Medical Device Excise Tax


HUGE, BIG Win for O&P – Most Devices Are Exempt from 2.3% Excise Tax at Both the Component Manufacturer and Patient Care Facility Level!

AOPA is pleased to inform members that the Treasury Department has today released the final rule for the medical device excise tax.  Broadly speaking, and most importantly, Treasury has confirmed what they had stated in the proposed rule—that “prosthetic and orthotic devices,” DO qualify for exemption from the 2.3 percent medical device tax under the retail exemption provided in the Affordable Care Act.

The technical jargon in the final rule confirmed “prosthetic and orthotic” devices as defined in 42 CFR 414.202, that do not require implementation or insertion by a medical professional; and “(T)herapeutic shoes,” as described in 42 CFR 414.228(c) qualify for the safe harbor provision“ considered to be of a type generally purchased by the general public at retail for individual use” (and so, qualify for retail exemption).  AOPA had several specific meetings and consultations with IRS and Treasury beginning nearly two years ago explaining why we believed O&P devices were eligible for this retail exemption.

Additionally, Treasury has responded favorably to the specific argument AOPA presented that this retail exemption required that the manufacturers of components (and potentially complete devices) should also be exempt from the 2.3% tax as to these products because otherwise the patient would be required to “…pay the excise tax as the tax would just be shifted higher up the distribution chain.”   This is a dramatically important and favorable outcome for O&P in this final rule.  It is clear that companies that manufacture components that are used by a patient care facility provider to fabricate an exempt O&P device (under the safe harbor rule) are also exempt, as to those components, from the medical device excise tax.

The key statement from the final regulations on the component policy is the following example given:

“Example 8.  X manufactures single axis endoskeletal knee shin systems, which are used in the manufacture of prosthetic legs.  X sells the knee shin systems to Y, a business that makes prosthetic legs.  The FDA requires manufacturers of knee shin systems and prosthetic legs to list the items as devices with the FDA.  The FDA classifies prosthetic leg components, including knee shin systems, as external limb prosthetic components under Subpart D of 21 CFR part 890.3420 and product code ISH.  The FDA classifies prosthetic legs as an external assembled lower limb prosthesis under 21 CFR part 890.3500 and product code ISW/KFX.  In addition, the Centers for Medicare and Medicaid Services have assigned the knee shin systems Healthcare Procedure Coding System code L5810.

“Prosthetic legs and certain prosthetic leg components, including single axis endoskeletal knee shin systems, fall within the safe harbor for prosthetic and orthotic devices that do not require implantation or insertion by a medical profession(al) that is set forth in paragraph (b)(2)(iii)(D)(1) of this section.  Accordingly, both the single axis endoskeletal knee shin systems manufactured by X and the prosthetic legs made by Y are devices that are of a type generally purchased by the general public at retail for individual use.”

We need to be clear that this is not a universal exemption of any manufacturer’s entire product line—it really depends on whether the component goes into a finished O&P device that qualifies for exemption.  If every component a company makes is used in an exempt device, then all those products would be exempt from the tax.  Other manufacturers may sell some components that meet the criteria for the retail exemption and other products (e.g., non-O&P devices) that do not qualify for the exemption. They will have to pay tax on the latter products, but not as to the former ones.

What we quoted above is the “safe harbor” eligibility for the retail exemption, and it appears virtually all O&P devices will qualify under this preferred pathway.  There is a second pathway—the facts and circumstances test.  This is a path open to any manufacturer who wishes to argue that the retail exemption should apply to their product(s), and is open to any type of manufacturer (not limited to O&P)—this route would take a longer time and have less immediate certainty.