[Federal Register Volume 77, Number 236 (Friday, December 7, 2012)]
[Rules and Regulations]
[Pages 72924-72939]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-29628]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 48

[TD 9604]
RIN 1545-BJ44


Taxable Medical Devices

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations that provide guidance 
on the excise tax imposed on the sale of certain medical devices, 
enacted by the Health Care and Education Reconciliation Act of 2010 in 
conjunction with the Patient Protection and Affordable Care Act. The 
final regulations affect manufacturers, importers, and producers of 
taxable medical devices.

DATES: Effective date: These regulations are effective on December 7, 
2012.
    Applicability date: These regulations are applicable to sales of 
taxable medical devices after December 31, 2012.

FOR FURTHER INFORMATION CONTACT: Natalie Payne, Michael Beker, or 
Stephanie Bland, at (202) 622-3130 (not a toll-free number).

SUPPLEMENTARY INFORMATION: 

Background

    This document contains final regulations that provide guidance on 
the excise tax imposed on the sale of certain medical devices under 
section 4191 (the medical device excise tax) of the Internal Revenue 
Code (Code), enacted by section 1405 of the Health Care and Education 
Reconciliation Act of 2010,

[[Page 72925]]

Public Law 111-152 (124 Stat. 1029 (2010)), in conjunction with the 
Patient Protection and Affordable Care Act, Public Law 111-148 (124 
Stat. 119 (2010)) (jointly, the ACA).
    On February 7, 2012, the IRS and the Treasury Department published 
a notice of proposed rulemaking (REG-113770-10) (the proposed 
regulations) in the Federal Register (77 FR 6028). The IRS and the 
Treasury Department received numerous written comments from the public 
in response to the proposed regulations. A public hearing was held on 
May 16, 2012. After consideration of the public written comments and 
hearing comments, the IRS and the Treasury Department are finalizing 
the proposed regulations with the changes described in this preamble.
    Public comments on the proposed regulations identified two issues 
that the IRS and the Treasury Department will study further and on 
which the IRS and the Treasury Department have requested additional 
comments. Those issues are discussed later in this preamble. Comments 
with regard to those issues should be submitted in writing and can be 
mailed to the Office of Associate Chief Counsel (Passthroughs and 
Special Industries), Re: REG-113770-10, CC:PSI:B7, Room 5314, 1111 
Constitution Avenue NW., Washington, DC 20224. All comments received 
will be available for public inspection at http://www.regulations.gov 
(IRS REG-113770-10).

Explanation of Provisions and Summary of Comments

I. Definition of a ``Taxable Medical Device''

    Section 4191(b)(1) provides that, in general, a ``taxable medical 
device'' is any device, as defined in section 201(h) of the Federal 
Food, Drug & Cosmetic Act (FFDCA) (codified as amended at 21 U.S.C. 301 
et seq. (2006)) that is intended for humans.
A. Proposed Regulations
    The proposed regulations provide that for purposes of the medical 
device excise tax, a device defined in section 201(h) of the FFDCA that 
is intended for humans means a device that is listed as a device with 
the Food and Drug Administration (FDA) under section 510(j) of the 
FFDCA and 21 CFR part 807, pursuant to FDA requirements. The proposed 
regulations further provide that if a device is not listed with the 
FDA, but the FDA later determines that the device should have been 
listed as a device, the device will be deemed to have been listed as a 
device with the FDA as of the date the FDA notifies the manufacturer or 
importer in writing that corrective action with respect to listing is 
required.
B. Public Comments and the Final Regulations

Listing Requirement

    One commenter suggested that the listing rule is overbroad because 
it includes virtually all types of medical devices in the tax base. The 
commenter requested that the final regulations narrow the definition of 
a taxable medical device so that the excise tax is imposed only on 
devices that Congress specifically intended to subject to the tax.
    The final regulations do not adopt this suggestion. Congress linked 
the definition of a taxable medical device to the definition of a 
``device'' under section 201(h) of the FFDCA. In general, the FDA 
requires a device defined in section 201(h) of the FFDCA that is 
intended for humans to be listed as device with the FDA under section 
510(j) of the FFDCA and 21 CFR part 807, subject to certain limited 
exceptions. The final regulations track this FDA requirement by 
defining a taxable medical device as a device that is listed as a 
device with the FDA under section 510(j) of the FFDCA and 21 CFR part 
807. This provides taxpayers with greater certainty as to which devices 
are subject to the tax.

Biologic Devices

    Several commenters requested that the final regulations clarify 
that the definition of a taxable medical device does not include the 
category of products reviewed as devices by the FDA Center for 
Biologics Evaluation and Research (CBER).
    In general, CBER licenses biologics, such as in vitro diagnostic 
tests for blood donor screening, after the filing of a Biologics 
License Application (BLA) under the Public Health Service Act. 
Biologics are listed with the FDA under 21 CFR part 607.
    Under the final regulations a taxable medical device is a device 
that is listed as a device with the FDA under section 510(j) of the 
FFDCA and 21 CFR part 807, pursuant to FDA requirements. Therefore, 
devices that CBER regulates that are listed with the FDA under section 
510(j) of the FFDCA and 21 CFR part 807 are taxable medical devices. 
Devices that CBER regulates that are not listed with the FDA under 
section 510(j) of the FFDCA and 21 CFR part 807, such as biologics that 
are listed under 21 CFR part 607, are not taxable medical devices.

Devices ``Intended for Humans''

    A number of commenters suggested that certain devices, such as 
sterilization process indicators, software, and containers used to hold 
or transport medical products and specimens, should be excluded from 
the definition of a taxable medical device on the basis that they are 
not ``intended for humans.'' Commenters argued that even if the FDA 
requires certain such devices to be listed with the FDA under section 
510(j) of the FFDCA and 21 CFR part 807, the devices should not be 
taxable medical devices because they are not used in the direct 
treatment, diagnosis, or monitoring of a patient.
    Section 4191 links the definition of a taxable medical device to 
the definition of a device in section 201(h) of the FFDCA. Section 
201(h) of the FFDCA provides generally that the term ``device'' means 
an instrument, apparatus, etc., that is 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 
intended to affect the structure or any function of the body of man or 
other animals, and that does not achieve its primary intended purposes 
through chemical action within or on the body of man or other animals 
and that is not dependent upon being metabolized for the achievement of 
its primary intended purposes. Section 201(h) of the FFDCA includes 
devices intended for ``man'' and devices intended for ``other 
animals.'' Thus, the phrase ``intended for humans'' included in section 
4191(b) limits the definition of a taxable medical device to the 
devices defined in section 201(h) of the FFDCA that are intended for 
``man'' (intended for humans) and excludes from the section 201(h) 
definition the devices that are intended for ``other animals.''
    There is no support in the statute, or in either the legislative 
history or the Joint Committee on Taxation's General Explanation (Joint 
Committee on Taxation General Explanation of Tax Legislation Enacted in 
the 111th Congress (JCS-2-11), March 2011, at 365-367) (JCT General 
Explanation) for the proposition that Congress included the statutory 
phrase ``intended for humans'' in section 4191(b) to distinguish 
between devices defined in section 201(h) of the FFDCA that are 
intended for use directly on patients or directly in patient care from 
other devices defined in section 201(h) of the FFDCA that are otherwise 
used in human medicine. Accordingly, the final regulations do not adopt 
this suggestion.

[[Page 72926]]

Veterinary Devices
    One commenter stated that the listing requirement is insufficient 
to distinguish medical devices for human use from those intended for 
use in veterinary medicine for purposes of applying the medical device 
excise tax. The commenter suggested that subjecting devices to the 
medical device excise tax because the device is listed with the FDA 
under section 510(j) of the FFDCA disadvantages certain manufacturers. 
Specifically, the commenter noted that medical device manufacturers 
selling devices for both human use and veterinary use must pay the 
excise tax on sales into the veterinary market. The commenter requested 
that the final regulations provide that devices that are labeled ``not 
for human use'' or ``veterinary use only'' are not taxable medical 
devices.
    The definition of a device in section 201(h) of the FFDCA includes 
devices used in veterinary medicine. Section 4191 limits the definition 
of a taxable medical device to devices described in section 201(h) of 
the FFDCA that are intended for humans, but does not provide that the 
device must be intended exclusively for humans. Under existing FDA 
regulations, a device intended for use exclusively in veterinary 
medicine is not required to be listed as a device with the FDA, whereas 
a device intended for use in human medicine is required to be listed as 
a device with the FDA even if the device may also be used in veterinary 
medicine. Thus, the FDA's listing requirement effectively tracks those 
devices that are intended for humans within the meaning of section 
4191. Accordingly, the final regulations retain the definition of a 
taxable medical device from the proposed regulations. Therefore, a 
device defined in section 201(h) of the FFDCA that is intended for 
humans means a device that is listed as a device with the FDA under 
section 510(j) of the FFDCA and 21 CFR part 807, pursuant to FDA 
requirements. Because devices that are intended for use exclusively in 
veterinary medicine are not listed as devices under section 510(j) of 
the FFDCA and 21 CFR part 807, they are not taxable medical devices 
within the meaning of section 4191.
Devices That Have Medical and Non-Medical Applications (``Dual Use'' 
Devices)
    The IRS and the Treasury Department received public comments and 
several informal inquiries on dual use devices. These comments 
suggested that the sale of a device defined in section 201(h) of the 
FFDCA that is listed as a device with the FDA under 21 CFR part 807 but 
that is used for a non-medical purpose should not be subject to the 
medical device excise tax. One commenter recommended that the sale of a 
taxable medical device be exempt where the manufacturer or importer can 
provide evidence that the product was purchased specifically for use in 
non-medical applications.
    One commenter noted that because it sells directly to the end user 
and installs its devices at the end user's facilities, it can easily 
identify when it sells a device for a non-medical purpose, as opposed 
to a medical purpose. The commenter also noted that it must list a 
device with the FDA even if it makes only some sales of that device for 
a medical purpose. Accordingly, all of the commenter's sales will be 
subject to tax, while sales of the same device by competitors who sell 
the device only for non-medical purposes, and thus do not have to list 
their devices with the FDA, will not be subject to tax.
    The final regulations do not adopt the commenters' suggestions. The 
language of section 4191 does not limit the definition of a taxable 
medical device to a device that is intended exclusively for medical 
purposes. Whether or not a given device is a taxable medical device 
depends upon whether it is a device defined in section 201(h) of the 
FFDCA. Although section 4191 provides a number of exemptions, the 
statute does not provide an exemption based on whether a given end user 
intends to use a particular device for a medical purpose or a non-
medical purpose.
Humanitarian Use Devices
    One commenter asked that the final regulations clarify that 
Humanitarian Use Devices (HUDs) for which the FDA has approved a 
Humanitarian Device Exemption (HDE) are exempt from the medical device 
excise tax.
    A HUD is a device within the meaning of section 201(h) of the FFDCA 
that is intended to benefit patients by treating or diagnosing a 
disease or condition that affects or is manifested in fewer than 4,000 
individuals in the United States per year. 21 CFR 814.3(n). A 
manufacturer must obtain an approved HDE from the FDA to market a HUD. 
HUDs that are marketed under an HDE exemption are not exempt from the 
FDA's listing requirements.
    There is no statutory basis for excluding HUDs from the definition 
of taxable medical device. Therefore, the final regulations do not 
distinguish HUDs from other taxable medical devices, and a HUD that is 
marketed under an HDE exemption is a taxable medical device unless it 
falls within one of the statutory exemptions to the tax in section 
4191(b)(2), such as the retail exemption.
Software Upgrades
    Two commenters asked that the final regulations provide that sales 
of software upgrades are not taxable. One commenter noted that software 
upgrades should not be subject to the medical device excise tax where 
the software itself is not listed but is merely a component part of a 
listed device. A second commenter suggested that the final regulations 
should differentiate between a listed software product and software 
updates.
    Under the final regulations, a taxable medical device is a device 
that is listed as a device with the FDA under section 510(j) of the 
FFDCA and 21 CFR part 807. Accordingly, software and software updates 
that are not required to be separately listed with the FDA do not fall 
within the definition of a taxable medical device, and sales of such 
software and software updates are not subject to the tax.
Devices That Should Have Been Listed With the FDA
    Two commenters objected to the rule in the proposed regulations 
that deems a device to have been listed on the date the FDA provides 
written notice to the manufacturer or importer that corrective action 
with respect to listing is required. One commenter suggested that the 
rule be clarified so that a device is not deemed to be listed until the 
FDA delivers final written notice to the manufacturer or importer that 
corrective action with respect to listing is required.
    The final regulations do not adopt this suggestion. If the FDA 
initially notifies a manufacturer that corrective action with respect 
to listing is required but later determines that the device is not 
required to be listed, a credit or refund may be available for tax paid 
on sales of the device during the intervening period. See section 
6416(a) and the regulations under section 6416(a) for rules regarding 
the requirements for filing a claim for credit or refund.
Devices That Are Not Required To Be Listed With the FDA
    The IRS received several informal inquiries on the tax consequences 
of listing a product as a device with the FDA when the FDA does not 
require the product to be listed.
    If a manufacturer lists a device with the FDA, but the device was 
not required to be listed, a credit or refund may be available for tax 
paid on sales of the device once the device has been

[[Page 72927]]

de-listed. See section 6416(a) and the regulations under section 
6416(a) for rules regarding the requirements for filing a claim for 
credit or refund.

