Who pays the tax?

Courtesy of the IRS

A medical device--say, a pacemaker--can have a long journey before it ends up in a patient. From a lab to a contract manufacturer to a distributor to a hospital group to a specialist. All along that line, who absorbs the 2.3% charge?

That all depends on when what the IRS calls a "taxable event" occurs. The agency defines that as when ownership of a taxable medical device in its final state passes from the manufacturer or importer to a purchaser.

Of course, the intent of the purchaser comes into play, too. If the purchaser plans to export, tinker with or repackage the device, then no taxable event has taken place. If pretty much anything else is planned, then the manufacturer needs to cough up 2.3% of the sales price. After the product has been further manufactured or rebranded as part of a kit, the taxable event arrives when that purchaser turns it around for a second sale.

Basically, the IRS will look to collect its dues whenever a final, patient-ready product changes hands, so long as it's going to stay in the U.S. Whether the device is given away, purchased on credit or bought in installments, the agency expects its cut.

Furthermore, the 2.3% comes off the listed sale price, not the actual dollar amount exchanged. While these numbers will often be identical, that rule means any rebate, discount or pre-existing arrangement that brings down the price could leave the manufacturer short-changed. For example, if your firm lists a device at $10,000 a pop, but you have a bulk deal with a distributor in which you get $8,000 for each one, the IRS will still expect to collect taxes on the $10,000 list price. 

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Who pays the tax?