massmedic update on mdet implementation · © 2012 kpmg llp, a delaware limited liability...

MassMEDIC–

Update on MDET

Implementation

August 22, 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.

NDPPS 105210

1

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.



NDPPS 105210

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Today’s objectives

Understand how to prepare for MDET

Understand challenges companies face

Understand how tax base is determined

Implementing systems for the computation of tax



NDPPS 105210

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Open discussion: Preparing for MDET

What have companies done to prepare thus far?

Compliance Deadlines: Reminder

– 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

What are the next steps being planned by a company?

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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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. vs. 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

Note the importance of coming back to the general rule

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



NDPPS 105210

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Generic supply chain for excise tax purposes

Wholesaler

Retailer

End User

Manufacturer/Importer



NDPPS 105210

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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



NDPPS 105210

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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



NDPPS 105210

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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



NDPPS 105210

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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



NDPPS 105210

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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. vs. 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



NDPPS 105210

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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?



NDPPS 105210

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Assessment phase

Step 3

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

Step 4

Review price for

determining tax

base

Sale price generally

Constructed sale

price

Step 5

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

Review company

structure

Identify

manufacturers

Identify importers

Step 2

Step 1

Review devices in

product line

Identify taxable

medical devices

Identify exempt

devices



NDPPS 105210

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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



NDPPS 105210

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Implementation phase

Understand excise tax procedural rules

Develop excise tax compliance policies and procedures

Document positions taken



NDPPS 105210

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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



NDPPS 105210

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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



NDPPS 105210

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Highlights

Identifying entities by EIN

Recognizing importance of doing assessment phase

Identifying Section 4216(a) adjustments to sales price

Bundled sales

Whether MDET needs to be separately stated

Tracking price readjustments

Establishing fair market price in related party sales



NDPPS 105210

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Contact information

Zara Muradali

Managing Director, Federal Tax

KPMG LLP

60 South Street

Boston, MA 02111

Phone: 617.988.5431

Email: [email protected]

Ruth Hoffman

Director, Excise Tax

KPMG Washington National Tax

1801 K St NW, Suite 12000

Washington, DC 20006

Phone: 202.533.6196

E-mail: [email protected]

© 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.

NDPPS 105210

The KPMG name, logo and “cutting through complexity” are

registered trademarks or trademarks of KPMG International.

massmedic update on mdet implementation · © 2012 kpmg llp, a delaware limited liability...

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