II. The Retail Exemption

    Section 4191(b)(2) provides that the term taxable medical device 
does not include eyeglasses, contact lenses, hearing aids, and any 
other medical device determined by the Secretary to be of a type that 
is generally purchased by the general public at retail for individual 
use (the retail exemption).
A. Proposed Regulations
    The proposed regulations provide a facts and circumstances approach 
to evaluating whether a medical device is of a type that is generally 
purchased by the general public at retail for individual use. 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 non-exclusive list of factors to 
be considered in determining whether a device is regularly available 
for purchase and use by individual consumers who are not medical 
professionals. Those factors are (i) whether consumers who are not 
medical professionals can purchase the device through retail businesses 
that also sell items other than medical devices, including drug stores, 
supermarkets, and similar vendors; (ii) whether consumers who are not 
medical professionals can safely and effectively use the device for its 
intended medical purpose with minimal or no training from a medical 
professional; and (iii) whether the device is classified by the FDA 
under Subpart D of 21 CFR part 890 (Physical Medicine Devices) 
(referred to collectively herein as the ``positive factors'').
    The proposed regulations also provide a non-exclusive list of 
factors to be considered in determining whether the design of a device 
demonstrates that it is primarily intended for use in a medical 
institution or office, or by medical professionals, and therefore not 
intended for purchase and use by individual consumers. The factors are 
(i) whether the device generally must be implanted, inserted, operated, 
or otherwise administered by a medical professional; (ii) whether the 
cost to acquire, maintain, and/or use the device requires a large 
initial investment and/or ongoing expenditure that is not affordable 
for the average consumer; (iii) whether the device is a Class III 
device under the FDA system of classification; (iv) whether the device 
is classified by the FDA under certain enumerated parts or subparts of 
21 CFR; and (v) whether the device qualifies as durable medical 
equipment (DME), prosthetics, orthotics, and supplies (collectively, 
DMEPOS) for which payment is available exclusively on a rental basis 
under the Medicare Part B payment rules and is an ``item requiring 
frequent and substantial servicing'' as defined in 42 CFR 414.222 
(referred to collectively herein as the ``negative factors'').
    To provide greater certainty, the proposed regulations also include 
a safe harbor provision that identifies certain categories of medical 
devices that the IRS and the Treasury Department have determined fall 
within the retail exemption. The safe harbor includes (i) devices that 
are identified in the FDA's IVD Home Use Lab Tests (Over-the-Counter 
Tests) database, available at http://www.accessdata.fda.gov/scripts/cdrh/cfdocs/cfIVD/Search.cfm; (ii) devices described as ``OTC'' or 
``over the counter'' devices in the relevant FDA classification 
regulation heading; and (iii) devices that are described as ``OTC'' or 
``over the counter'' devices in the FDA's product code name, the FDA's 
device classification name, or the ``classification name'' field in the 
FDA's device registration and listing database, available at http://www.accessdata.fda.gov/scripts/cdrh/cfdocs/cfrl/rl.cfm. The safe harbor 
also includes devices that qualify as DMEPOS (as described in Subpart C 
of 42 CFR part 414 (Parenteral and Enteral Nutrition) and Subpart D of 
42 CFR part 414 (Durable Medical Equipment and Prosthetic and Orthotic 
Devices)) for which payment is available on a purchase basis under 
Medicare Part B payment rules (in accordance with the fee schedule 
published by Centers for Medicare and Medicaid Services (CMS)), and are 
(i) ``prosthetic and orthotic devices,'' as defined in 42 CFR 414.202, 
that do not require implantation or insertion by a medical 
professional; (ii) ``parenteral and enteral nutrients, equipment, and 
supplies'' as defined in 42 CFR 411.351 and described in 42 CFR 
414.102(b); (iii) ``customized items'' as described in 42 CFR 414.224; 
(iv) ``therapeutic shoes,'' as described in 42 CFR 414.228(c); or (v) 
supplies necessary for the effective use of DME, as described in 
section 110.3 of chapter 15 of the Medicare Benefit Policy Manual 
(Centers for Medicare and Medicaid Studies Publication 100-02).
B. Public Comments and the Final Regulations
1. Sales for Use in a Professional Medical Setting
    One commenter asked that the regulations clarify that the mere fact 
that a particular device is sold for use in medical offices and 
institutions is not determinative of whether the device falls within 
the retail exemption.
    As the regulations make clear, whether or not a device falls within 
the retail exemption is based on all relevant facts and circumstances. 
Therefore, the mere fact that an individual device is sold for use in a 
professional setting is not determinative of whether that type of 
device falls within the retail exemption.
2. Facts and Circumstances Test
Nonexclusivity of Factors
    Several commenters requested that the final regulations confirm 
that the factors enumerated in the facts and circumstances test for the 
retail exemption are non-exclusive, and that other factors may also be 
relevant in determining whether a particular device qualifies for the 
retail exemption. Commenters also asked for clarification that a device 
need not meet every positive factor, and that the fact that a device 
meets a negative factor is not determinative of whether a device 
qualifies for the retail exemption.
    The final regulations retain the facts and circumstances approach 
to determining whether a particular device falls within the retail 
exemption. The facts and circumstances approach requires a balancing of 
factors enumerated in Sec.  48.4191-2(b)(2). No one factor is 
determinative. Thus, a device may qualify for the retail exemption 
without meeting all of the positive factors listed under paragraph 
Sec.  48.4191-2(b)(2)(i). Additionally, a device may qualify for the 
retail exemption even if it meets one or more negative factors under 
paragraph Sec.  48.4191-2(b)(2)(ii).
    Accordingly, the final regulations state that there may be facts 
and circumstances that are relevant in evaluating whether a device is 
of a type generally purchased by the general public at retail for 
individual use in addition to those described as factors in Sec.  
48.4191-2(b)(2)(i) and (ii). In addition, the final regulations include 
seven additional examples that illustrate the process for determining 
whether a device falls within the retail exemption,

[[Page 72928]]

including examples that illustrate the balancing of different factors 
for a particular device.
Purchase at Retail
    Several commenters suggested that Internet sales should be included 
in the factor described in Sec.  48.4191-2(b)(2)(i)(A) that looks to 
whether consumers who are not medical professionals can purchase the 
device at certain retail businesses. Other commenters suggested that 
the fact that consumers who are not medical professionals can purchase 
a device over the Internet should be a factor that indicates that a 
device is ``regularly available for purchase and use by individual 
consumers,'' regardless of whether the Internet site is associated with 
a bricks and mortar store.
    Several commenters also suggested that retail sales should include 
those made over the telephone.
    In addition, several commenters suggested that the retail 
businesses identified in Sec.  48.4191-2(b)(2)(i)(A) should explicitly 
include medical supply stores and retailers that primarily sell medical 
devices (for example, specialty medical stores).
    The final regulations adopt all of these suggestions. Under the 
final regulations, the factor in Sec.  48.4191-2(b)(2)(i)(A) provides 
that consumers who are not medical professionals can purchase the 
device in person, over the telephone, or over the Internet, through 
retail businesses such as drug stores, supermarkets, or medical supply 
stores and retailers that primarily sell medical devices (for example, 
specialty medical stores, DMEPOS suppliers, and similar vendors).
Minimal or No Training
    One commenter requested that final regulations remove the factor 
that looks to whether consumers who are not medical professionals can 
use the device safely and effectively for its intended medical purpose 
with minimal or no training from a medical professional. The commenter 
reasoned that many taxable medical devices that would otherwise qualify 
for the retail exemption require at least some basic level of training. 
The commenter then noted that the suggestion that training would cause 
a taxable medical device to no longer qualify for the retail exemption 
is not appropriate.
    The final regulations do not adopt the commenter's suggestion. The 
IRS and the Treasury Department believe that whether more than minimal 
training from a medical professional is required to safely and 
effectively use a device is a relevant consideration. At the same time, 
however, the factor that considers training is only one of many factors 
to be considered in determining whether a device falls within the 
retail exemption, and it is possible that a device could qualify for 
the retail exemption even if it does not satisfy this factor.
Administered by a Medical Professional
    One commenter requested clarification that the phrase 
``administered by a medical professional'' in the factor described in 
Sec.  48.4191-2(b)(2)(ii)(A) does not include the initial and periodic 
fitting or adjustment with respect to an orthotic or prosthetic device 
that is not implanted.
    The final regulations provide a safe harbor for certain devices 
that fall under the retail exemption. Prosthetic and orthotic devices, 
as defined in 42 CFR 414.202, that do not require implantation or 
insertion by a medical professional, fall under the retail exemption 
safe harbor described in Sec.  48.4191-2(b)(2)(iii)(D)(1). Accordingly, 
prosthetic and orthotic devices within the meaning of 42 CFR 414.202 
that do not require implantation or insertion by a medical professional 
are considered to be of a type generally purchased by the general 
public at retail for individual use, without regard to whether they 
require initial or periodic fitting or adjustment.
    A prosthetic or orthotic device that is not in the safe harbor may 
qualify for the retail exemption based on an application of the facts 
and circumstances test. The final regulations include an example of a 
prosthetic device that falls within the retail exemption.
Cost
    Two commenters suggested that the factor enumerated in Sec.  
48.4191-2(b)(2)(ii)(B) that considers a device's cost should not be 
included in the final regulations. One commenter stated that whether or 
not a device is affordable depends on the consumer's insurance coverage 
and cost alternatives.
    The final regulations do not adopt this suggestion. The final 
regulations take a facts and circumstances approach to the retail 
exemption. The facts and circumstances test is comprised of a number of 
non-exclusive factors; each factor is one of several to be considered 
in determining whether a device falls within the retail exemption. 
Devices used in hospitals, doctors offices and other medical 
institutions, such as x-ray machines, magnetic resonance imaging (MRI) 
systems, and computed tomography (CT scan) or computed axial tomography 
(CAT scan) equipment, would likely be prohibitively expensive for an 
average individual user. Accordingly, the factor that considers cost is 
meaningful in determining whether a type of device is primarily for use 
in a medical institution or office or by a medical professional.
Class III Devices
    Several commenters requested that the final regulations not include 
classification as a Class III device as a factor, because the JCT 
General Explanation noted that the retail exemption is not limited by 
device class.
    The final regulations do not adopt this suggestion. Although the 
JCT General Explanation notes that the retail exemption is not limited 
by device class, it does not state that classification in Class I, 
Class II, or Class III is irrelevant to the determination of whether a 
device falls within the retail exemption. The IRS and the Treasury 
Department, in consultation with FDA, have determined that the vast 
majority of Class III types of devices are not devices that are of a 
type generally purchased by the general public at retail for individual 
use. Accordingly, the factor that considers whether a device is a Class 
III type of device is meaningful in determining whether a type of 
device is primarily for use in a medical institution or office or by a 
medical professional.
FDA Classification Categories
    Two commenters suggested that 21 CFR part 868 (Anesthesiology 
Devices) should not be included in the list of FDA classification 
categories in Sec.  48.4191-2(b)(2)(ii)(D) that suggest that a device 
is primarily for use in a medical institution or office or by a medical 
professional. The commenters noted that certain portable oxygen systems 
are classified in 21 CFR part 868.
    One commenter requested that 21 CFR part 876 (Gastroenterology-
Urology Devices) be removed from the list of FDA classification 
categories in Sec.  48.4191-2(b)(2)(ii)(D) because 21 CFR part 876 
contains many devices, such as ostomy supplies, that would otherwise 
fall within the retail exemption.
    The final regulations do not remove any FDA classification 
categories from those enumerated in Sec.  48.4191-2(b)(2)(ii)(D). The 
IRS and the Treasury Department have determined, after consultation 
with the FDA, that the overwhelming majority of devices that fall 
within these regulatory categories are not of a type generally 
purchased by the general public at retail for

