warranty

• If an article is returned by reason of the failure of the article under warranty and a new article is furnished free or at reduced price, then the tax on the new article is computed based on the price, if any, for the new article [Reg. §4216(a)-3(b)]

• See Reg. §48.6416(b) for circumstances under which return of first article constitutes a price adjustment for which credit or refund can be made

41

Leases and Rentals

42

Taxable Event

• The lease of an article by the manufacturer (including importer) is treated as a sale

• Tax is paid on each rental payment, rather than at the time of sale

• If medical device is sold to a lessor (including an affiliate), the sale is the taxable event, and rental payments would not be taxed

43

Amount of Tax

• 2.3% of each rental payment until the total of the tax payments under the lease and any prior lease equals the “total tax.” [IRC §4217(b)]

• “Total Tax”: Tax computed on constructive sale price “which would be determined under section 4216(b) if such article were sold at retail on the date of the first lease” [IRC §4217(c)(1)].

• “Total Tax” limitation applies only if the person making the lease or the prior lease was also engaged in the business of selling in arm’s length transactions the same type and model of article. [IRC §4217(d)(1)]

44

� Overview:

� Supply Chain Mapping

� Defining the Tax Base

� Determining When the Liability Arises

� Amount of Liability

� Compliance/IT considerations

� Does the way we obtain ownership of taxable medical

devices potentially make us liable for the tax

� Do we make it?

� Did we import it?

� Are we treated as if we made it?

� What about:

� Kitting

� Installation and/or periodic servicing

� Training

� Repairs

� Refurbishing

� Which legal entities in our structure have compliance

obligations

� Single US entity

� Foreign parent

� Domestic parent

� Multiple US entities

� Central domestic distributor

� Product Exemptions

� Mapping FDA product codes onto item masters

� Exemptions lost to kitting

� Export transactions

� Can we prove it?

� Further manufacturing

� Whose liability?

� Is it ours or our vendor’s?

� Can double taxation be avoided?

� Vendor policies

� Hospitals

� Which transaction triggers the liability

� First sale after manufacturing

� Some common “foot faults” when determining when

manufacturing ends

� Sterilization?

� Imported product issues

� Identifying uses treated as sales

� We don’t sell our equipment

� Rental as use

� Valuation issues

� Pricing determinations

� Pricing adjustments

� What can be excluded?

� 4216(a) charges

� Other charges not properly not included as manufacturing or

selling expense Reg.§ 48.4216(a)-2

� Many ERP environments

� SAP

� QUAD

� JDE

� Oracle

� QuickBooks

� Data processes – What is needed?

� Tax calculation

� ERP reporting

� Tax audit support

� Return preparation

� How much to automate?

� Initial

� Registrations

� Exemption certificates

� Recurring

� Payment procedures

� Filing of quarterly Forms 720

� Record retention

� Supplier relationship changes

� Item master changes

� Acquisitions

� Develop and sell

� Demonstration and training units

� Lent tools associated with implantables

� Tools are returned after use with implantable device, then

sterilized and reused

� Are they depreciated?

� Pre-2013 inventory of tools

� Sales

� Retail exemption

� Kitting

� Loss of the retail exemption

� Purchased product both resold and kitted

� Repairs

� Tools

� Capital equipment

� Taxable or not?

� Does the retail exemption apply?

� Purchase, use, and design tests

� Rental or sale?

� Reagent rental model

� Razor/razor blade business model

� Case 1: The specified and recurring fee for the disposables

includes an implicit charge for the use of capital equipment.

Customers who own their capital equipment purchase at a lower

price.

� Case 2: The specified and recurring fee for the disposables

includes an implicit charge for the use of capital equipment, with

no transactions involving customer-owned equipment.

� Rental issues

� Does the first use rule exempt property used prior to 2013?

� Definition of a lease and the cap on rental payments

� Contracts for a capability v. a specific piece of equipment

Medical Device Excise TaxTechnical Overview/Systems Approach/Automation Considerations

Stephen MetoyerPrincipalDeloitte Tax LLP

September 20, 2012

Copyright © 2012 Deloitte Development LLC. All rights reserved.2

Agenda

• Overview

• MDET Solution Development Life Cycle• Impact Analysis• Business Decisions• Requirements Gathering• Solution Development

• Reporting and Systems Readiness

Copyright © 2012 Deloitte Development LLC. All rights reserved.

