This post was also written by Ruth N. Holzman, Angelo Ciavarella and Jennifer A. Goldstein.

On February 7, 2012, the Internal Revenue Service (IRS) published proposed regulations to implement the Affordable Care Act’s (ACA) 2.3% excise tax on the sale price of medical devices sold by the manufacturer, producer, or importer of the device after December 31, 2012. The ACA defines a taxable medical device as any device (as defined in section 201(h) of the Federal Food, Drug, and Cosmetic Act) that is intended for humans and is listed as a medical device with FDA (or should have been listed) by a registered medical device establishment excluding eyeglasses, contact lenses, hearing aids, and any other medical device of a type that is generally purchased by the general public at retail for individual use. The proposed regulations set forth the IRS’s interpretation of key elements of the excise tax, including the retail exemption.

Additional details are available after the jump.

In brief, under the proposed regulations, a device is considered to be of a type generally purchased by the general public at retail for individual use if: (i) the device is regularly available for purchase and use by individual consumers who are not medical professionals, and (ii) the device’s design demonstrates that it is not primarily intended for use in a medical institution or office, or by medical professionals. The proposed regulations provide a set of non-exclusive factors for use in evaluating whether a taxable medical device qualifies for the retail exemption, as well as a safe harbor provision identifying certain categories of taxable medical devices determined to fall within the retail exemption. The safe harbor includes: (1) devices that are identified in the FDA’s IVD Home Use Lab Tests (over-the-counter, or OTC, tests) database; (2) devices described as OTC devices in the relevant FDA classification regulation heading; (3) devices that are described as OTC devices in the FDA’s product code name, device classification name, or the classification name field in the FDA’s device registration and listing database; and (4) certain devices that qualify as durable medical equipment, prosthetics, orthotics and supplies (DMEPOS) for which payment is available on a purchase basis under Medicare Part B payment rules in accordance with the fee schedule published by the Centers for Medicare & Medicaid Services (CMS).

The preamble to the proposed regulations also addresses the application of the excise tax to certain specific circumstances, including dual use devices, investigational devices, veterinary devices, and dental instruments. Existing rules governing manufacturer excise taxes, including exemptions for use by the purchaser for further manufacture, or for resale by the purchaser to a second purchaser for use by the second purchaser for further manufacture; and for export, generally will apply to this excise tax, subject to certain exceptions. The preamble to the proposed regulations discusses how these general rules will be applied to medical devices, including guidance on the meaning of manufacturer, importer, taxable event, and sales price. The IRS also addresses in the preamble a number of other issues raised by public comments submitted prior to the rulemaking, including classification of “convenience kits,” associated devices and components of devices, combination products, and medical software. Comments will be accepted until May 7, 2012. The notice of proposed rulemaking also includes a notice of a public hearing on the proposed regulations to be held on May 16, 2012.