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The Impact of a New Excise Tax on Medical Device Manufacturers
Posted in Tax and Finance

How are medical device manufacturers weathering the new medical device excise tax storm? As medical device companies are aware, effective January 1 of this year, there is a tax equal to 2.3 percent imposed on the sales price of certain medical devices which must be paid by the manufacturer, producer, or importer of such device. The medical device excise tax is one of the more significant taxes introduced by the 2010 Patient Protection & Affordable Care Act, commonly referred to as “Obamacare.”

According to a recent article published in the Indianapolis Business Journal, the medical device excise tax is having a significant impact on many Indiana-based medical device manufacturers. For example, Zimmer Holdings Inc., based in Warsaw, Ind., estimates that its excise tax liability for the 2013 fiscal year will be the equivalent of approximately 43 percent of the company’s total cash flow from the previous year. As a result, Zimmer has reduced its profit forecast for this year by as much as 19 percent.

Companies are frantically cutting costs in order to absorb the tax, as well as to compensate for a steady decline in pricing of medical devices due to increased negotiating leverage from hospitals. Zimmer has plans to cut costs by $400 million by 2016, and is unfortunately achieving these cuts through employee layoffs and decreased research and development efforts.

A major frustration with the medical device excise tax is that it is assessed on sales, rather than net income, so a company may be liable for the tax regardless of whether or not the company is profitable. However, the tax does not apply to all medical devices. Devices that are usually purchased by the general public at retail for individual use, such as eyeglasses, contact lenses, and hearing aids, are exempt.

If you have questions about the medical device excise tax, please contact Ross Cohen, Jordan Green, or a member of the Tax and Finance Practice Group at Bingham Greenebaum Doll LLP.

To learn more about Ross D. Cohen and his practice, visit his profile.

DISCLOSURE REQUIRED BY CIRCULAR 230. This Disclosure may be required by Circular 230 issued by the Department of Treasury and the Internal Revenue Service. If this article, including any attachments, contains any federal tax advice, such advice is not intended or written by the practitioner to be used, and it may not be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer. Furthermore, any federal tax advice herein (including any attachment hereto) may not be used or referred to in promoting, marketing or recommending a transaction or arrangement to another party. Further information concerning this disclosure, and the reasons for such disclosure, may be obtained upon request from the author of this article. Thank you.

  • Partner

    Ross D. Cohen serves as Co-Leader of the Federal Tax Team and concentrates his practice in the areas of tax and business law, focusing on federal tax transactional and planning issues of partnerships, joint ventures, limited ...

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