[[Page 72929]]

individual use. Further, classification in one of the enumerated parts 
or subparts is not determinative of whether a device falls within the 
retail exemption. Devices in these categories must be evaluated in 
light of all relevant facts and circumstances.
    The final regulations include an example that weighs the facts and 
circumstances with respect to a portable oxygen concentrator, including 
the fact that it is a device under 21 CFR part 868, and concludes that 
the portable oxygen concentrator falls within the retail exemption. The 
final regulations also include an example that illustrates that a 
urinary ileostomy bag, which is a device under 21 CFR part 876, is 
included in the safe harbor set forth in Sec.  48.4191-
2(b)(2)(iii)(D)(1).
Packaging and Labeling
    Several commenters suggested that the final regulations include a 
factor that considers whether a device's packaging and labeling 
suggests that the device is intended for use by individuals who are not 
medical professionals. One commenter noted that product labeling that 
is easy for someone who is not a medical or health care professional to 
understand suggests that the device is regularly available for purchase 
and use by individual consumers who are not medical professionals.
    The final regulations do not adopt this suggestion. Device 
manufacturers determine the packaging and labeling of a device. 
Manufacturers may package and label a device in a consumer-friendly 
manner, even if the device is of a type that is primarily intended for 
use in a medical institution or office, or by medical professionals. 
Therefore, the IRS and the Treasury Department have determined that a 
device's packaging and labeling are not instructive as to whether a 
device is generally purchased by the general public at retail for 
individual use.
Documents Submitted for FDA Notification or Approval
    One commenter requested that the final regulations include a factor 
that looks to whether documents submitted to the FDA, such as a 
Premarket Notification (510(k)) or application for Premarket Approval 
(PMA), state that the device is intended for individual use.
    The final regulations do not adopt this suggestion. After 
consultation with the FDA, the IRS and the Treasury Department have 
determined that documents submitted to the FDA, such as 510(k) 
documents and PMA applications, are not consistently reliable 
indicators of whether a device is of a type that is generally purchased 
by the general public for individual use.
3. Safe Harbor
Durable Medical Equipment, Prosthetics, Orthotics and Supplies
    One commenter suggested that the retail exemption safe harbor 
defined in Sec.  48.4191-2(b)(2)(iii)(D) be expanded to include all 
devices that fall under the definition of DMEPOS in 42 CFR 414.202.
    The final regulations do not adopt this suggestion. However, 
devices that fall within the definition of DMEPOS that are not included 
in the retail exemption safe harbor in Sec.  48.4191-2(b)(2)(iii)(D), 
such as oxygen equipment and other rental durable medical equipment 
devices, may qualify for the retail exemption by application of the 
facts and circumstances test. The final regulations provide an example 
that evaluates whether a portable oxygen concentrator falls within the 
retail exemption based upon an evaluation of such a device under the 
facts and circumstances test.
Capped Rental Devices
    One commenter suggested that the safe harbor defined in Sec.  
48.4191-2(b)(2)(iii)(D) be expanded to include ``capped rental'' 
devices, within the meaning of 42 CFR 414.229, for which title 
transfers to the individual user (the Medicare beneficiary) at the end 
of the rental term.
    The category of capped rental DME consists of DME that is not 
subject to the payment provisions set forth in 42 CFR 414.220 through 
42 CFR 414.228. Medicare pays for capped rental DME other than complex 
rehabilitation power-driven wheelchairs on a rental basis. See 42 CFR 
414.229. Payment is made on a rental basis, not to exceed a period of 
continuous use of longer than 13 months. On the first day after 13 
continuous rental months during which payment is made, the supplier 
must transfer title to the equipment to the Medicare beneficiary. See 
42 CFR 414.229(f)(2). Medicare also pays for complex rehabilitation 
power-driven wheelchairs on a capped rental or lump-sum purchase basis. 
The supplier of the complex rehabilitation power-driven wheelchair must 
offer Medicare beneficiaries the option to purchase the complex 
rehabilitation power-driven wheelchair at the time the equipment is 
initially furnished. See 42 CFR 414.229(h). If the beneficiary does not 
elect to purchase the complex rehabilitation power-driven wheelchair, 
payment is made on a capped rental basis in accordance with the rules 
described above for other capped rental DME. See 42 CFR 414.229(f).
    The IRS and the Treasury Department, in consultation with the 
Center for Medicare and Medicaid Services (CMS), have determined that, 
in most instances, the rental period of a capped rental device 
terminates before the transfer of title. Further, information on the 
capped rental devices for which title has transferred to the individual 
user does not suggest a pattern of title transfer for specific types of 
devices. Accordingly, capped rental devices cannot be categorically 
said to qualify as devices that are generally purchased by the general 
public at retail for individual use. They may, however, qualify for the 
retail exemption by an application of the facts and circumstances test. 
Therefore, safe harbor treatment is not appropriate for capped rental 
devices, and the final regulations do not adopt the commenter's 
suggestion.
Prosthetics and Orthotics
    One commenter noted that 42 CFR 414.202 excludes from the 
definition of prosthetic and orthotic devices medical supplies such as 
catheters, catheter supplies, ostomy bags, and supplies related to 
ostomy care that are furnished by a Home Health Agency (HHA) as part of 
home health services under 42 CFR 409.40(e). The commenter asked that 
the final regulations address the significance, if any, of the 
exclusion of products furnished by an HHA on the breadth of the safe 
harbor in Sec.  48.4191-2(b)(2)(iii)(D)(1) for prosthetic and orthotic 
devices as defined in 42 CFR 414.202.
    The IRS and the Treasury Department, in consultation with CMS, have 
determined that the HHA language in 42 CFR 414.202 is a provision that 
clarifies that when individual devices are furnished by an HHA, they 
are payable as home health services under 42 CFR 409 subpart E. The HHA 
language in 42 CFR 414.202 does not exclude any type of device from the 
definition of prosthetic and orthotic devices and, therefore, has no 
impact on the retail exemption safe harbor in Sec.  48.4191-
2(b)(2)(iii)(D).
4. ``Of a Type''
    Section 4191(b)(2) provides that the term taxable medical device 
does not include eyeglasses, contact lenses, hearing aids, and any 
other medical device determined by the Secretary to be of a type that 
is generally purchased by the general public at retail for individual 
use. Several commenters requested that final regulations define a 
``type'' of device to include all devices

[[Page 72930]]

that are categorized in the same FDA product code.
    The final regulations do not adopt this suggestion. In consultation 
with the FDA, the IRS and the Treasury Department determined that the 
breadth and variety of devices within a particular product code and 
across product codes can vary greatly. Therefore, the product code 
designation is generally too broad to be useful in determining which 
devices fall within the retail exemption.
5. Components of Exempt Devices
    One commenter noted that the FDA requires some components of 
devices to be separately listed as devices. The commenter suggested 
that the final regulations exempt listed components that are ultimately 
used as component parts of a device that is exempt under section 
4191(b) and Sec.  48.4191-2(b), such as component parts of certain 
completed prosthetic or orthotic devices.
    The safe harbor provision in Sec.  48.4191-2(b)(2)(iii)(D) includes 
some components of prosthetic and orthotic devices. The IRS and the 
Treasury Department request public comments to help identify listed 
components of devices that are exempt under section 4191(b) and Sec.  
48.4191-2(b) that are not included in a safe harbor or that do not 
otherwise fall within the retail exemption by an application of the 
facts and circumstances test.
6. Dental Devices
    Several commenters suggested that dental devices that are 
customized for an individual patient, such as crowns, bridges, and 
braces, should qualify for the retail exemption because they are sold 
directly to individual consumers. Further, one commenter noted that the 
factor described in Sec.  48.4191-2(b)(2)(ii)(A), which considers 
whether a device ``generally must be implanted, inserted, operated, or 
otherwise administered by a medical professional,'' creates an 
unnecessary distinction between devices that an individual can insert 
and remove, and devices that a dentist must embed or affix within the 
patient's mouth.
    The final regulations do not create a special rule for dental 
devices. The final regulations take a facts and circumstances approach 
to the retail exemption. The facts and circumstances test is comprised 
of a number of non-exclusive factors. A customized dental device will 
qualify for the retail exemption if, based on the totality of the facts 
and circumstances, the device is of a type that is generally purchased 
by the general public at retail for individual use.

III. Combination Products

A. Proposed Regulations
    Combination products are therapeutic and diagnostic products that 
combine drugs, devices, and/or biological products. See 21 CFR 3.2(e). 
The proposed regulations tie the definition of taxable medical device 
to the FDA's listing requirements for devices. Therefore, under the 
proposed regulations, a combination product that is listed as a device 
with the FDA under section 510(j) of the FFDCA and 21 CFR part 807 and 
that does not fall under a statutory exemption, such as the retail 
exemption, is subject to the medical device excise tax.
B. Public Comments and the Final Regulations
    Several commenters requested that the final regulations provide 
that a manufacturer will not be required to pay the medical device 
excise tax on a combination product that is taken into account in 
computing the branded prescription drug (BPD) fee enacted under section 
9008 of the ACA.
    The final regulations do not adopt this suggestion. The ACA enacted 
both the medical device excise tax and the BPD fee, but provided no 
coordination between the provisions. Therefore, there is no statutory 
basis for providing an exclusion from the tax under section 4191 for a 
combination product with both a device component and a drug component, 
even if the combination product is taken into account for purposes of 
computing the BPD fee. Moreover, the comments did not raise any likely 
scenarios in which both the BPD fee and the medical device excise tax 
apply to the same product. Based on consultation with the FDA, the IRS 
and the Treasury Department anticipate that few, if any, combination 
products will be subject to both the medical device excise tax and the 
BPD fee. Accordingly, under the final regulations, a combination 
product that is listed as a device with the FDA under section 510(j) of 
the FFDCA and 21 CFR part 807 is a taxable medical device.

