mass medic planning for the medical device excise tax · 2017-03-30 · first deposit of medical...

Mass Medic–

Planning for the

Medical Device

Excise Tax

May 16, 2012

© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent

member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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Notice

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY KPMG TO

BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY

FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY

TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY

ANY MATTERS ADDRESSED HEREIN.

You (and your employees, representatives, or agents) may disclose to any and all persons,

without limitation, the tax treatment or tax structure, or both, of any transaction described in the

associated materials we provide to you, including, but not limited to, any tax opinions,

memoranda, or other tax analyses contained in those materials.

The information contained herein is of a general nature and based on authorities that are subject

to change. Applicability of the information to specific situations should be determined through

consultation with your tax adviser.



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Today’s objectives

Understand what challenges companies face

Understand tax technical issues

Understand the excise tax compliance process

Understand the assessment process needed to begin preparing for the tax



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Open discussion

What are companies’ medical device excise tax concerns?

What are the key issues and challenges?

Unique Concepts of

Federal Excise Tax



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Excise tax procedural rules

No consolidated federal excise tax return

Disregarded entities are regarded for federal excise tax purposes

Each entity with EIN is treated as a separate entity

Form 720, Quarterly Federal Excise Tax Return

– Based on a calendar quarter

Semimonthly deposits required in advance of return

– Required for each semimonthly period during calendar quarter in which liability incurred

Under IRS Small Business/Self-Employed Division

No Tax Court jurisdiction



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When does compliance start?

First deposit of medical device excise tax will be due January 29, 2013

– Relating to tax liability incurred January 1 - 15

First return of medical device excise tax will be due April 30, 2013

– Reporting tax liability incurred January 1 – March 31

Basics―

Medical Device Excise Tax



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Section 4191

Effective January 1, 2013

Tax is imposed on the sale of any taxable medical device by its manufacturer or importer at a

rate of 2.3% of the price for which sold

A device is

– Any product for use in diagnosis or treatment of human disease

– Intended to affect the structure or any function of the body

– But not drugs

Exempt medical devices are

– Eyeglasses, contact lenses, and hearing aids

– Any medical device determined by the Treasury to be of a type that is generally purchased

by the general public at retail for individual use (the “retail exemption”)



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Proposed regulations

A “taxable medical device” is a device listed with the FDA under section 510(j) of the FFDC

Act and 21 CFR Part 807, pursuant to FDA requirements

A device meets the “retail exemption” if it is regularly available for purchase and use by

individual consumers who are not medical professionals and it is not primarily intended for

use in a medical institution or office or by a medical professional

– Facts and circumstances test

– Safe harbor

Existing manufacturers excise tax regulations apply

Issued on February 3, 2012



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Retail exemption safe harbor

Identifies categories of devices that IRS determined fall within retail exemption

Specified over-the-counter devices

Specified durable medical equipment, prosthetics, orthotics, and supplies



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Retail exemption facts and circumstances test

Some of the non-exclusive factors

Regularly available for purchase and use by individual consumers

Whether consumers who are not medical professionals can:

Purchase the device through general retail business, such as drug stores and supermarkets

Safely and effectively use the device as intended without training by a medical professional

Primarily intended for use in a medical institution or office or by a medical professional

Device generally must be implanted or otherwise administered by a medical professional

Cost to acquire, maintain, and use the device requires a large initial investment and ongoing expenditure that is not affordable for the average consumer



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Examples of exempt devices

Proposed regulations provide the following examples

Safe harbor

Pregnancy test kits

Blood glucose monitors

Facts and circumstances test

Non-sterile absorbent tipped applicators

Adhesive bandages

Snake bite suction kits

Denture adhesives



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Existing manufacturers excise tax rules apply

Section 4191 is a manufacturers excise tax under IRC Chapter 32

Existing regulations provide rules relating to

– Defining “manufacturer” and “importer”

– Tax imposed on uses and leases

– Determining the “sale price” to be used as the tax base

– Tax-free sales

– Refunds of tax, including price readjustments, exports, and use in further manufacture

– Filing returns and making deposits of tax



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Who is a manufacturer?

