AdvaMed is pressing for a repeal of the impending medical device tax in the context of broader federal tax reform in an effort to attract more bipartisan support for the measure.

The device trade group issued a white paper on tax reform Feb. 7, highlighting a device tax repeal as its number one priority, but also outlining four additional recommendations more broadly focused on reducing taxes for companies that conduct R&D and manufacturing activities in the U.S.

The proposals are an effort to “decouple” discussion of the device tax from the health care reform debate and link its repeal to efforts by policymakers in both political parties focused on improving the tax system, AdvaMed suggested.

“This isn’t about health care reform,” Steve Ubl, president and CEO of AdvaMed, said during a Feb. 7 press briefing. “Repealing the device tax is the first down payment on a much-needed reform of America’s tax code.”

“We believe, candidly, that if we are successful repositioning the device tax as a jobs and economic growth issue in the context of tax reform, many more Democrats will ... join us in the effort to repeal the tax,” AdvaMed’s Ubl said.

“We believe, candidly, that if we are successful repositioning the device tax as a jobs and economic growth issue in the context of tax reform, many more Democrats will view that issue in the same way and join us in the effort to repeal the tax going forward,” Ubl said.

Tax Reform Issue ‘Maturing’

The 2.3% excise tax on most U.S. device sales, enacted under the 2010 Affordable Care Act, is scheduled to take effect next January. The Internal Revenue Service issued draft rules to implement the tax earlier this month. (See Also see "Tax Time Cometh: IRS Issues Device Tax Proposed Rule" - Medtech Insight, 6 February, 2012..) But industry groups, including AdvaMed and the Medical Device Manufacturers Association, say they are squarely targeting repeal of the tax this year, rather than focusing too much attention on the details of the proposed regulation. (See table.)

Several bills have been introduced in Congress to repeal the device tax. And device lobbyists are optimistic that Rep. Erik Paulsen’s, R-Minn., Protect Medical Innovation Act in the House is gaining enough support to pass in that chamber. (See Also see "Republicans Renew Push To Repeal Device Tax; Broad Support Questionable" - Medtech Insight, 31 January, 2011..)

Still, many financial and policy analysts believe the device tax is more likely to take effect in January than be repealed by that time, though some see opportunity for near-term legislation to at least revise the tax provision to limit its reach.

“Although device makers would like the provision to be repealed altogether, we continue to believe changes around the edges are more likely,” writes Eric Assaraf, an analyst with Guggenheim Securities/Washington Research Group, in a Feb. 3 note. “Such changes include revenue-based exclusions for small companies and a 10-year cap at $20 billion.”

Industry representatives acknowledge that significant challenges remain, particularly in the Senate and the administration, on a stand-alone device-tax-repeal bill. Lobbyists have previously floated the potential for attaching a repeal provision to a broader bipartisan jobs bill or tax reform bill. (See Also see "AdvaMed Steps Up Effort To Link Device Tax Repeal To Job Growth" - Medtech Insight, 12 September, 2011..)

In making its case last week for a device tax repeal as part of, or the first step in, broader tax reform, AdvaMed noted in its white paper that “tax reform is maturing as a public issue and ... we believe that medical technology has an important perspective to add – not only for our industry but more broadly.”

“The device tax makes an uncompetitive tax system far worse,” Ubl said during the press briefing. “The tax gives us one of the most burdensome tax regimes of any sector of our economy.”

In addition to calling for a repeal of the device tax, AdvaMed makes four recommendations that member companies believe will improve U.S. competitiveness.

The trade group proposes reducing combined federal and state corporate tax rates to levels “comparable or lower than competitor nations.” It also renewed calls to expand the federal R&D tax credit and make it permanent.

Further, AdvaMed says the U.S. should adopt a “territorial” tax system, in which the U.S. only taxes income earned in the U.S. However, the group notes that if this change is not possible, “the current system of deferral of taxes on foreign earnings should be retained.”

Finally, the trade group advocates establishing a so-called “innovation box” in the tax code that provides bigger tax rate reductions on profits derived from intellectual property developed in the U.S. or used in manufacturing products in the U.S.

“Since even a substantially lowered tax rate ... would still leave a very large differential between the tax on economic activities conducted in the U.S. and those located abroad, targeted tax incentives are needed to create a level playing field for industries in the tradable sector – especially knowledge-based, high-value industries,” the white paper states.