IV. Manufacturers Excise Taxes

    The ACA added section 4191 to chapter 32, subtitle D of the Code, 
which relates to taxes imposed on the sales of taxable articles by 
manufacturers, producers, and importers (commonly referred to as 
``manufacturers excise taxes''). Accordingly, the preamble to the 
proposed regulations states that the existing chapter 32 rules apply to 
the medical device excise tax.
Definition of a ``Manufacturer''
    One commenter requested that the final regulations include a 
presumption that a manufacturer who lists a device with the FDA is the 
manufacturer of the device for excise tax purposes.
    The final regulations do not adopt this suggestion. There are 
longstanding rules with respect to the definition of ``manufacturer'' 
or ``importer'' for chapter 32 purposes. These rules are contained in 
statutory and regulatory provisions, and they have been developed 
further through other published guidance and case law. Therefore, the 
definitions of manufacturer and importer under chapter 32 apply to 
section 4191; whether a person is considered a manufacturer or importer 
for FDA purposes is not relevant.
Sale Price
    Numerous commenters suggested that the IRS apply the constructive 
sale price rules with flexibility and sensitivity to data limitations 
that medical device companies face. The IRS and the Treasury Department 
recognize that the medical device industry will likely face some 
implementation issues when the medical device excise tax goes into 
effect on January 1, 2013, and the IRS intends to work with 
stakeholders on compliance-related issues, such as the determination of 
price.
    Numerous commenters requested that the final regulations extend the 
principle of Revenue Ruling 80-273 (1980-2 CB 315) to taxable medical 
devices. Rev. Rul. 80-273 holds that when a manufacturer or importer 
sells a taxable article directly to an unrelated end user at retail, 
the excise tax may be based on a sale price of 75 percent of the retail 
sale price, after any adjustments under section 4216(a), such as for 
containers, packing, and transportation charges. The holding applies 
only to the excise taxes imposed under the Code sections explicitly 
listed in the revenue ruling. Commenters also requested that the final 
regulations clarify that sales ``at retail'' in the medical device 
context include sales to hospitals and other medical service providers. 
Although the final regulations do not adopt this suggestion, the IRS 
and the Treasury Department will issue separate interim guidance along 
with these regulations to address sale price issues and have considered 
these comments in the context of such guidance.
    One commenter requested that the final regulations provide that 
taxpayers can use transfer pricing under section 482 to determine the 
taxable sale price of a taxable medical device.

[[Page 72931]]

    The final regulations do not adopt the commenter's suggestion. 
Because the standards are not the same under the section 482 
regulations and section 4216, an arm's length result determined under 
section 482 is not an appropriate proxy for the constructive sale price 
or fair market price under section 4216. While in certain circumstances 
facts used to support a transfer price for purposes of section 482 may 
be relevant to determining the sale price under section 4216, transfer 
pricing documentation or studies developed for purposes of section 482 
or section 6662(e) will not be conclusive.
    Finally, the IRS received several informal inquiries about whether 
the 2.3% medical device excise tax may be excluded from the sale price 
upon which the medical device excise tax is imposed. Section 4216(a) 
provides that in determining the price for which an article is sold 
there should be excluded the amount of tax imposed, whether or not 
stated as a separate charge. See section 4216(a) and Sec.  48.4216(a)-
2(a) of the Manufacturers and Retailers Excise Tax Regulations for the 
rules regarding the exclusion of tax from sale price.
Installment Sales, Leases, and Long-Term Contracts
    Several commenters requested transition relief for installment 
sales and leases of taxable medical devices where the contract is 
entered into prior to the effective date of the tax on January 1, 2013.
    The final regulations do not provide transition relief for all 
contracts entered into prior to January 1, 2013. However, the final 
regulations do provide transition relief for contracts entered into 
prior to March 30, 2010, the date the ACA was enacted. More 
specifically, the final regulations provide that payments made on or 
after January 1, 2013, pursuant to a written binding contract for the 
lease, installment sale, or sale on credit of a taxable medical device 
that was in effect prior to March 30, 2010, are not subject to tax 
under section 4191 unless the contract is materially modified on or 
after March 30, 2010. For purposes of this transition relief, a 
material modification includes only a modification that materially 
affects the property to be provided under the contract, the terms of 
payment under the contract, or the amount payable under the contract. A 
material modification does not include a modification to the contract 
required by applicable Federal, State, or local law.
    Payments made pursuant to a contract that was entered into on or 
after March 30, 2010, are subject to tax under section 4191 and the 
existing provisions of sections 4216(c) and 4217, and Sec. Sec.  
48.4216(c)-1 and 48.4217-2 apply.
Uses
    Several commenters requested that the final regulations 
specifically provide that the following are not taxable uses where the 
manufacturer receives no direct benefit in the form of money, services, 
or other property: (i) Demonstration products used for health care 
professionals and product awareness, such as samples used to 
demonstrate the type of device to be implanted in a patient; (ii) 
evaluation products provided to help health care professionals 
determine whether and when to use, order, purchase, or recommend the 
device; (iii) loaned devices to facilitate procedures utilizing a sold 
taxable medical device, such as instruments specifically designed to 
implant a particular orthopedic joint; (iv) testing and development 
products; and (v) product donations and charitable contributions.
    The final regulations do not adopt this suggestion because it is 
necessary to have consistent rules for all manufacturers excise taxes. 
Section 4218 generally imposes a tax on certain uses of an article by 
the article's manufacturer. In general, under Sec.  48.4218-1(b), if 
the manufacturer of a taxable article uses the article for any purpose 
other than in the manufacture of another taxable article, then the 
manufacturer is liable for tax on the article as if the manufacturer 
had sold it.
    With regard to demonstration products, the provision or use of a 
taxable medical device as a demonstration product may constitute a 
taxable use, depending on the facts and circumstances of the 
arrangement. See Rev. Rul. 60-290 (160-2 CB 331) and Rev. Rul. 72-563 
(1972-1 CB 568).
    With regard to evaluation and testing products, Rev. Rul. 76-119 
(1976-1 CB 345) holds that if a manufacturer uses a taxable article in 
the testing of another article of its own manufacture, the use of the 
taxable article is not a taxable use.
    The existing chapter 32 rules do not specifically address whether a 
donation of a taxable article to charity constitutes a taxable use 
under section 4218. However, the IRS and the Treasury Department will 
issue separate interim guidance along with these regulations to address 
donations of taxable medical devices.
Rebates
    Several commenters requested that the final regulations provide 
manufacturers with the option of excluding from the sale price a 
reasonable estimate of purchase price adjustments for rebates, with a 
later true-up based on the actual rebate amounts. These commenters 
suggest that manufacturers have reliable historical data on past rebate 
performance, so they are able to project rebate amounts with reasonable 
certainty.
    The final regulations do not adopt this suggestion. Section 
48.4216(a)-3(c) provides that a manufacturer may take a rebate into 
account in determining sale price only to the extent the rebate is made 
prior to the close of the quarter during which the sale associated with 
the rebate is made. In addition, if the manufacturer subsequently 
allows a rebate for taxable articles on which tax has been paid, the 
manufacturer may make a claim for credit or refund of that portion of 
the tax that is proportionate to the part of the price that is rebated.
Software Sold Together With Services
    One commenter requested clarification with respect to the 
taxability of software that is sold together with services and/or 
maintenance contracts.
    Section 48.4216(a)-1(e) provides that where a taxable article and a 
nontaxable article are sold by the manufacturer as a unit, the tax 
attaches to that portion of the manufacturer's sale price of the unit 
that is properly allocable to the taxable article. Because the 
definition of a taxable medical device is tied to the FDA's device 
listing requirements, if the software and service bundle is not listed 
with the FDA under section 510(j) of the FFDCA and 21 CFR part 807 (in 
other words, if the entire bundle is not a taxable medical device), the 
medical device excise tax attaches only to the sale of the devices 
within the bundle that are listed with the FDA under section 510(j) of 
the FFDCA and 21 CFR part 807.
Refurbished and Remanufactured Medical Devices
    Several commenters requested guidance on how the medical device 
excise tax will apply to sales of refurbished and remanufactured 
medical devices. One commenter requested that the definition of 
manufacturer in Sec.  48.0-2(a)(4) be clarified to ensure that 
repairing, refurbishing, or rebuilding an already taxed medical device 
does not create another taxable medical device and is not considered 
manufacturing.
    The final regulations do not adopt these suggestions. Under 
existing chapter 32 rules, remanufacturing or refurbishing constitutes 
manufacture if

[[Page 72932]]

the remanufacturing or refurbishing process produces a new and 
different taxable article. See Rev. Rul. 86-130 (1986-2 CB 179), Rev. 
Rul. 83-149 (1983-2 CB 186), Rev. Rul. 68-40 (1968-1 CB 452), Rev. Rul. 
64-202 (1964-2 CB 431), and Rev. Rul. 58-586 (1958-2 CB 806). If a 
remanufacturer or refurbisher produces a new and different taxable 
article, the tax is imposed upon the sale or use of the remanufactured 
or refurbished article.
Replacement Parts
    Two commenters suggested that parts used to replace an existing 
part or component in a taxable medical device should not be subject to 
the tax, even if the part or component is listed separately as a device 
with the FDA.
    The final regulations do not adopt this suggestion. Under existing 
law, if a taxable article is returned to the manufacturer under a 
warranty and the manufacturer provides a replacement article free or at 
a reduced price, the tax on the replacement article is computed on the 
actual amount, if any, paid to the manufacturer for the replacement 
article. See Sec.  48.4216(a)-3(b) and Rev. Rul. 75-272 (1975-2 CB 
421).
    With regard to replacements that are not made under warranty, 
replacement parts that are listed with the FDA under section 510(j) of 
the FFDCA and 21 CFR part 807 are taxable medical devices, and their 
sale by the manufacturer is generally subject to tax.
Licensing of Software
    One commenter requested clarification on whether the licensing of 
software that is a taxable medical device is a taxable event.
    Under existing chapter 32 rules, the manufacturers excise tax 
generally attaches upon the sale or use of a taxable article by the 
manufacturer. The lease of a taxable article by the manufacturer is 
considered a sale. Neither the existing chapter 32 rules nor the final 
regulations address the issue of whether the licensing of a taxable 
article is a taxable event. However, the IRS and the Treasury 
Department will issue separate interim guidance along with these 
regulations to address this issue.
Consolidated Filing of Form 720
    The medical device excise tax is reported on Form 720, Quarterly 
Federal Excise Tax Return. Several commenters requested that the IRS 
and the Treasury Department permit manufacturers and importers of 
taxable medical devices who are members of a affiliated group for 
income tax purposes to file Form 720 on a consolidated basis.
    The final regulations do not adopt this suggestion. Section 1501 
provides generally that an affiliated group of corporations shall have 
the privilege of making a consolidated return with respect to the 
income tax imposed by chapter 1 for the taxable year in lieu of 
separate returns. There is no similar provision that applies to excise 
tax. Thus, the privilege to file consolidated returns applies only to 
income tax returns and not to excise tax returns. Accordingly, for 
excise tax purposes, each business unit that has or is required to have 
a separate employer identification number is treated as a separate 
person with separate tax liability, and each such business unit must 
file a separate Form 720.
Consolidated Form 637 Registration
    Registration through the Form 637 application process is necessary 
to effectuate tax-free sales. Several commenters requested that final 
regulations allow one entity in an affiliated group to register on 
behalf of the group with respect to intra-group sales.
    The final regulations do not adopt this suggestion. The IRS and the 
Treasury Department have determined that it is necessary in the 
interest of effective tax administration to require each entity with a 
separate employer identification number to apply for registration under 
Application for Registration (For Certain Excise Tax Activities) (Form 
637) to verify the activity for which the entity seeks registration. 
Once an entity is registered for a particular activity, the 
registration does not expire. Therefore, for most entities, the initial 
application process is the extent of the entity's obligation with 
respect to registration.
Form 720 Filing Requirements
    One commenter suggested that the quarterly reporting requirement is 
unduly burdensome on small medical device manufacturers. The commenter 
suggested that the final regulations initially require only annual 
reporting for small medical device manufacturers to enable those 
taxpayers to become familiar with the excise tax rules and implement 
the proper accounting practices and procedures.
    The final regulations do not adopt this suggestion. The ACA added 
section 4191 to chapter 32. Therefore, the existing rules governing 
chapter 32 apply. Manufacturers excise taxes, including the medical 
device excise tax, are reported on Form 720. In general, Form 720 must 
be filed on a quarterly basis. For more information about reporting 
requirements, see Sec.  40.6011(a)-1(a).
Semimonthly Deposits
    Several commenters suggested that the semimonthly deposit 
requirements under section 6302 are burdensome to medical device 
manufacturers because device manufacturers have little or no experience 
with returning and paying federal excise taxes and because 
manufacturers need time to develop their systems to implement these 
final regulations. Some of those commenters requested that final 
regulations specifically carve out taxable medical devices from the 
deposit rules set forth in section 6302 and the regulations thereunder. 
Other commenters requested that the IRS and the Treasury Department 
waive on a reasonable cause basis any tax penalty applicable to the 
failure to deposit the correct amount of tax.
    The final regulations do not carve taxable medical devices out of 
the semimonthly deposit rules. Therefore, medical device manufacturers 
will generally be required to make semimonthly deposits of tax unless 
the manufacturer's net tax liability does not exceed $2,500 for the 
quarter. See section 6302 and the regulations thereunder for the rules 
regarding semimonthly deposits.
    The IRS and the Treasury Department recognize that the application 
of the manufacturers excise tax rules, particularly with regard to sale 
price, may present certain challenges. The IRS and the Treasury 
Department further recognize that manufacturers and importers in the 
medical device industry may not have prior experience complying with 
the rules regarding semimonthly deposits. Given that the tax goes into 
effect on January 1, 2013, the IRS and the Treasury Department will 
issue separate interim guidance along with these regulations that 
addresses penalties under section 6656.
Disregarded Entities
    One commenter requested that the IRS and the Treasury Department 
amend the regulations under section 7701 to allow entities that are 
disregarded as separate from their owners for income tax purposes to be 
similarly disregarded for excise tax purposes.
    The final regulations do not adopt this suggestion because it is 
necessary to have a consistent rule for all excise taxes. Specifically, 
Sec.  1.1361-4(a)(8) and Sec.  301.7701-2(c)(2)(v) treat a qualified 
subchapter S subsidiary and a single-owner eligible entity that is 
disregarded as an entity separate from its owner under Sec.  301.7701-2 
as a separate entity for purposes of excise taxes imposed by

