See how firms in the device industry have met the tax and compliance challenges of the Medical Device Excise Tax, which goes into effect January 1, 2013.

1. 22nd Annual Health Sciences
Tax Conference
Medical device excise tax: ready or not?
December 5, 2012

2. Disclaimer
► Any US tax advice contained herein was not intended or
written to be used, and cannot be used, for the purpose of
avoiding penalties that may be imposed under the Internal
Revenue Code or applicable state or local tax law
provisions.
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3. Disclaimer
Ernst & Young refers to the global organization of member firms of Ernst & Young
Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a client-
serving member firm of Ernst & Young Global Limited operating in the US. For more
information about our organization, please visit www.ey.com.
This presentation is © 2012 Ernst & Young LLP. All rights reserved. No part of this
document may be reproduced, transmitted or otherwise distributed in any form or by
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transmission or distribution of this form or any of the material herein is prohibited and
is in violation of US and international law. Ernst & Young LLP expressly disclaims any
liability in connection with use of this presentation or its contents by any third party.
Views expressed in this presentation are not necessarily those of Ernst & Young LLP.
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4. Presenters
► Mar Haeussler ► Chris Ohmes
Vice President Ernst & Young LLP
Economic Analysis/Transfer Washington, DC
Pricing +1 202 327 8753
Olympus Center Valley, PA chris.ohmes@ey.com
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5. Agenda
► Introduction to MDET
► Preparation for the medical device excise tax (MDET)
► Supply chain mapping
► Tax base
► When liability arises
► Amount of Liability
► Compliance and IT considerations
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6. Introduction to the MDET

7. What is the MDET?
► The MDET is a federal, ad valorem, manufacturers
excise tax.
► Enacted as part of the Patient Protection and Affordable
Care Act, the MDET imposes on manufacturers,
importers, and producers a tax at a rate of 2.3% of the
price of the first sale or use of medical devices in the US.
► The MDET is effective for taxable sales (and uses)
occurring after December 31, 2012.
► The MDET is incorporated into Chapter 32 of the Internal
Revenue Code, thus a series of existing manufacturers
excise tax rules apply to the MDET.
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8. Preparation for the MDET

9. Where to start?
► Do we obtain ownership of taxable medical devices in a
way that potentially make us liable for the tax?
► Do we make them?
► Did we import them?
► Are we treated as if we made them?
► What about:
► Kitting
► Installation and/or periodic servicing
► Repairs/refurbishing
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10. What are we talking about?
► Taxable medical devices are defined with reference to
Section 201(h) of the Federal Food, Drug and Cosmetic
Act. A medical device is:
► An instrument, apparatus, contrivance, in vitro reagent, recognized in
the National Formulary or the US Pharmacopoeia
► Intended for use in diagnosis of disease or other conditions or in the
cure, mitigation, treatment or prevention of disease
► Intended to affect the structure or any function of the body of man or
other animals, in a non-chemical manner
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11. Who is liable for the tax?
► MDET is imposed on the manufacturer, producer or
importer of a taxable medical device.
► For excise tax purposes, the term manufacturer includes a
“producer” and an “importer.”
► A manufacturer is a person who produces a taxable article
by processing, manipulating or changing the form of an
article or, by combining or assembling two or more
articles.
► The importer rule treats the importer as the manufacturer
of imported goods.
► MDET applies by legal entity, thus multiple entities within
a controlled group can have compliance obligations.
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12. Which devices are exempt?
► Exemptions based on the product
► Some medical devices are MDET-exempt because they are not
listed with a three-letter Food and Drug Administration (FDA)
product code.
► Eyeglasses, hearing aids and contact lenses
► Certain medical devices sold at retail, as specified in regulations
► Exemptions based on sales
► Exports (can we prove it?)
► Sold for further manufacturing (shifting of liability)
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13. The retail exemption isn’t sales based?
► Congress delegated to Treasury the authority to exempt
medical devices, which are of a type generally purchased
by the general public at retail for individual.
► Internal Revenue Service (IRS) has proposed regulations
indicating the retail exemption applies to medical devices
► The device satisfies a three-part test:
► It is regularly available for purchase and use by individual consumers
who are not medical professionals.
► The design demonstrates that it is not primarily intended for use in in a
medical institution or office or by medical professionals.
► Alternatively, the device satisfies one of the regulations’ safe
harbor provisions
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14. Triggering liability for the tax
► In general, the tax attaches to the first sale in the US after
the completion of manufacturing of a taxable medical
device
► Importers are subject to the same first sale rule, when a
taxable medical device is imported into the US.
► Uses are also subject to the MDET
► Leases
► Rental arrangements not involving payments of rent
► Loaners
► Demonstration units
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15. Section 4191 medical device excise tax point
of attachment
Do you manufacture,
produce, or import Yes Do you export Yes
listed FDA medical No tax
medical devices?
devices for use by
humans?
No
No
Do you sell
partially completed
Yes No tax
medical devices?
No tax
No
Are they eyeglasses,
contact lenses, Yes No tax
hearing aids or exempt
devices?
Yes
No Do you sell, rent,
lease, lend or use Yes
Tax due
medical devices?
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16. MDET liability

