There’s no question that the new Medical Device Excise Tax (MDET) is going to involve cost, complexity and risk. Companies affected by the new MDET risk penalties, interest charges, additional transaction processing time and reconciliation costs to the extent that their systems and processes aren’t ready to cope with the regulation’s demands.
Fortunately, medical device makers with QAD ERP in place are in a better position to reduce these risks and meet the implementation deadline. Strategic has been helping medical device customers get ready to meet the implementation deadlines with minimum cost and maximum compliance.
MDET fast facts:
- In conjunction with the Affordable Care Act, the US Government enacted a 2.3 percent excise tax on the sale of taxable medical devices.
- The MDET, under Internal Revenue Code Section 4191, takes effect on January 1, 2013.
- The MDET is a manufacturers excise tax: The manufacturer or importer of a taxable medical device is responsible for reporting and paying the tax. The tax will attach at the point of sale from the manufacturer to the distributor.
- Companies will have to pay the tax on inventory on hand on December 31, 2012, that is not sold until January 1, 2013.
Which products are taxable? The new law provides that any device defined in Section 201(h) of the Federal Food, Drug, & Cosmetic Act (FFDCA) that is intended for humans will be taxable. The FFDCA is written very broadly to include instruments, machines, implants and in vitro reagents, among others. Section 201(h) also includes associated parts and accessories that are:
- Recognized in the official National Formulary, or the United States Pharmacopeia, or any supplement to them.
- Intended for use in the diagnosis, cure, treatment or prevention of disease or other conditions.
- Intended to affect the structure or any function of the body, excluding products relying on a chemical reaction within or on the body or being metabolized to achieve their primary intended purposes.
- Dental instruments, dental equipment, and research-use-only devices.
There are three major categories of exemptions:
- Devices to be further manufactured.
- Devices manufactured that are ultimately destined for export outside the United States.
- Eyeglasses, contact lenses, hearing aids, or “any other medical device determined by the Secretary as generally purchased by the general public at retail for individual use” — referred to as the “retail exemption”.
How do companies pay the excise tax? IRS Form 720 must be filed each quarter in the month following the calendar quarter end. In general, however, MDET must be paid twice per month. Processes must also be established to handle registration requirements, exemptions and credit and refund issues.
QAD Global Tax Management is a module within QAD Financials that provides tax management solutions for excise, sales, use and VAT taxes globally, ensuring correct tax registrations and smooth tax reporting. QAD Global Tax Management provides:
- Global tax treatment for multiple tax environments in the same database
- Unlimited number of tax types and rates — VAT, luxury, consumption/excise, capped, non-recoverable, sales.
- Consideration of geography; item status (taxable, non-taxable); customer/supplier status; effective dates
- Flexible reporting
- API into Vertex, AvaTax, Cytak and other state rate tax providers and filers
Strategic can help you leverage your QAD system to address these critical MDET details:
- The MDET applies to US-only sales; if your company sells to both foreign and domestic markets, this tax is only reported on your US sales.
- MDET is product specific; the system automatically flags applicable products. When invoices are made up of multiple line items, only flagged products are taxable.
- Sales to certain entities (e.g., non-profits) can be flagged as exempt.
- MDET is a Federal tax, however reporting by state is needed.
- Companies have the option to handle the tax on-invoice — pass the tax to customers — or off-invoice — internal, accruing the tax based on calculations.
- Process product returns and similar transactions accurately:
- When a product is returned and replaced with another, MDET is not paid on both products.
- When a product is returned without replacement, issue a tax credit to offset the original tax paid.
There are multiple approaches for using your QAD application to comply with the MDET, and we are available to help you understand which approach is best for your circumstances. Once you determine your strategy, we can also do the behind the scenes work to set up your system properly. If your QAD ERP interfaces with outside tax systems, we can help there too.