[[Page 72933]]

chapter 32 of the Code. These rules were adopted because of the 
difficulties that arise from the interaction of the disregarded entity 
rules and the federal excise tax rules. For example, the manufacturers 
excise tax rules rely on state law, rather than Federal law, to 
determine attachment of a tax. See Sec.  48.0-2(b) (providing that 
excise taxes attach when title to an article passes to the purchaser, 
which is based on the laws of the local jurisdiction where the sale is 
made in the absence of express intention of the parties to the sale). 
Accordingly, a Form 720 reporting the medical device excise tax imposed 
on sales of taxable medical devices by the manufacturer or importer 
after December 31, 2012, must be filed under the name and employer 
identification number of the entity rather than under the name and EIN 
of the disregarded entity's owner.
Penalties for Failure To File and Failure To Pay Tax; Accuracy-Related 
Penalties
    Several commenters highlighted the compliance challenges associated 
with implementation of the medical device excise tax. These commenters 
requested that the IRS and the Treasury Department temporarily waive 
all tax penalties relating to the filing of Form 720.
    The final regulations do not adopt this suggestion. Section 6651(a) 
imposes penalties for failure to file any return required under 
subchapter A of chapter 61 and for failure to pay the amount shown as 
tax on any such return, unless it is shown that the failure is due to 
reasonable cause and not willful neglect. Under Sec.  301.6651-1(c), a 
taxpayer may avoid penalties under section 6651 for the failure to file 
a tax return or pay tax if the taxpayer makes an affirmative showing of 
all facts necessary to establish a reasonable cause for the taxpayer's 
failure to file a return or pay tax on time. If the taxpayer exercised 
ordinary business care and prudence but was nevertheless unable to file 
the return within the prescribed time, then the delay is due to a 
reasonable cause. A failure to pay will be considered to be due to a 
reasonable cause to the extent the taxpayer has made a satisfactory 
showing that the taxpayer exercised ordinary business care and prudence 
in providing for payment of the taxpayer's tax liability and was 
nevertheless either unable to pay the tax or would suffer an undue 
hardship (as described in Sec.  1.6161-1(b)) if the taxpayer paid on 
the due date.
    Section 6662 imposes an accuracy-related penalty for, among other 
things, negligence or disregard of the rules or regulations. Under 
section 6662(c), the term ``negligence'' includes any failure to make a 
reasonable attempt to comply with the provisions of the Code, and the 
term ``disregard'' includes any careless, reckless, or intentional 
disregard.
    The IRS and the Treasury Department recognize that the application 
of the manufacturers excise tax rules may present certain 
implementation challenges. The IRS and the Treasury Department also 
recognize that manufacturers and importers in the medical device 
industry may not have prior experience with filing a Form 720. However, 
the IRS and the Treasury Department believe that the existing 
reasonable cause provisions under section 6651(a) and Sec.  301.6651-
1(c) and the negligence standard in section 6662 provide taxpayers with 
an appropriate mechanism for relief. If a penalty is assessed under 
section 6651 or section 6662, the IRS encourages taxpayers to call the 
telephone number on the penalty notice to discuss abatement options.

V. Kits

    Under the proposed regulations, a taxable medical device is a 
device that is listed as a device with the FDA under section 510(j) of 
the FFDCA and 21 CFR part 807. Therefore, under the proposed 
regulations, a listed kit is a taxable medical device. The proposed 
regulations define a ``kit'' as a set of two or more articles packaged 
in a single bag, tray, or box for the convenience of the end user. In 
addition, the proposed regulations provide that if a kit is a taxable 
medical device, then the use of other taxable medical devices in the 
assembly of the kit constitutes ``further manufacture'' within the 
meaning of section 4221(a)(1) of the Code by the person who produces 
the kit.
    The IRS and the Department of Treasury received numerous public 
comments regarding kits. Several commenters noted that taxing the kit 
will result in taxing items contained in the kit that, standing alone, 
are not taxable medical devices.
    Some public comments pointed to certain FDA rules governing kits as 
evidence that kits should receive a different tax treatment than other 
devices that are listed with the FDA under section 510(j) of the FFDCA 
and 21 CFR part 807. The commenters suggested that kits should receive 
special tax treatment because many kits are not subject to FDA 
premarket notification requirements.
    Additionally, several commenters suggested that the producer of a 
kit is not a ``manufacturer'' within the meaning of section 48.0-
2(a)(4)(i). Other commenters requested that the final regulations 
exclude kits from the definition of ``further manufacture'' within the 
meaning of section 4221(a)(1), so that the sale of a kit is not subject 
to the medical device excise tax.
    The final regulations do not explicitly provide that the use of 
other taxable medical devices in the assembly of the kit constitutes 
further manufacture, within the meaning of section 4221(a)(1), by the 
person who produces the kit. The IRS and the Treasury Department will 
issue separate interim guidance along with these regulations on the 
treatment of kits for purposes of the medical device excise tax.
    Several commentators requested that the final regulations confirm 
that the use of a kit by a hospital or medical institution that 
produced the kit is not a taxable use within the meaning of section 
4218.
    Hospitals or medical institutions that produce kits for their own 
use are known as self-kitters. Self-kitters are exempt from the FDA's 
registration and listing requirements. See 21 CFR 807.65(f). Therefore, 
under the definition of a taxable medical device in both the proposed 
regulations and the final regulations, a kit produced by a hospital or 
medical institution for its own use would not be a ``taxable medical 
device.'' Accordingly, the use of the self-produced kits by the 
hospital or medical institution would not be a taxable use under the 
rules of section 4218.

Availability of IRS Documents

    The IRS final regulations and revenue rulings cited in this 
preamble are published in the Internal Revenue Cumulative Bulletin and 
are available from the Superintendent of Documents, P.O. Box 979050, 
St. Louis, MO 63197-9000.

Special Analyses

    It has been determined that this Treasury Decision is not a 
significant regulatory action as defined in Executive Order 12866, as 
supplemented by Executive Order 13563. Therefore, a regulatory 
assessment is not required. It also has been determined that section 
553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does 
not apply to these regulations, and because these regulations do not 
impose a collection of information on small entities, the provisions of 
the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply. 
Pursuant to section 7805(f) of the Code, the notice of proposed 
rulemaking that preceded these regulations was submitted to the Chief 
Counsel for Advocacy of the Small Business

[[Page 72934]]

Administration for comment on its impact on small business. No comments 
were received.

Drafting Information

    The principal authors of these regulations are Natalie Payne and 
Stephanie Bland, Office of the Associate Chief Counsel (Passthroughs 
and Special Industries). However, other personnel from the IRS and the 
Treasury Department participated in their development.

List of Subjects in 26 CFR Part 48

    Excise taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 48 is amended as follows:

PART 48--MANUFACTURERS AND RETAILERS EXCISE TAXES

0
Paragraph 1. The authority citation for part 48 is amended by adding 
entries in numerical order to read in part as follows:

    Authority:  26 U.S.C. 7805. * * *
    Section 48.4191-1 also issued under 26 U.S.C. 4191.
    Section 48.4191-2 also issued under 26 U.S.C. 4191(b)(2).


Sec.  48.0-1  [Amended]

0
Par. 2. The fourth sentence of Sec.  48.0-1 is amended by removing the 
language ``and sporting goods'' and adding ``sporting goods, and 
taxable medical devices'' in its place.
0
Par. 3. Subpart L, consisting of Sec. Sec.  48.4191-1 and 48.4191-2 is 
added to read as follows:

Subpart L--Taxable Medical Devices

Sec.
48.4191-1 Imposition and rate of tax.
48.4191-2 Taxable medical device.


Sec.  48.4191-1  Imposition and rate of tax.

    (a) Imposition of tax. Under section 4191(a), tax is imposed on the 
sale of any taxable medical device by the manufacturer, producer, or 
importer of the device. For the definition of the term taxable medical 
device, see Sec.  48.4191-2.
    (b) Rate of tax. Tax is imposed on the sale of a taxable medical 
device at the rate of 2.3 percent of the price for which the device is 
sold. For the definition of the term price, see section 4216 and 
Sec. Sec.  48.4216(a)-1 through 48.4216(e)-3.
    (c) Liability for tax. The manufacturer, producer, or importer 
making the sale of a taxable medical device is liable for the tax 
imposed by section 4191(a). For rules relating to the determination of 
who the manufacturer, producer, or importer is for purposes of section 
4191, see Sec.  48.0-2(a)(4). For the definition of the term sale, see 
Sec.  48.0-2(a)(5). For rules relating to the lease of an article by 
the manufacturer, producer, or importer, see section 4217 and Sec.  
48.4217-1 through Sec.  48.4217-2. For rules relating to the use of an 
article by the manufacturer, producer, or importer, see section 4218 
and Sec.  48.4218-1 through Sec.  48.4218-5.
    (d) Procedural rules. For the procedural rules relating to section 
4191, see part 40 of this chapter.
    (e) Tax-free sales for further manufacture or export. For rules 
relating to tax-free sales of taxable medical devices for further 
manufacture or export, see section 4221 and Sec.  48.4221-1 through 
Sec.  48.4221-3.
    (f) Payments made on or after January 1, 2013, pursuant to lease, 
installment sale, or sale on credit contracts. For rules relating to 
the taxability of payments made on or after January 1, 2013, pursuant 
to a lease, installment sale, or sale on credit contract entered into 
on or after March 30, 2010, see Sec.  48.4216(c)-1(e)(1). For rules 
relating to the taxability of payments made on or after January 1, 
2013, pursuant to a lease, installment sale, or sale on credit contract 
entered into before March 30, 2010, see Sec.  48.4216(c)-1(e)(2).
    (g) Effective/applicability date. This section applies to sales of 
taxable medical devices on and after January 1, 2013.