Under existing excise tax rules, manufacturer includes any person that produces a device

From scrap, salvage, or junk material, or from new or raw material

By processing, manipulating, or changing the form of an article, or by combining or assembling

two or more articles

Fabricator is not the manufacturer if

Person for whom Fabricator produces article

Furnishes materials to Fabricator

Retains title to materials and finished device

Producer is not the manufacturer if

Person for whom Producer makes article

Owns the patents

Exercises complete control over outputs

Polaroid Corp. v. United States, 235 F.2d 276 (1st Cir. 1956); Revenue Ruling 58-134



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Who is an importer?

Under existing excise tax rules, importer means the person that sells or uses the device

in the United States after

Bringing a device into the United States from a source outside the United States, or

Withdrawing a device from a customs bonded warehouse

If the nominal importer of a device is not its beneficial owner, the beneficial owner is the

importer

Example

Customs broker engaged by the beneficial owner

How Does The Medical Device

Excise Tax Work?



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How the tax works

Sale, use, or lease of taxable medical device by manufacturer or importer triggers the tax

The manufacturer or importer is liable for the tax

Tax base is “sale price”

– Generally, sale price is the price for which the device is sold

– Sometimes, substitute a “constructed sale price”

Tax-free sales for export and “for use in further manufacture”

– If seller and purchaser (except foreign purchaser) registered in advance by IRS

– and paperwork requirements met

Refund of tax

– In the case of certain price readjustments

– If the device was not sold tax free for export or for use in further manufacture



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What triggers tax?

Sale by manufacturer or importer

Tax applies upon sale, even if sale price not paid

Use by manufacturer or importer treated as sale

Tax applies at time use begins

Lease by manufacturer or importer treated as sale

Generally, tax applies to each lease payment



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What is use in further manufacture?

Use of a taxable medical device as a component of another taxable medical device



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What is a kit?

A kit is a set of two or more articles enclosed in a single package (such as a bag, tray, or box)

for the convenience of a medical or health care professional or the end user

A kit that is a listed device is a taxable medical device



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Generic supply chain for excise tax purposes

Wholesaler

Retailer

End User

Manufacturer/

Importer



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Sale price

Generally, the price for which the device is sold

Includes certain charges required as condition of sale

Excludes certain charges

– Excise tax

– Transportation, delivery, installation, and insurance

– Optional service contracts

– Optional warranties

Price readjustments cannot be anticipated



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Price readjustments

Devices returned by purchaser and some or all of the price is refunded

Rebates, discounts, and other allowances paid to purchaser

Refund of tax may be allowable for price readjustments



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Constructed sale price

There are constructed sale price (CSP) rules for

– Sales at retail

– Sales “not at arm’s length” and at less than a “fair market price”

Sales “not at arm’s length” is defined in excise tax regulations

– One of the parties is controlled (in law or in fact) by the other, or there is common control,

whether or not such control is actually exercised to influence the sale price, or

– The sale is made pursuant to special arrangements between a manufacturer and a

purchaser

“Fair market price” is not defined in excise tax regulations

Requires detailed understanding of the supply chain on a device-by-device basis

No IRS guidance on CSP that are specific to medical device excise tax



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What is a sale at retail?

A sale by the manufacturer or importer directly to the end user

Under section 4216(b)(1)(A), the CSP is the lower of―

The price for which the device is sold, or

The highest price for which such devices are sold to wholesale distributors, in the ordinary

course of trade, by manufacturers or importers thereof, as determined by the IRS

Under Revenue Ruling 81-73

If manufacturer or importer has an established bona fide practice of selling the articles in

substantial quantities to wholesale distributors―

CSP is the highest price for which it sells similar articles to wholesale distributors



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Sale at retail―

what if there are no sales to unrelated wholesale distributors?


CSP is 75% of the price for which sold, after taking into account allowable sale price exclusions,

unless it can be shown on an industry-wide basis that a lower percentage should apply


CSP for sport fishing equipment is 60% of price for which sold, after taking into account

allowable sale price exclusions



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Sales not at arm’s length and at less than fair market price

Under section 4216(b)(1)(C), CSP is the price for which such devices are

sold in the ordinary course of trade by manufacturers or importers

thereof, as determined by the IRS



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If sales are to related wholesale distributor


CSP is 95% of related wholesale distributor’s lowest established price to unrelated wholesale

distributors, or

The actual selling price at which the taxable article leaves the corporate family in the ordinary

course of trade


If intercompany price is less than 95% of price to unrelated wholesalers, IRS presumes it is not a

fair market price



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For sales by related wholesale distributor to unrelated retailers

Under section 4216(b)(3), CSP is 90% of the lowest price for which

related wholesale distributor regularly sells such articles to unrelated

retailers, if related wholesale distributor does not regularly sell to

unrelated wholesaler distributors



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What is the challenge for intercompany sales?

