US House of Representatives Passes Legislation Aimed at Repealing the Medical Device Tax

September 18, 2014—Representative Erik Paulsen (R–MN) announced that the US House of Representatives passed legislation authored by the congressman to repeal the medical device tax. Paulsen’s bill, the Protect Medical Innovation Act (H.R.523), which has 275 cosponsors including 46 Democrats, was included in a larger package of jobs bills, the Jobs for America Act (H.R. 4) that was passed with a bipartisan vote of 253 to 163.

Originally instituted as a funding source for the Patient Protection and Affordable Care Act signed into law by President Barack Obama in March 2010, Section 4191 of the Internal Revenue Code imposes an excise tax on the sale of certain medical devices by the manufacturer or importer of the device. The tax applies to sales of taxable medical devices after December 31, 2012.

According to Congressman Paulsen’s press release, a study has shown that the 2.3% excise tax included in the health care law has already resulted in the loss of 33,000 jobs, and future jobs losses are estimated at 132,000. Paulsen also noted that a recent Harvard Business Review article found that the device industry faces more uncertainty than any other industry in the country. In addition, recent problems have also surfaced with the Internal Revenue Service’s (IRS’s) inability to adequately enforce the tax. A Treasury Inspector General audit found that the IRS issued 217 erroneous penalties to device companies over a 6-month period.

In the press release, Congressman Paulsen commented, “The medical device tax continues to eliminate thousands of good-paying jobs and stifle medical innovation. The tax has already meant the loss of 33,000 jobs—equivalent to wiping out the entire Minnesota medical device industry—and will continue to harm our economy. Repealing this tax is the only answer for a bad idea that only gets worse.” Congressman Paulsen serves on the House Ways and Means Committee and the bicameral Joint Economic Committee and is cochair of the Congressional Medical Technology Caucus.

As noted in a Minneapolis StarTribune report on September 20, although the Republican-run House of Representatives approved the jobs package that repeals the device tax, the Democratic-run Senate is unlikely to follow suit without finding an alternate revenue source. The report stated that even if the House jobs bill makes it through the Senate, the Office of Management and Budget has said it will recommend that President Obama veto the legislation rather than sign it into law. In March 2013, the US Senate voted overwhelmingly, 79–20, to repeal the device tax. But as the Wall Street Journal advised, this was largely a symbolic vote because of the likely failure of the budget bill to which it was attached. 

On September 19, the Medical Imaging & Technology Alliance (MITA), Advanced Medical Technology Association (AdvaMed), and the Medical Device Manufacturers Association (MDMA) announced their collective support for the continued bipartisan efforts to repeal the 2.3% medical device excise tax.

The joint announcement stated, “The medical technology industry is an important engine for economic growth in the United States, employing more than 400,000 workers nationwide, generating approximately $25 billion in payroll, paying out salaries that are 40% more than the national average ($58,000 vs $42,000) and investing nearly $10 billion in research and development annually. The industry is fueled by innovative companies, the majority of which are small businesses, with 80% of companies having fewer than 50 employees. Repealing the medical device tax will remove the burden to invest in research and development, ultimately benefitting patients, increasing jobs, and boosting the economy.”

In the press release, MITA executive director Gail Rodrigues commented, “Federal policies that affect medical imaging innovation also have reverberating effects on patients, jobs and the United States economy. We support the bipartisan efforts to repeal this harmful tax and pursue policies that promote the development of lifesaving technologies.”

Stephen J. Ubl, president and CEO of AdvaMed, added, “Repealing this tax will help ensure the United States maintains its global leadership in this high-tech manufacturing sector and advance the development of new cures and treatments. We greatly appreciate the ongoing support from both sides of the aisle on this important issue.”

Mark Leahey, president and CEO of MDMA, said, “MDMA thanks the House of Representatives for working to strengthen medical technology innovation by removing a major roadblock towards developing the cures of tomorrow. Repealing the medical device tax not only empowers patients and providers, but will allow America’s innovators to create more high-tech manufacturing jobs that our communities desperately need.”

On August 19, the US Treasury Inspector General for Tax Administration (TIGTA) announced its audit showing that the IRS needs to improve its strategy to ensure accurate reporting and payment of the Medical Device Excise Tax. The overall objective of TIGTA’s review was to assess the IRS’s processing of tax returns reporting the medical device excise tax and its efforts to identify taxpayer noncompliance. The audit is available online.

The announcement noted that the Joint Committee on Taxation estimated revenues from the medical device excise tax of $20 billion for fiscal years 2013 through 2019. TIGTA found that both the number of Forms 720 filed reporting the medical device excise tax and the amount of associated revenue reported were lower than estimated.

As shown in Figure 2 of the report, there was an approximately $300 million shortfall for the first half of 2013 alone from the tax collected versus the IRS projected estimates. The IRS processed 5,107 Forms 720 with reported excise taxes of $913.4 million for the quarters ending March 31 and June 30, 2013. The IRS had estimated between 9,000 and 15,600 quarterly Forms 720 tax returns with excise tax revenue of $1.2 billion for this period.

The TIGTA announcement noted that the IRS is attempting to develop a compliance strategy to ensure that businesses are compliant with the filing and payment requirements and has taken several measures to advise medical device manufacturers of the new excise tax.

However TIGTA advised, the IRS cannot identify the population of medical device manufacturers registered with the Food and Drug Administration that are required to file a Form 720 and pay the excise tax. 

In addition, processing controls do not ensure the accuracy of medical device excise tax figures reported on paper-filed Forms 720. TIGTA’s analysis of 5,107 Forms 720 processed for the first half of 2013 identified discrepancies in the amount of the excise tax and/or taxable sales amount captured from 276 paper-filed tax returns.

TIGTA identified medical device excise tax discrepancies totaling almost $117.8 million when comparing the excise tax amount captured by the IRS from the Form 720 to the excise tax amount that TIGTA calculated.

Finally, the IRS erroneously assessed 219 failure-to-deposit penalties totaling $706,753 against businesses filing a Form 720 for the 6 months ending June 30, 2013, which was designated a penalty relief period. The IRS had reversed 133 of the 219 penalty assessments. When TIGTA alerted the IRS of the remaining 86 penalties, IRS management reversed the penalties and issued apology letters to the affected taxpayers.

TIGTA recommended that the IRS continue refining its compliance strategy to include actions that can be taken to identify noncompliant manufacturers. Additionally, TIGTA recommended that the IRS review the 276 tax returns TIGTA identified to determine the proper excise tax owed, establish a process to verify the accuracy of the medical device excise tax amount for paper-filed Forms 720, and initiate a process to correspond with taxpayers to obtain missing taxable sales or tax amounts.

According to the press release, the IRS agreed with TIGTA’s recommendations and plans to consider alternative strategies for identifying noncompliant manufacturers, identify programming changes needed to improve the math verification for paper-filed Forms 720, and implement procedures for corresponding with taxpayers if the changes can be accomplished within budgetary constraints. The IRS also indicated that approximately two-thirds of the paper-filed tax returns TIGTA identified were reviewed.