17. Identifying the tax price
► The supply chain and distribution channels determine
which prices can be used to calculate the tax.
► Existing manufacturers’ excise tax rules assume a certain
supply chain and distribution-channel paradigm – pricing
rules follow from that paradigm.
► Supply chain and distribution channels vary widely in the
medical device industry.
► Economic versus legal responsibility for MDET
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18. The pricing paradigm
Seeking a manufacturer’s
wholesale price
US
Unrelated Unrelated End
manufacturer or
distributer retailer customer
Importer
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19. What is a constructive sales price?
► A fair market value price that the IRS may impose by
statute
► Applies only if tax is not paid on fair market value price.
► IRS has issued numerous rulings allowing a fixed
percentage of retail as a proxy for a wholesale price but
these are specific to other excise taxes.
► Most MDET taxpayers will want to avoid constructive
pricing
► Constructive price rules are set out in code Section
4216(b)(1) through (b)(4)
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20. At what price is the tax paid?
Constructive price rules
Taxable Transaction is always the first sale or use
Constructive Sales Price
Taxable Sale
Unrelated
Transfer Price wholesaler/
True wholesale distributer E
n
d
Related
US
wholesaler/
manufacturer distributer c
Outside US or u
(OUS) importer Unrelated s
manufacturer retailer t
o
Related m
retailer
e
r
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21. Determining pricing
► Price must reflect a return for all functions, intangibles and
risks necessary to manufacture a finished device ready for
the market
► Existing regulations provide for the following exclusions
► Excise tax
► Transportation
► Delivery
► Insurance
► Installation charges
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22. Pricing hot topics
► Separately stating the tax on invoices
► Intercompany sales to related distribution company
► Rebates and sales incentives
► Treatment of marketing intangibles and marketing costs
► Services incorporated into sales price (training, repairs,
loaners, etc.)
► Application of Rev Rul 80-273
► Vendor communications on tax-exempt sales
► Razor and razor blade sales model
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23. MDET compliance

24. Compliance issues
► Tax deposits every two weeks, electronic federal tax
payment system per legal entity
► Quarterly form 720 (yet to be modified for MDET)
► Form 637 exemption certificates
► Acquire
► Provide
► Maintain
► Record retention (and compliance with export and further
manufacturing regulations)
► Refunds
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25. Compliance issues
► No off the shelf software solution is available
► Integration with Enterprise Resource Planning Software
(ERP) or standalone?
► Systems
► Calculate tax and refunds
► Create audit reports
► Update financials
► Customer relationship changes
► Supplier relationship changes
► Item master changes
► Acquisitions
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26. Questions
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