An intercompany sale is never an arm’s length sale under excise tax rules

Will the intercompany price be respected as a “fair market price” under the excise tax rules?

If yes, then intercompany price is the tax base

If no, the CSP rules would apply

Support for conclusion that intercompany sales are at “fair market price”

Storm Plastics, Inc. v. United States, 770 F.2d 148 (10th Cir. 1985)

– Evidence may be presented that price is fair market price to rebut IRS presumption that

CSP applies

Revenue Ruling 89-47

– IRS will follow the Storm Plastics decision and allow rebuttal of the CSP

– Manufacturer/importer has the burden of establishing that its product was sold at a

clearly applicable fair market price, using industry data, expert testimony, etc.

KPMG Approach―

Preparing for the Medical Device

Excise Tax



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Approach to medical device excise tax

Multi-step process

Assessment Phase

Analysis and Conclusions Phase

Implementation Phase



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Key questions

Which products are “taxable medical devices”?

Which devices are exempt under the “retail exemption”?

Which entities are “manufacturers” or “importers”?

What activities are taxable events?

What is the applicable tax base for those activities?

In what situations do “constructed sale price” rules apply?

Which sales can be made tax free for export and for “use in further manufacture”?

For which sales may tax refunds be allowable?

What are the excise tax procedural rules for reporting tax to the IRS?



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Assessment phase

Step 3

Step 4

Step 5

Review company

structure

Identify

manufacturers

Identify

importers

Review flow of

devices from

manufacturer/

importer to end user

Identify activities

other than sales

that may trigger tax

Identify sales and

purchases that may

qualify for tax free

treatment

Review sales and

distribution chain

Review price for

determining tax

base

Sale price

generally

Constructed sale

price

Review post-sale

events for tax refund

possibilities

Identify sales to

which price

readjustments may

apply

Identify other sales

for which a tax

refund may be

allowable

Step 1

Step 2

Review devices in

product line

Identify taxable

medical devices

Identify exempt

devices



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Analysis and conclusions phase

Provide technical analysis of issues identified during assessment phase

Make recommendations relating to identified issues

Answer key questions to determine tax liability



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Implementation phase

Understand excise tax procedural rules

Develop excise tax compliance policies and procedures

Document positions taken



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Implementation phase―develop excise tax compliance process

Determine entities that should become registered by IRS

Develop data collection system

Develop model workpapers to support excise tax return

Develop process for reporting tax quarterly

Develop process for making semimonthly deposits of tax



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Implementation phase―develop documentation

Documentation of decisions on significant issues

Manufacturer/importer entities

Taxable medical devices

Exempt devices

Constructed sale price issues

Documentation of computation of tax

Tax base

Tax-free sales

Refunds

Resumes and Contact Information



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Robert T. Noonan

Partner

Professional and Industry Experience

Rob Noonan is KPMG’s Tax Partner-in-Charge for New England and Upstate New York and is

resident in Boston. Rob joined KPMG’s Boston office in 1985 and was admitted into the partnership in

1996.

Rob is the partner in charge of our New England and Upstate New York Tax practice and is resident

in the Boston office with over 25 years of experience in delivering tax consulting and compliance

services to our clients. His experience includes advising companies on the individual and corporate

income tax consequences of equity and debt financing arrangements, employment compensation

plans, and legal entity structuring. Rob has experience in identifying federal and state direct and

indirect tax credits for start-up and mature companies. His experience also includes performing due

diligence on acquisition targets to determine income and indirect tax exposures and structuring the

form of the purchase to include the overall tax burden of the transaction, and recommending legal

structures to minimize federal and state taxes.