In his Jan. 24 State of the Union address to Congress, President Obama emphasized tax reform as one of his near-term priorities with the potential for bipartisan agreement. In particular, the president proposed removing current tax breaks for companies that invest resources overseas, while increasing tax incentives to companies that manufacture products in the U.S.

The administration also has signaled support for lowering corporate tax rates while increasing personal income tax rates on the wealthiest Americans.

Republicans also favor tax reductions and simplifying the tax code, although many congressional observers suggest the odds are still against Democrats and Republicans coming together in an election year on significant tax reform.

Vehicle Shopping Continues

AdvaMed, however, stressed that it does not see the chances of a repeal of the device tax in 2012 as totally dependent on Congress achieving broader tax reform this year.

“I think we’re going to be very opportunistic and look at every opportunity, every bill that we think is a potential vehicle to carry the repeal of the device tax,” Ubl said.

Meanwhile, Mark Leahey, president and CEO of MDMA, says that his group “defers to Congress as to what is the best vehicle to achieve this bipartisan goal.”

“When there is wide agreement that the excise tax will harm innovation, job creation and patient care, repealing this onerous provision of health care reform should be a priority in every agenda," Leahey argued in a statement.

One vehicle Ubl did not rule out is FDA user-fee reauthorization legislation that needs to pass by September.

“I don’t believe considering the device tax [repeal] would really slow the process of the [user-fee] legislation,” Ubl said.

But he acknowledged the likely need to work with lawmakers to find a suitable off-set to cover the lost revenue from repeal of the device tax, which is budgeted to raise $20 billion over ten years to help balance the costs of the Affordable Care Act. AdvaMed does not currently have any specific off-set proposals.

In the context of the Affordable Care Act, “We’re talking about a $1 trillion bill [and] the device tax counts for about $20 billion,” Ubl noted. “So by any objective measure it’s a very minor component of the underlying legislation,” he argued.

Device Tax: Details From Proposed Reg

The IRS issued proposed regulations for the 2.3% device excise tax Feb. 3, with comments due May 7 and a public meeting on the matter set for May 16. (See Also see "Tax Time Cometh: IRS Issues Device Tax Proposed Rule" - Medtech Insight, 6 February, 2012. .) “Facts and circumstances” will drive many exemption decisions on taxability, but IRS suggests that its definition of a “taxable medical device” should clarify most cases.

Issue	What the proposed rule says
“Taxable medical device”	A Food, Drug and Cosmetic Act-defined device that must be listed according to FDA’s “registration and listing” rules.
Retail exemption	“Facts and circumstances” approach will be applied to identify device types that are “generally purchased by the general public at retail for individual use.” Automatically exempt: devices labeled as over the counter in FDA regulations or product code listings; devices listed in FDA’s home-use lab test database; and certain durable medical equipment available on a purchase basis to users.
Investigational device exemption	Devices approved only for use in a clinical trial are not taxable because they are exempt from FDA’s listing requirements.
Demonstration products	Current rules hold that use of a taxable article by its manufacturer for demonstration purposes is a taxable use and that providing an article “free of charge” for promotional purposes counts as a sale.
“Further manufacture” or export	The tax does not apply to the sale of an otherwise taxable device when it is intended for “further manufacture” or for export.
Product kits	Sale of an otherwise taxable device to another party for the purpose of packaging the product in a bundle would not be taxed under the “further manufacture” provision.
Combination products	IRS anticipates that “few, if any” combination products will be subject to both the device tax and the branded pharmaceutical fee outlined in the health care reform law, but the agency requests comments on this assumption.
Medical software/IT contracts	Each payment under a long-term contract will be taxed at the 2.3% rate, and ongoing payment resulting from contracts signed prior to Jan. 1, 2013, will not be exempt.
Research-use- only devices	Research-use devices subject to listing requirements, because they are introduced into commercial distribution or are not solely used for research, are taxable.
Sale price	Includes “total consideration paid,” including money, services or other. Excludes: excise tax amount; cost of bringing and installing a product for a purchaser; discounts, rebates and similar allowances; and warranty charges.
Contract manufacturing arrangements	If more than one entity is involved in the manufacture or importation of an item, the determination of which entity is the tax-liable manufacturer or importer is based on “facts and circumstances” of the arrangement.
Leases	Considered a sale, with the particulars of the tax payment dependent on whether or not a manufacturer also sells the same products outright to other customers.

Source: Internal Revenue Service, Taxable Medical Devices, Notice of Proposed Rulemaking, filed Feb. 3, 2012.

Device Tax Repeal As Tax Reform: AdvaMed Makes The Case

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