Overview – Medical Device Excise Tax

3

• Beginning January 1, 2013, a 2.3% excise tax is levied on the sale of any taxable medical device. The tax is imposed on the manufacturer, producer, or importer.

• The tax applies to sales of any medical device intended for humans (as defined in section 201(h) of the Federal Food, Drug, and Cosmetic Act)


Overview – What is a Medical Device?

4

Sec 201(h) of the Federal Food, Drug, and Cosmetic Act:The term "device“ means an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other 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 o ther conditions, or in the

cure, mitigation, treatment, or prevention of disea se, in man or other animals, or

3. intended to affect the structure or any 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. (i.e., not a drug)


Overview – Exemptions

5

Three Exceptions/Exemptions:1. Devices sold at Retail to the public for individual use (eyeglasses,

hearing aids, etc.)2. Devices sold for further manufacture3. Devices sold for export

Observations:• Information technology implications may require reconfiguring ERP

systems• Registration process and exemption certificate management will be

required


The Implications are Far Reaching

6

Copyright © 2010 Deloitte Development LLC. All rights reserved.7

Integrated BRD

FRICEWFunctional

specs

Tax business requirements

Taxdata elements

BRDWorkshops

Fit/Gap assessment

Tax design blueprints

Configurationdesign

Processdesign

Solution Approach


MDET Solution Development Life Cycle

8


Excise Tax Impact Analysis

9


MDET Business Decisions

In some solution development projects requirements are gathered and business decisions are made based upon gathered requirements. However, with the complexit y of MDET, it is clear that certain business decisions might d rive how requirements are gathered.

10

Timing / Type of Calculation

Tax Base

Pass-through and financial impact

Communications


Business Decisions - Timing / Type of Calculation

Real-time Calculation• Leverages existing systems and

transactional events to calculate tax

• Tax is calculated and booked at transaction time and level

Batch Process Calculation• Perform offline calculation of

MDET in batch• Can be done via reporting / BI

tools

Use of Tax Software?• Content• Taxability• Calculation• Taxable transaction event• Perform Calculation with ERP

native functionality

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Business Decisions - Tax Base

The taxable price for MDET will be either the actual or a constructive sales price. Under either the actual or constructive sales price, certain items are either included or excluded. (One word of caution, certain of the CSP scenarios don’t permit the use of the exclusions listed below. )

A taxpayer only falls into the CSP rules if the article is:• Sold at retail *• Sold on consignment, or• Sold (otherwise than through an arm’s length transaction) at less than fair market value*

* A sale at retail for these rules is a sale of an article to a purchaser who intends to use or lease the article rather than resell the article.

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Inclusions

• Coverings & containers• Charges incident to placing the article in a

condition to be packed and ready for shipment

• Standard warranty

Exclusions

• The excise tax itself• The actual cost of transportation, delivery,

insurance, installation and other expenses incurred in connection with placing the article in the hands of the purchaser

• Discounts, rebates and similar allowances actually granted to the purchaser

• Warranty paid at the purchaser’s option


Business Decisions – Pass through and financial impa ct

Will the tax get passed through to

customers?

Will the tax be presented as a line item to customers?

What information is being divulged regarding cost

structure?

Is the price elastic enough to absorb

the perceived price increase?

How is the impact measured?

- Financial- Customer- Tax Authority

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YES

NO

YES

NO

• Certain business decisions related to financial impact, customer relationship, market conditions will drive the required robustness of a system solution for reporting and or calculation.

• It is often the case that these business decisions are far more complicated than the actual systems design and implementations.


