|Courtesy of Sxc.hu|
While the FDA's definition of a medical device is broad, the tax doesn't apply across the board. The IRS recognizes a whole host of distinct products, uses and end results that disqualify taxation.
The retail exemption
First, medical devices are exempt if they "are generally purchased by the general public," the IRS says. This rule is designed to protect direct-to-consumer products like eyeglasses, contacts and hearing aids from the 2.3% charge.
That "generally purchased" clause is a little murky, of course, and the IRS explanation isn't much clearer. The regulations say the IRS will decide how to apply the exemption based upon whether the device is regularly available to non-medical professionals and whether its design demonstrates that "it is not primarily intended for use in a medical institution." The agency goes on to say it will also consider cost, FDA classification and whether the device is implantable when making its decision.
That's still likely to leave quite a bit of room for debate. However, if you find the definitions obtuse, the IRS agrees with you; the agency's guidance document on the issue concludes with a promise that it will work with the Treasury Department to make the exemption test simpler.
The further manufacture exemption
The IRS also exempts devices destined for further manufacture. The agency defines this as any device sold to another outfit as "a material in the production of, or component part of" another taxable medical device. In order to claim the exemption, both manufacturer and purchaser must be registered with the IRS and must disclose the fate of the device in question.
While that provision is fairly simple, things get a bit murkier with kits. The IRS says that taxable medical devices are exempt from the charge if they're sold to purchasers who intend to repackage them as part of a kit, but manufacturers have to pay it if those devices are sold individually. So, imagine your company makes endoscope attachments. If you sell one to a physician, you owe the feds the device tax. If you sell it to another firm that will flip it as part of an endoscopy kit, the burden falls on your client.
The export exemption
This one's pretty cut-and-dry: Any device sold to a purchaser outside the United States is exempt from the tax, no matter where it was manufactured. Furthermore, any device sold to a domestic purchaser who intends to export it is also protected. Thus, if a manufacturer sells its product to a distributor, both are exempt from paying the charge so long as the device's final destination isn't on American soil. Much like with the further manufacture exemption, the IRS is going to want to see documentation of all that.
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