Sec.  48.4191-2  Taxable medical device.

    (a) Taxable medical device--(1) In general. A taxable medical 
device is any device, as defined in section 201(h) of the Federal Food, 
Drug, and Cosmetic Act (FFDCA), that is intended for humans. For 
purposes of this section, a device defined in section 201(h) of the 
FFDCA that is intended for humans means a device that is listed as a 
device with the Food and Drug Administration (FDA) under section 510(j) 
of the FFDCA and 21 CFR part 807, pursuant to FDA requirements.
    (2) Devices that should have been listed with the FDA. If a device 
is not listed as a device with the FDA but the FDA determines that the 
device should have been listed as a device, the device will be deemed 
to be listed as a device with the FDA as of the date the FDA notifies 
the manufacturer or importer in writing that corrective action with 
respect to listing is required.
    (b) Exemptions--(1) Specific exemptions. The term taxable medical 
device does not include eyeglasses, contact lenses, and hearing aids.
    (2) Retail exemption. The term taxable medical device does not 
include any device of a type that is generally purchased by the general 
public at retail for individual use (the retail exemption). A device 
will be considered to be of a type generally purchased by the general 
public at retail for individual use if it is regularly available for 
purchase and use by individual consumers who are not medical 
professionals, and if the design of the device demonstrates that it is 
not primarily intended for use in a medical institution or office or by 
a medical professional. Whether a device is of a type described in the 
preceding sentence is evaluated based on all the relevant facts and 
circumstances. Factors relevant to this evaluation are enumerated in 
paragraphs (b)(2)(i) and (ii) of this section. Further, there may be 
facts and circumstances that are relevant in evaluating whether a 
device is of a type generally purchased by the general public at retail 
for individual use in addition to those described in paragraphs 
(b)(2)(i) and (ii) of this section. The determination of whether a 
device is of a type that qualifies for the retail exemption is made 
based on the overall balance of factors relevant to the particular type 
of device. The fact that a device is of a type that requires a 
prescription is not a factor in the determination of whether or not the 
device falls under the retail exemption.
    (i) Regularly available for purchase and use by individual 
consumers. The following factors are relevant in determining whether a 
device is of a type that is regularly available for purchase and use by 
individual consumers who are not medical professionals:
    (A) Whether consumers who are not medical professionals can 
purchase the device in person, over the telephone, or over the 
Internet, through retail businesses such as drug stores, supermarkets, 
or medical supply stores and retailers that primarily sell devices (for 
example, specialty medical stores, durable medical equipment, 
prosthetics, orthotics, and supplies (DMEPOS) suppliers and similar 
vendors);
    (B) Whether consumers who are not medical professionals can use the 
device safely and effectively for its intended medical purpose with 
minimal or no training from a medical professional; and
    (C) Whether the device is classified by the FDA under Subpart D of 
21 CFR part 890 (Physical Medicine Devices).
    (ii) Primarily for use in a medical institution or office or by a 
medical professional. The following factors are relevant in determining 
whether a

[[Page 72935]]

device is designed primarily for use in a medical institution or office 
or by a medical professional:
    (A) Whether the device generally must be implanted, inserted, 
operated, or otherwise administered by a medical professional;
    (B) Whether the cost to acquire, maintain, and/or use the device 
requires a large initial investment and/or ongoing expenditure that is 
not affordable for the average individual consumer;
    (C) Whether the device is a Class III device under the FDA system 
of classification;
    (D) Whether the device is classified by the FDA under--
    (1) 21 CFR part 862 (Clinical Chemistry and Clinical Toxicology 
Devices), 21 CFR part 864 (Hematology and Pathology Devices), 21 CFR 
part 866 (Immunology and Microbiology Devices), 21 CFR part 868 
(Anesthesiology Devices), 21 CFR part 870 (Cardiovascular Devices), 21 
CFR part 874 (Ear, Nose, and Throat Devices), 21 CFR part 876 
(Gastroenterology--Urology Devices), 21 CFR part 878 (General and 
Plastic Surgery Devices), 21 CFR part 882 (Neurological Devices), 21 
CFR part 886 (Ophthalmic Devices), 21 CFR part 888 (Orthopedic 
Devices), or 21 CFR part 892 (Radiology Devices);
    (2) Subpart B, Subpart D, or Subpart E of 21 CFR part 872 (Dental 
Devices);
    (3) Subpart B, Subpart C, Subpart D, Subpart E, or Subpart G of 21 
CFR part 884 (Obstetrical and Gynecological Devices); or
    (4) Subpart B of 21 CFR part 890 (Physical Medicine Devices); and
    (E) Whether the device qualifies as durable medical equipment, 
prosthetics, orthotics, and supplies for which payment is available 
exclusively on a rental basis under the Medicare Part B payment rules, 
and is an ``item requiring frequent and substantial servicing'' as 
defined in 42 CFR 414.222.
    (iii) Safe Harbor. The following devices will be considered to be 
of a type generally purchased by the general public at retail for 
individual use:
    (A) Devices that are included in the FDA's online IVD Home Use Lab 
Tests (Over-the-Counter Tests) database, available at http://www.accessdata.fda.gov/scripts/cdrh/cfdocs/cfIVD/Search.cfm.
    (B) Devices that are described as ``OTC'' or ``over the counter'' 
devices in the relevant FDA classification regulation heading.
    (C) Devices that are described as ``OTC'' or ``over the counter'' 
devices in the FDA's product code name, the FDA's device classification 
name, or the ``classification name'' field in the FDA's device 
registration and listing database, available at http://www.accessdata.fda.gov/scripts/cdrh/cfdocs/cfrl/rl.cfm.
    (D) Devices that qualify as durable medical equipment, prosthetics, 
orthotics, and supplies, as described in Subpart C of 42 CFR part 414 
(Parenteral and Enteral Nutrition) and Subpart D of 42 CFR part 414 
(Durable Medical Equipment and Prosthetic and Orthotic Devices), for 
which payment is available on a purchase basis under Medicare Part B 
payment rules, and are--
    (1) ``Prosthetic and orthotic devices,'' as defined in 42 CFR 
414.202, that do not require implantation or insertion by a medical 
professional;
    (2) ``Parenteral and enteral nutrients, equipment, and supplies'' 
as defined in 42 CFR 411.351 and described in 42 CFR 414.102(b);
    (3) ``Customized items,'' as described in 42 CFR 414.224;
    (4) ``Therapeutic shoes,'' as described in 42 CFR 414.228(c); or
    (5) Supplies necessary for the effective use of durable medical 
equipment (DME), as described in section 110.3 of chapter 15 of the 
Medicare Benefit Policy Manual (Centers for Medicare and Medicaid 
Studies Publication 100-02).
    (iv) Examples. The following examples illustrate the rules of this 
paragraph (b)(2).

    Example 1.  X manufactures non-sterile absorbent tipped 
applicators. X sells the applicators to distributors Y and Z, which, 
in turn, sell the applicators to medical institutions and offices, 
medical professionals, and retail businesses. The FDA requires 
manufacturers of non-sterile absorbent tipped applicators to list 
the applicators as a device with the FDA. The applicators are 
classified by the FDA under 21 CFR part 880 (General Hospital and 
Personal Use Devices) and product code KXF.
    Absorbent tipped applicators do not fall within a retail 
exemption safe harbor set forth in paragraph (b)(2)(iii) of this 
section. Therefore, the determination of whether the absorbent 
tipped applicators are devices of a type generally purchased by the 
general public at retail for individual use must be made on a facts 
and circumstances basis.
    Individual consumers who are not medical professionals can 
regularly purchase the absorbent tipped applicators at drug stores, 
supermarkets, cosmetic supply stores or other similar businesses, 
and can use the applicators safely and effectively for their 
intended medical purpose without training from a medical 
professional. Further, the absorbent tipped applicators do not need 
to be implanted, inserted, operated, or otherwise administered by a 
medical professional, do not require a large investment and/or 
ongoing expenditure, are not a Class III device, are not classified 
by the FDA under a category described in paragraph (b)(2)(ii)(D) of 
this section, and are not ``items requiring frequent and substantial 
servicing'' as defined in 42 CFR 414.222.
    Thus, the applicators have multiple factors under paragraph 
(b)(2)(i) of this section that tend to show they are regularly 
available for purchase and use by individual consumers and none of 
the factors under paragraph (b)(2)(ii) of this section tend to show 
they are designed primarily for use in a medical institution or 
office or by medical professionals. Based on the totality of the 
facts and circumstances, the applicators are devices that are of a 
type that are generally purchased by the general public at retail 
for individual use.
    Example 2.  X manufactures adhesive bandages. X sells the 
adhesive bandages to distributors Y and Z, which, in turn, sell the 
bandages to medical institutions and offices, medical professionals, 
and retail businesses. The FDA requires manufacturers of adhesive 
bandages to list the bandages as a device with the FDA. The adhesive 
bandages are classified by the FDA under 21 CFR part 880 (General 
Hospital and Personal Use Devices) and product code KGX.
    Adhesive bandages do not fall within a retail exemption safe 
harbor set forth in paragraph (b)(2)(iii) of this section. 
Therefore, the determination of whether the adhesive bandages are 
devices of a type generally purchased by the general public at 
retail for individual use must be made on a facts and circumstances 
basis.
    Individual consumers who are not medical professionals can 
regularly purchase the adhesive bandages at drug stores, 
supermarkets, or other similar businesses, and can use the adhesive 
bandages safely and effectively for their intended medical purpose 
without training from a medical professional. Further, the adhesive 
bandages do not need to be implanted, inserted, operated, or 
otherwise administered by a medical professional, do not require a 
large investment and/or ongoing expenditure, are not Class III 
devices, are not classified by the FDA under a category described in 
paragraph (b)(2)(ii)(D) of this section, and are not ``items 
requiring frequent and substantial servicing'' as defined in 42 CFR 
414.222.
    Thus, the adhesive bandages have multiple factors under 
paragraph (b)(2)(i) of this section that tend to show they are 
regularly available for purchase and use by individual consumers and 
none of the factors under paragraph (b)(2)(ii) of this section tend 
to show they are designed primarily for use in a medical institution 
or office or by medical professionals. Based on the totality of the 
facts and circumstances, the adhesive bandages are devices that are 
of a type that are generally purchased by the general public at 
retail for individual use.
    Example 3.  X manufactures snake bite suction kits. X sells the 
snake bite suction kits to distributors Y and Z, which, in turn, 
sell the kits to medical institutions and offices, medical 
professionals, and retail businesses. The FDA requires manufacturers 
of snake bite suction kits to list the kits as a device with the 
FDA. The FDA classifies the snake bit suction kits under 21 CFR part 
880 (General Hospital and Personal Use Devices) and product code 
KYP.