Representative Clients

Advent International

Nuance

Atlas Venture Partners

Thomas H. Lee Partners

Polaris Ventures

Sapient

ROBERT T. NOONAN Partner

KPMG LLP

Two Financial Center

60 South Street

Boston, MA 02111

Tel 617-988-1129

Fax 617-507-7894

Cell 781-552-9754

[email protected]

Function and Specialization

Federal Tax

Education, Licenses & Certifications

• J.D. – Suffolk Law School

• B.A. – St. Michaels College



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Zara Muradali, managing director

Background

Zara Muradali has over 16 years of public accounting experience serving New England-based multinational

and middle market companies in numerous industries including manufacturing, software, and biotechnology.

She currently leads the Accounting Methods and Credits Practice for KPMG’s New England Service Area.

Professional and industry experience

Zara has provided tax compliance and consulting services for over 16 years. Her experience includes

assisting clients with design and development of tax functions, carve-out accounting, ASC 740 income tax

reserve analysis, and cash tax planning. She also has experience in performing accounting methods and

credits diagnostic studies to increase cash flow through risk mitigation and/or potential tax planning as well

as assessing the impact of IFRS conversions.

Zara has served as a technical advisor, IRS exam strategist and Tax Account Leader on a number of

multinational and inbound companies. She also served as the ASC 740 Business Tax Leader for a Big Four

accounting Firm.

Technical skills

Accounting Methods (including R&D studies and Section 199), IFRS Conversion, ASC 740, Tax Planning,

IRS Controversy (including pre-filing agreements), Intellectual Property Planning, acquisition and disposition

planning, Global Tax Compliance and Reporting.

Other activities

Co-chair of Diversity Initiatives for a Big Four accounting Firm

Founder of the Women in Tax Networking group

Travel, Food and Wine, Health and Fitness

Zara Muradali Managing Director, Tax

KPMG LLP

Two Financial Center

60 South Street

Boston, MA 02110

Tel: 617-988-5431

Fax: 617-801-8107

Cell: 617-369-9520

[email protected]

Function and Specialization Federal Tax

Representative Clients

Cerberus (Private Equity)

Boston Scientific Corporation

Blue Bird Corporation

Revision Eyewear

IAP Worldwide Services, Inc.

Teradyne

Professional Associations

Massachusetts Society of CPA

AICPA

Education, Licenses & Certifications

B.A. - University of Massachusetts

MST - Northeastern University, Graduate School

of Business

CPA, MA



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Ruth Hoffman Director

KPMG LLP

1801 K Street, NW

Washington, DC 20006

Tel 202-533-6196

Fax 202-315-3133 [email protected] Function and Specialization Ms. Hoffman is a director in the Excise Tax

group of the Washington National Tax

practice. Her services include excise tax

consulting and IRS excise tax controversies

and cover a wide range of excise taxes,

including manufacturers taxes (e.g., medical

devices; sporting goods; tires), taxable fuel

taxes, air transportation taxes, environmental

taxes (e.g., ozone-depleting chemicals; oil

spill), retail taxes (e.g., alternative fuels;

heavy vehicles), and the foreign insurance

tax, and the alcohol, biodiesel, and

alternative fuel incentives. Education, Licenses & Certifications

J.D., cum laude, at Western New England

College School of Law in 1986.

B.A. from American University

Admitted to the New York Bar in 1987.

Professional and industry experience

Prior to joining KPMG in January 2003, Ms. Hoffman spent over 15 years as an attorney at the IRS Office of

Chief Counsel. Most recently, she was the Senior Technician Reviewer of the Excise Tax Branch where,

together with the Branch Chief, she supervised a staff of eight attorneys and was responsible for IRS

published guidance on excise taxes (revenue rulings, revenue procedures, etc.), technical advice to IRS

excise tax agents, and letter rulings to taxpayers. She also worked closely with the Treasury Department in

developing regulations and legislation in the excise tax area, and with the Justice Department in developing

the government’s litigation positions. As one of the principal legal advisers to the IRS Commissioner on

excise tax matters, she developed a thorough understanding of both the substantive and procedural aspects

of federal excise taxes as well as the IRS administration of those taxes.

Ruth Hoffman, director

© 2012 KPMG LLP, a Delaware limited liability

partnership and the U.S. member firm of the KPMG

network of independent member firms affiliated with

KPMG International Cooperative (“KPMG

International”), a Swiss entity. All rights reserved.

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The KPMG name, logo and “cutting through

complexity” are registered trademarks or trademarks

of KPMG International.

mass medic planning for the medical device excise tax · 2017-03-30 · first deposit of medical...

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