Science Company Comments on Excise Tax on Medical Devices

Thank you very much for meeting with us to discuss the proposed medical device tax regulations. Set out below are specific topics regarding how certain areas of the regulations could affect similarly situated manufacturers, our current interpretation of guidance, and our view as to how these topics could be clarified. We have drafted suggested language to clarify the regulations and attached it as Appendix A.

General Commentary

Our interpretation of IRC 4191 is that it applies only to the manufacturer, importer or producer of a medical device intended for humans. The definition of a medical device will include FDA class I, II and III items with certain exceptions.

We believe clarification should be made around two specific areas, namely the identification of the manufacturer and the intended use of the device.

Dual Use Products -- Research Use Only or Industrial Laboratory Uses Not Intended to Diagnose Disease

Certain medical devices we manufacture may have multiple uses, some of which may not be subject to the proposed medical device tax. A "medical device" is generally defined as an instrument, apparatus, implant, in vitro reagent, or other similar or related article, including a component part, or accessory which is (i) recognized in the official National Formulary, or the United States Pharmacopoeia, or any supplement to them, (ii) intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment, or prevention of disease, in man or other animals, or (iii) intended to affect the structure or any function of the body of man or other animals, and which does not achieve any of it's primary intended purposes through chemical action within or on the body of man or other animals and which is not dependent upon being metabolized for the achievement of any of its primary intended purposes.

Some products we manufacture may be sold as a medical device, i.e., intended to diagnose disease in man or animals, but may also be sold for "research use only" (RUO) or for industrial laboratory uses that are not intended to diagnose disease in man or animals. These products may share the same part number or SKU, however, their intended use differs. The FDA's definition of a "medical device" explicitly contemplates "intended use" and thus products which are intended to be sold for RUO and industrial laboratory uses (and thus are not intended to diagnose disease in man or animals) should be exempt from the proposed medical device tax.

Presumably the explicit language of proposed IRC 4191 should exempt these sales since their intended use is not to diagnose disease in man or animals, however, since they may share a part number or SKU, we believe the regulations should be specific in exempting these "dual use" products when they are intended for sale as a RUO or industrial laboratory use. The regulations may even provide examples of dual use products and when the tax would not apply.

Manufacturer

Within Chapter 32 of the IRC, the primary definitions of manufacturer lie within IRC 4221 and IRC 5845. These definitions appear to have been interpreted using various case law and guidance, developed over the last 50 plus years.

There are however much more specific definitions of "manufacturer" and "manufacture" in Sub Part F of Sub Chapter N, Chapter 1 of the IRC. There are also very well developed related regulations and a multitude of cases providing guidance to be found there. We believe these regulations can provide guidance to a number of areas impacted by the medical device tax and we believe that a simple reference to those regulations would provide a lot of clarity.

There are two specific examples of how we see the Sub Part F definitions impacting many manufacturers in the medical device industry, specifically substantial transformation and substantial contribution.

Substantial transformation is a defined term in the Sub Part F rules. The premise is that if raw materials were transformed into something else, effectively in a non-reversible form, then that constitutes manufacturing and, generally, the person causing the transformation is the manufacturer. There are a number of examples given in the regulations which give guidance on this. We interpret these rules in our business such that kitting and bulk repackaging may not be considered manufacturing and therefore the medical device tax would not apply.

Kitting

There are instances where we collect a number of different items which individually do not constitute a medical device for FDA purposes and put them in a kit. The kit itself could then be labeled as a medical device. We believe that if in assembling the kit, the component items have not changed, there was no transformation so the medical device tax on the kit's manufacturer doesn't apply.

If one of the component parts of a kit is a medical device approved by the FDA and it forms part of a kit which is itself deemed a medical device, provided again the process is reversible, then the medical device tax should only apply to that component part and not to the whole kit.

We believe the regulations should be specific on this point.

Bulk Repackaging

There will be certain instances where a reagent may be manufactured by ourselves in bulk and sold to customers. The bulk product is not itself a medical device and is not FDA approved. The customer may then take smaller samples from the bulk and place the reagent in a vial. The re-packaged reagent may then be registered as a medical device but the tax would not apply to the re-packaged reagent. Our belief is that if the sample material has not physically changed, then under current guidance there is no manufacture. If it has changed due to the addition of other products and cannot be reversed to its bulk state, then manufacture did take place because the sample was transformed and the medical device tax would apply.

Substantial Contribution and Contract Manufacturing

We believe that contract manufacturers generally should not be considered a manufacturer under the proposed regulations. This is clearly fact dependent and the regulations under sub part F give a number of examples to provide guidance. We do not consider these regulations to contradict TAM200103005 and thus no specific reference needs to be made in considering excise tax regulations.

Importing and Exporting

IRC 4191 applies the medical device excise tax not only to the manufacturer, but also to the importer of Medical Devices. IRC 4221 provides a list of exceptions from Chapter 32, which includes product sold by the manufacturer for export. However we do not see any cross reference in that exception to importers of product categorized as Medical Devices which are then exported. We believe specific reference should be made to this in regulations.

Price

The Definition of price is set forth in IRC Sec 4216. No specific mention is made of discounts and the subsections dealing with transactions with affiliated corporations as defined under IRC section 1504(a) do not cover all circumstances.

Not at Arm's Length

We believe the appropriate method of defining the price in a transaction considered not at arm's length should be through a cross reference to the transfer pricing regulations under 1.482.

Discounts

We believe that sales price should be the price for the actual medical device after the impact of discounts, returns, duties or other taxes. We do not see this specified in the existing Code or regulations.

We would suggest that specific reference is made to this in the regulations. This should also be expanded not only to include discounts applied to the sale price, but to any subsequent volume discounts or rebates offered by the seller in relation to the medical devices. Suggested wording is included in the appendix.

Collection methods

We think the existing collection form 720 is appropriate to collect the tax. Per our discussion, this should be filed by the individual manufacturing entity, not on a consolidated basis. We also believe that any subsequent discounts or rebates relating to medical devices should be treated as a negative sale if issued in periods different from the original sale.

We look forward to any further comments or feedback you might have. Should you wish us to come in for another meeting we are, of course, very happy to do so.

In the case of the simple assembly of a kit which is then classed as a medical device and which none of the components physically change, no tax is due under this chapter. The following examples illustrate:

Example (1)

Corporation "A" is the manufacturer of medical device "X". This device is categorized under Class II of section 201(h) of the Federal Food, Drug, and Cosmetic Act. The device is put into a kit with several other components which themselves are not subject to the Act. The kit itself is categorized under Class II. The tax under section 4191 is only applicable to medical device "X" and not to the kit or other components comprising the kit.

Example (2)

Corporation "A" purchases several components from unrelated parties, none of which would be considered a medical device under section 201(h) of the Federal Food, Drug, and Cosmetic Act. Corporation "A" collects the components into one package but none of the components physically changes. The package itself is required to be categorized under Class II of section 201(h) of the Act. No tax under section 4191 is due because there was no actual manufacture of the package and none of the components physically changed.

Exceptions

In general, section 4191 applies to the sale of any medical device by the manufacturer, producer or importer of the device. Section 4221 specifically excludes from the tax imposed by chapter 32 certain items including those manufactured for export. That exception shall also include any medical device imported for subsequent export.