[[Page 72936]]

    Snake bite suction kits do not fall within a retail exemption 
safe harbor set forth in paragraph (b)(2)(iii) of this section. 
Therefore, the determination of whether the snake bite suction kits 
are devices of a type generally purchased by the general public at 
retail for individual use must be made on a facts and circumstances 
basis.
    Individual consumers who are not medical professionals can 
regularly purchase the snake bite suction kits at sporting goods 
stores, camping stores, or other similar retail businesses, and can 
use the kits safely and effectively for their intended medical 
purpose without training from a medical professional. Further, the 
snake bite suction kits do not need to be implanted, inserted, 
operated, or otherwise administered by a medical professional, do 
not require a large investment and/or ongoing expenditure, are not 
Class III devices, are not classified by the FDA under a category 
described in paragraph (b)(2)(ii)(D) of this section, and are not 
``items requiring frequent and substantial servicing'' as defined in 
42 CFR 414.222.
    Thus, the snake bite suction kits have multiple factors under 
paragraph (b)(2)(i) of this section that tend to show they are 
regularly available for purchase and use by individual consumers and 
none of the factors under paragraph (b)(2)(ii) of this section tend 
to show they are designed primarily for use in a medical institution 
or office or by medical professionals. Based on the totality of the 
facts and circumstances, the snake bite suction kits are devices 
that are of a type that are generally purchased by the general 
public at retail for individual use.
    Example 4.  X manufactures denture adhesives. X sells the 
denture adhesives to distributors Y and Z, which, in turn, sell the 
adhesives to dental offices and retail businesses. The FDA requires 
manufacturers of denture adhesives to list the adhesive as a device 
with the FDA. The FDA classifies the denture adhesives under 21 CFR 
part 872 (Dental Devices) and product code KXX.
    The denture adhesives do not fall within a retail exemption safe 
harbor set forth in paragraph (b)(2)(iii) of this section. 
Therefore, the determination of whether the denture adhesives are 
devices of a type generally purchased by the general public at 
retail for individual use must be made on a facts and circumstances 
basis.
    Individual consumers who are not medical professionals can 
regularly purchase the denture adhesives at drug stores, 
supermarkets, or other similar businesses, and can use the adhesives 
safely and effectively for their intended medical purpose with 
minimal or no training from a medical professional. Further, the 
denture adhesives do not need to be implanted, inserted, operated, 
or otherwise administered by a medical professional, do not require 
a large investment and/or ongoing expenditure, are not Class III 
devices, are not classified by the FDA under a category described in 
paragraph (b)(2)(ii)(D) of this section, and are not ``items 
requiring frequent and substantial servicing'' as defined in 42 CFR 
414.222.
    Thus, the denture adhesives have multiple factors under 
paragraph (b)(2)(i) of this section that tend to show they are 
regularly available for purchase and use by individual consumers and 
none of the factors under paragraph (b)(2)(ii) of this section tend 
to show they are designed primarily for use in a medical institution 
or office or by medical professionals. Based on the totality of the 
facts and circumstances, the denture adhesives are devices that are 
of a type that are generally purchased by the general public at 
retail for individual use.
    Example 5.  X manufactures mobile x-ray systems. X sells the x-
ray systems to distributors Y and Z, which, in turn, sell the 
systems generally to medical institutions and offices, as well as 
medical professionals. The FDA requires manufacturers of mobile x-
ray systems to list the systems as a device with the FDA. The FDA 
classifies the mobile x-ray systems under 21 CFR part 892 (Radiology 
Devices) and product code IZL.
    Mobile x-ray systems do not fall within a retail exemption safe 
harbor set forth in paragraph (b)(2)(iii) of this section. 
Therefore, the determination of whether the mobile x-ray systems are 
devices of a type generally purchased by the general public at 
retail for individual use must be made on a facts and circumstances 
basis.
    Individual consumers who are not medical professionals can 
regularly purchase the mobile x-ray systems over the Internet. 
However, individual consumers cannot use the x-ray systems safely 
and effectively for their intended medical purpose without training 
from a medical professional. Although the mobile x-ray systems are 
not Class III devices and are not ``items requiring frequent and 
substantial servicing'' as defined in 42 CFR 414.222, they need to 
be operated by a medical professional, may require a large 
investment and/or ongoing expenditure, and are classified by the FDA 
under a category described in paragraph (b)(2)(ii)(D) of this 
section (21 CFR part 892 (Radiology Devices).
    Thus, with regard to the factors under paragraph (b)(2)(i) of 
this section, the mobile x-ray systems have one factor that tends to 
show they are regularly available for purchase and use by individual 
consumers and one factor that tends to show that they are not 
regularly available for purchase and use by individual consumers. 
With regard to the factors under paragraph (b)(2)(ii) of this 
section, the mobile x-ray systems have multiple factors that tend to 
show they are designed primarily for use in a medical institution or 
office or by medical professionals. Based on the totality of the 
facts and circumstances, the mobile x-ray systems are not devices 
that are of a type generally purchased by the general public at 
retail for individual use.
    Example 6.  X manufactures pregnancy test kits. X sells the kits 
to distributors Y and Z, which, in turn, sell the pregnancy test 
kits to medical institutions and offices, medical professionals, and 
retail businesses. The FDA requires manufacturers of pregnancy test 
kits to list the kits as a device with the FDA. The FDA classifies 
the kits under 21 CFR part 862 (Clinical Chemistry and Clinical 
Toxicology Devices) and product code LCX.
    The pregnancy test kits are included in the FDA's online IVD 
Home Use Lab Tests (Over-the-Counter Tests) database. Therefore, the 
over the counter pregnancy test kits fall within the safe harbor set 
forth in paragraph (b)(2)(iii)(A) of this section. Further, the FDA 
product code name for LCX is ``Kit, Test, Pregnancy, HCG, Over The 
Counter.'' Therefore, the pregnancy test kits also fall within the 
safe harbor set forth in paragraph (b)(2)(iii)(C) of this section. 
Accordingly, the pregnancy test kits are devices that are of a type 
generally purchased by the general public at retail for individual 
use.
    Example 7.  X manufactures blood glucose monitors, blood glucose 
test strips, and lancets. X sells the blood glucose monitors, test 
strips, and lancets to distributors Y and Z, which, in turn, sell 
the monitors, test strips, and lancets to medical institutions and 
offices, medical professionals, and retail businesses. The FDA 
requires manufacturers of blood glucose monitors, test strips, and 
lancets to list the items as devices with the FDA. The FDA 
classifies the blood glucose monitors under 21 CFR part 862 
(Clinical Chemistry and Clinical Toxicology Devices) and product 
code NBW. The FDA classifies the test strips under 21 CFR part 862 
(Clinical Chemistry and Clinical Toxicology Devices) and product 
code NBW. The FDA classifies the lancets under 21 CFR part 878 
(General and Plastic Surgery Devices) and product code FMK.
    The blood glucose monitors and test strips are included in the 
FDA's online IVD Home Use Lab Tests (Over-the-Counter Tests) 
database. Therefore, the blood glucose monitors and test strips fall 
within the safe harbor set forth in paragraph (b)(2)(iii)(A) of this 
section. Further, the FDA product code name for NBW is ``System, 
Test, Blood Glucose, Over the Counter.'' Therefore, the blood 
glucose monitors and test strips also fall within the safe harbor 
set forth in paragraph (b)(2)(iii)(C) of this section.
    In addition, the lancets are supplies necessary for the 
effective use of DME as described in chapter 15 of the Medicare 
Policy Benefit Manual. Therefore, the lancets fall within the safe 
harbor set forth in paragraph (b)(2)(iii)(D)(5) of this section.
    Accordingly, the blood glucose monitors, test strips, and 
lancets are devices that are of a type generally purchased by the 
general public at retail for individual use.
    Example 8.  X manufactures single axis endoskeletal knee shin 
systems, which are used in the manufacture of prosthetic legs. X 
sells the knee shin systems to Y, a business that makes prosthetic 
legs. The FDA requires manufacturers of knee shin systems and 
prosthetic legs to list the items as devices with the FDA. The FDA 
classifies prosthetic leg components, including knee shin systems, 
as external limb prosthetic components under Subpart D of 21 CFR 
part 890.3420 and product code ISH. The FDA classifies prosthetic 
legs as an external assembled lower limb prosthesis under 21 CFR 
part 890.3500 and product code ISW/KFX. In addition, the Centers for 
Medicare and Medicaid Services have assigned the knee shin systems 
Healthcare Procedure Coding System code L5810.
    Prosthetic legs and certain prosthetic leg components, including 
single axis endoskeletal knee shin systems, fall within the safe 
harbor for prosthetic and orthotic devices that do not require 
implantation or

[[Page 72937]]

