New tax on medical device manufacturers set for Jan. 1

While many key provisions of the federal Affordable Care Act (ACA) do not take effect until 2014, one element is scheduled to take effect Jan. 1, barring any last-minute change – a 2.3 percent excise tax on “medical devices” that include many dental products such as equipment and prostheses.

The medical device tax has been a controversial component of the ACA since the law’s enactment two years ago. Currently, several organizations and individual members of Congress have been calling for its repeal or at least a delay in its implementation. In addition, key national dental organizations, including the ADA, the Dental Trade Alliance, and the National Association of Dental Laboratories, have been advocating for the Internal Revenue Service (IRS) to exempt dental products from the tax. CDA has joined in this grassroots effort, which is continuing even as the implementation date approaches.

One of the key elements of the advocacy effort to delay the implementation of the tax is that there remain many questions about exactly what devices are subject to the tax. What is clear is that the new excise tax will be directly reported and paid by product manufacturers and importers, not by dental practices, but inevitably the cost of the tax will be passed on to dentists in the form of higher product costs. Over the last year, the IRS has been developing its regulations that will govern the implementation of the new tax. At a basic level, the tax applies to any device that is required to be registered with the federal Food and Drug Administration (FDA) and is not commonly sold at retail drug stores or other market places available to the public.

The link to FDA registration makes the issue particularly complex for dental laboratories. As interpreted by the National Association of Dental Laboratories, a domestic lab that manufactures its own crowns, bridges, etc., would not have to pay the tax on the product itself; however, that lab’s suppliers of materials (alloys, ceramic, etc.) would be paying the tax and presumably passing on the cost, since those materials themselves have FDA product codes and thus are considered taxable. It is not yet clear if this interpretation is agreed to by the IRS.

There are a number of narrower issues remaining to be resolved with the IRS as the new tax is implemented. These included whether overseas dental labs would be required to pay the tax on their products (on top of the tax on materials), whether dentists who manufacturer their own snoring/sleep apnea devices (which have an FDA code) would be required to pay the device tax, or whether those devices will be subject to the broader “over-the-counter” retail exemption.

CDA, in conjunction with the ADA, will continue to provide members with information on the medical device tax as it becomes available on cda.org and in the Update.