Business Decisions - Communications

Internal

Finance & controllers

Tax compliance

Sales, contracting & customer relations

Supply chain management

Quality and Regulatory

Information technology

External

Customers

Suppliers

Governmental Authorities

Business partners

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Business Requirements

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Description

Inputs and ToolsActivities

1.1 Systems Requirements Definition

• Conduct workshops with functional areas to determine process flows and surface requirements

• Review transactional data for financial transactions

• Review product lines to determine taxable medical devices

• Identify applicable exemptions and/or exclusions

• Identify high-level MDET requirements

1.2 Fit-Gap Determinations

• Assess impact of requirements on current processes

• Assess Impacts to current systems

• Assess system and process fit-gap for requirements

1.3 Requirements / IT Systems Environment Review D ocumentation

• Prepare, review, and finalize Requirements

Specific Outcomes

High-level MDET requirements serves as the baseline to develop systems and business processes. These requirements must be met in order to lay the foundation for designing the MDET solution. Particular focus should be placed on the business structure and strategy, tax impositions, and the processes that impact them. The requirements are compared to the potential solution alternatives (once identified) to identify potential gaps.

• Tax

• Finance

• IT

Resourcing

Week 1 2 3 4 5 6 7

Potential timing

1. System Requirements Development

1.1 System Requirements Definition1.2 Fit-Gap Determinations1.3 Requirements / IT Systems Environment Review

Documentation

Tax Blueprint Industry Print Fit-Gap Template

System Requirements IT Systems Environment Review

Key Activity

Key Deliverable

Workshop

Master Data • Ability to identify FDA registered devices as part of Master Data

• Ability to differentiate items purchased (fully completed medical devices) for resale vs. items used for further manufacturing

Incidence of MDET

• Ability to determine the Manufacturer/Producer/Importer (“MPI”) in supply chain

• Ability to differentiate physical product from services for MDET treatment

MDET Calculation

• Ability to calculate the MDET on cross legal entity transactions

• Ability to calculate the MDET across multiple ERP systems

• Ability to post MDET to the appropriate tax liability account in GL

Exemptions

• Ability to track exemption certificates related to purchases and sales of FDA-listed medical devices or otherwise determine that double tax is not paid

• Ability to track medical devices that are subject to further manufacturing

Reporting

• Ability to track price adjustments & rebates to recover tax previously paid

• Ability to generate reporting to track transactions where refunds are processed

• Ability to generate reporting for MDET compliance and audit purposes

Business Requirements

Design • Collaborative work with Information technology to develop a solution• Accounts for all aspects of MDET compliance (record to report)

Build

• Primarily a Information Technology effort to configure new reports, functionality etc. • Involves configuration, coding, and development of offline tools• Should include unit testing of built solutions

Test• Integrated testing of the designed and built solution(s)• Test all elements of solution

Cut-Over

• Exception handling • Returns• Communication strategy

Design – Build – Test – Cut-Over


Reporting and Systems Readiness: Compliance, Audit, Ad -Hoc

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Reporting

How will data be captured and stored?

How can the business

access the data when needed?

How can the integrity of the

data be confirmed ?

How do we prepare the

infrastructure for ad-hocreporting?

How do we consolidate

MDET-related data when

multiple ERPS are involved?


Reporting and Systems Readiness: Reporting and System Complexities

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Currently we have clients that are taking different approaches to capturing relevant data, calculating the tax, and generating reports that can be used to identify tax paid on registered medical devices.

1.For some medical device manufacturers it is impractical to determine taxability and calculate MDET on a transactional basis (e.g. real-time), since it does not follow the manufacturer->distributor->end customer sales model contemplated by excise tax law (i.e. the manufacturer and distributor are one in the same, and this is where tax applies)

2.Exemptions and exclusions are not ordinarily identifiable back to a transaction level, freight and other exclusions are aggregated and may be embedded in cost of good sold

3.Systems that can be used to store the detailed source data for a specified time period for audit defense and tax planning purposes may require some modification to store MDET related data


Reporting and Systems Readiness: Sample SAP Report

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This presentation contains general information only and Deloitte is not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this presentation.

About this presentation

About DeloitteDeloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.

Copyright © 2012 Deloitte Development LLC. All rights reserved.Member of Deloitte Touche Tohmatsu Limited

Medical Device Tax Workshop - HIDA Device Tax... · automating indirect tax systems and processes....

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