insertion by a medical profession that is set forth in paragraph 
(b)(2)(iii)(D)(1) of this section. Accordingly, both the single axis 
endoskeletal knee shin systems manufactured by X and the prosthetic 
legs made by Y are devices that are of a type generally purchased by 
the general public at retail for individual use.
    Example 9. X manufactures mechanical and powered wheelchairs. X 
sells the wheelchairs to distributors Y and Z, which, in turn, sell 
the wheelchairs to medical institutions and offices, medical 
professionals, nursing homes, and retail businesses. The FDA 
requires manufacturers of manual and powered wheelchairs to list the 
items as devices with the FDA. The FDA classifies the manual and 
powered wheelchairs under Subpart D of 21 CFR part 890 (Physical 
Medicine Devices). The FDA classifies mechanical wheelchairs under 
product code IOR. The FDA classifies powered wheelchairs under 
product code product code ITI.
    Mechanical and powered wheelchairs do not fall within a retail 
exemption safe harbor set forth in paragraph (b)(2)(iii) of this 
section. Therefore, the determination of whether the mechanical and 
powered wheelchairs are devices of a type generally purchased by the 
general public at retail for individual use must be made on a facts 
and circumstances basis.
    Individual consumers who are not medical professionals can 
regularly purchase the wheelchairs in drug stores, medical specialty 
stores, or DME suppliers, as well as over the Internet. In addition, 
individual consumers can use the wheelchairs safely and effectively 
for their intended medical purpose with minimal or no training from 
a medical professional, and the wheelchairs are classified by the 
FDA under Subpart D of 21 CFR part 890 (Physical Medicine Devices). 
Further, although the wheelchairs may require a large initial 
investment and/or ongoing expenditure, they do not need to be 
implanted, inserted, operated, or otherwise administered by a 
medical professional, are not Class III devices, are not classified 
by the FDA under a category described in paragraph (b)(2)(ii)(D) of 
this section, and are not ``items requiring frequent and substantial 
servicing'' as defined in 42 CFR 414.222.
    Thus, the wheelchairs have multiple factors under paragraph 
(b)(2)(i) of this section that tend to show they are regularly 
available for purchase and use by individual consumers and, at most, 
only one factor under paragraph (b)(2)(ii) of this section tends to 
show they are designed primarily for use in a medical institution or 
office or by medical professionals. Based on the totality of the 
facts and circumstances, the mechanical and powered wheelchairs are 
devices that are of a type that are generally purchased by the 
general public at retail for individual use.
    Example 10.  X manufactures portable oxygen concentrators. X 
sells the portable oxygen concentrators to distributors Y and Z, 
which, in turn, sell the portable oxygen concentrators to medical 
institutions and offices, medical professionals, and retail 
businesses. The FDA requires manufacturers of portable oxygen 
concentrators to list the items as devices with the FDA. The FDA 
classifies the oxygen regulators under 21 CFR part 868 
(Anesthesiology Devices) and product code CAW.
    Portable oxygen concentrators do not fall within a retail 
exemption safe harbor set forth in paragraph (b)(2)(iii) of this 
section. Therefore, the determination of whether the oxygen 
concentrators are devices of a type generally purchased by the 
general public at retail for individual use must be made on a facts 
and circumstances basis.
    Individual consumers who are not medical professionals can 
regularly purchase the portable oxygen concentrators in retail 
pharmacies, medical specialty stores, or DME suppliers, as well as 
over the Internet. In addition, individual consumers can use the 
portable oxygen concentrators safely and effectively for their 
intended medical purpose with minimal or no training from a medical 
professional. Further, although the portable oxygen concentrators 
are classified by the FDA under a category described in paragraph 
(b)(2)(ii)(D) of this section, they do not need to be implanted, 
inserted, operated, or otherwise administered by a medical 
professional, do not require a large investment and/or ongoing 
expenditure, are not Class III devices, and are not ``items 
requiring frequent and substantial servicing'' as defined in 42 CFR 
414.222.
    Thus, the portable oxygen concentrators have multiple factors 
under paragraph (b)(2)(i) of this section that tend to show they are 
regularly available for purchase and use by individual consumers and 
only one factor under paragraph (b)(2)(ii) of this section that 
tends to show they are designed primarily for use in a medical 
institution or office or by medical professionals. Based on the 
totality of the facts and circumstances, the portable oxygen 
concentrators are devices that are of a type that are generally 
purchased by the general public at retail for individual use.
    Example 11.  X manufactures urinary ileostomy bags. X sells the 
urinary ileostomy bags to distributors Y and Z, which, in turn, sell 
the urinary ileostomy bags to medical institutions and offices, 
medical professionals, and retail businesses. The FDA requires 
manufacturers of urinary ileostomy bags to list the items as devices 
with the FDA. The FDA classifies the urinary ileostomy bags under 21 
CFR part 876 (Gastroenterology--Urology Devices) and product code 
EXH.
    The urinary ileostomy bags are ``Prosthetic and orthotic 
devices,'' as defined in 42 CFR 414.202, that do not require 
implantation or insertion by a medical professional. Therefore, the 
urinary ileostomy bags fall within the safe harbor set forth in 
paragraph (b)(2)(iii)(D)(1) of this section. Accordingly, the 
urinary ileostomy bags are devices that are of a type generally 
purchased by the general public at retail for individual use.
    Example 12.  X manufactures nonabsorbable silk sutures. X sells 
the nonabsorbable silk sutures to distributors Y and Z, which, in 
turn, sell the nonabsorbable silk sutures to medical institutions 
and offices, medical professionals, and retail businesses. The FDA 
requires manufacturers of nonabsorbable silk sutures to list the 
items as devices with the FDA. The FDA classifies the nonabsorbable 
silk sutures under 21 CFR part 878 (General and Plastic Surgery 
Devices) and product code GAP.
    Nonabsorbable silk sutures do not fall within a retail exemption 
safe harbor set forth in paragraph (b)(2)(iii) of this section. 
Therefore, the determination of whether the nonabsorbable silk 
sutures are devices of a type generally purchased by the general 
public at retail for individual use must be made on a facts and 
circumstances basis.
    Individual consumers who are not medical professionals can 
regularly purchase the nonabsorbable silk sutures over the Internet. 
However, individual consumers cannot use nonabsorbable silk sutures 
safely and effectively for their intended medical purpose with 
minimal or no training from a medical professional. Further, 
although the nonabsorbable silk sutures do not require a large 
investment and/or ongoing expenditure, are not Class III devices, 
and are not ``items requiring frequent and substantial servicing'' 
as defined in 42 CFR 414.222, the nonabsorbable silk sutures are 
classified by the FDA under a category described in paragraph 
(b)(2)(ii)(D) of this section, and they need to be administered by a 
medical professional.
    Thus, with regard to the factors under paragraph (b)(2)(i) of 
this section, the nonabsorbable silk sutures have one factor that 
tends to show they are regularly available for purchase and use by 
individual consumers and one factor that tends to show that they are 
not regularly available for purchase and use by individual 
consumers. With regard to the factors under paragraph (b)(2)(ii) of 
this section, the nonabsorbable silk sutures have multiple factors 
that tend to show they are designed primarily for use in a medical 
institution or office or by medical professionals. Based on the 
totality of the facts and circumstances, the nonabsorbable silk 
sutures are not devices that are of a type that are generally 
purchased by the general public at retail for individual use.
    Example 13.  X manufactures nuclear magnetic resonance imaging 
(NMRI) systems (also known as magnetic resonance imaging (MRI) 
systems). X sells the NMRI systems to distributor Y, which, in turn, 
sells the systems to medical institutions. The FDA requires 
manufacturers of NMRI systems to list the systems as a device with 
the FDA. The FDA classifies the magnetic resonance diagnostic device 
under 21 CFR part 892 (Radiology Devices) and product code LNH.
    NMRI systems do not fall within a retail exemption safe harbor 
set forth in paragraph (b)(2)(iii) of this section. Therefore, the 
determination of whether the NMRI systems are devices of a type 
generally purchased by the general public at retail for individual 
use must be made on a facts and circumstances basis.
    Individual consumers who are not medical professionals may be 
able to regularly purchase the NMRI systems over the Internet. 
However, individual consumers cannot use the NMRI systems safely and 
effectively for their intended medical purpose without training from 
a medical professional. Although the NMRI systems are not Class III 
devices and are not ``items requiring frequent and substantial 
servicing'' as defined in 42

[[Page 72938]]

CFR 414.222, they need to be operated by a medical professional, and 
are of a type classified by the FDA under 21 CFR part 892 (Radiology 
Devices). Further, the cost to acquire, maintain, and/or use the 
NMRI systems requires a large initial investment and/or ongoing 
expenditure that is not affordable for the average consumer.
    Thus, with regard to the factors under paragraph (b)(2)(i), the 
NMRI systems have, at most, one factor that tends to show that they 
are regularly available for purchase and use by individual consumers 
and at least one factor that tends to show that they are not 
regularly available for purchase and use by individual consumers. 
With regard to the factors under paragraph (b)(2)(ii), the NMRI 
systems have multiple factors that tend to show they are designed 
primarily for use in a medical institution or office or by medical 
professionals. Based on the totality of the facts and circumstances, 
the NMRI systems are not devices that are of a type generally 
purchased by the general public at retail for individual use.
    Example 14.  X manufactures therapeutic AC powered adjustable 
home use beds. X sells the beds to distributors Y and Z, which, in 
turn, sell the beds to retail businesses. The FDA requires 
manufacturers of therapeutic AC powered adjustable home use beds to 
list the items as devices with the FDA. The FDA classifies the 
therapeutic AC powered adjustable home use beds under 21 CFR part 
880 (General Hospital Devices) and product code LLI.
    Therapeutic AC powered adjustable home use beds do not fall 
within a retail exemption safe harbor set forth in paragraph 
(b)(2)(iii) of this section. Therefore, the determination of whether 
the beds are devices of a type generally purchased by the general 
public at retail for individual use must be made on a facts and 
circumstances basis.
    Although the beds may require a large initial investment and/or 
ongoing expenditure, individual consumers who are not medical 
professionals can regularly purchase the beds in medical specialty 
stores or from DME suppliers, as well as over the Internet. In 
addition, individual consumers can use the beds safely and 
effectively for their intended medical purpose with minimal or no 
training from a medical professional. Further, the beds are not 
classified by the FDA under a category described in paragraph 
(b)(2)(ii)(D) of this section, do not need to be implanted, 
inserted, operated, or otherwise administered by a medical 
professional, are not Class III devices, and are not ``items 
requiring frequent and substantial servicing'' as defined in 42 CFR 
414.222.
    Thus, the therapeutic AC powered adjustable home use beds have 
multiple factors under paragraph (b)(2)(i) of this section that tend 
to show they are regularly available for purchase and use by 
individual consumers and, at most, only one factor under paragraph 
(b)(2)(ii) of this section that tends to show they are designed 
primarily for use in a medical institution or office or by medical 
professionals. Based on the totality of the facts and circumstances, 
the therapeutic AC powered adjustable home use beds are devices that 
are of a type that are generally purchased by the general public at 
retail for individual use.
    Example 15.  X manufactures powered flotation therapy beds. X 
sells the beds to distributors Y and Z, which, in turn, sell the 
beds to medical institutions and offices, and medical professionals. 
The FDA requires manufacturers of powered flotation therapy beds to 
list the items as devices with the FDA. The FDA classifies the 
powered flotation therapy beds under 21 CFR part 890 (Physical 
Medicine Devices) and product code IOQ.
    Powered flotation therapy beds do not fall within a retail 
exemption safe harbor set forth in paragraph (b)(2)(iii) of this 
section. Therefore, the determination of whether the beds are 
devices of a type generally purchased by the general public at 
retail for individual use must be made on a facts and circumstances 
basis.
    Individual consumers who are not medical professionals may be 
able to regularly purchase the beds over the Internet. However, 
individual consumers cannot use the beds safely and effectively for 
their intended medical purpose with minimal or no training from a 
medical professional. Although the powered flotation therapy beds 
are not Class III devices and are not ``items requiring frequent and 
substantial servicing'' as defined in 42 CFR 414.222, they need to 
be operated or otherwise administered by a medical professional. 
Further, the cost to acquire, maintain, and/or use the powered 
flotation therapy beds requires a large initial investment and/or 
ongoing expenditure that is not affordable for the average consumer.
    Thus, with regard to the factors under paragraph (b)(2)(i) of 
this section, the powered flotation therapy beds have, at most, one 
factor that tends to show they are regularly available for purchase 
and use by individual consumers and at least one factor that tends 
to show they are not regularly available for purchase and use by 
individual consumers. With regard to the factors under paragraph 
(b)(2)(ii) of this section, the powered flotation therapy beds have 
multiple factors that tend to show they are designed primarily for 
use in a medical institution or office or by medical professionals. 
Based on the totality of the facts and circumstances, the powered 
flotation therapy beds are not devices that are of a type that are 
generally purchased by the general public at retail for individual 
use.

    (c) Effective/applicability date. This section applies to sales of 
taxable medical devices on and after January 1, 2013.

0
Par. 4. Section 48.4216(c)-1 is amended by adding paragraph (e) to read 
as follows:


Sec.  48.4216(c)-1  Computation of tax on leases and installment sales.

* * * * *
    (e) Contracts for the lease, installment sale, or sale on credit, 
of a taxable medical device. (1) General rule. Payments made on or 
after January 1, 2013, pursuant to a contract for the lease, 
installment sale, or sale on credit of a taxable medical device that 
was entered into on or after March 30, 2010, are subject to tax under 
section 4191, and the provisions of paragraphs (a), (b), and (c) of 
this section apply.
    (2) Exception for payments made on or after January 1, 2013, 
pursuant to written binding contracts entered into prior to March 30, 
2010. Payments made on or after January 1, 2013, pursuant to a written 
binding contract for the lease, installment sale, or sale on credit of 
a taxable medical device that was in effect prior to March 30, 2010, 
are not subject to tax under section 4191. This exception includes 
payments made on or after January 1, 2013, if they are made pursuant to 
a written binding contract that was entered into prior to March 30, 
2010. This exception does not apply to payments made under any contract 
that is materially modified on or after March 30, 2010. For this 
purpose, a material modification includes only a modification that 
materially affects the property to be provided under the contract, the 
terms of payment under the contract, or the amount payable under the 
contract. Notwithstanding the foregoing, a material modification does 
not include a modification to the contract required by applicable 
Federal, State, or local law.
    (3) Effective/applicability date. This section applies on and after 
January 1, 2013.

0
Par. 5. Section 48.4221-1 is amended by adding paragraph (a)(2)(vii) to 
read as follows:


Sec.  48.4221-1  Tax-free sales; general rule.

    (a) * * *
    (2) * * *
    (vii) The exemptions under section 4221(a)(3) through (a)(6) do not 
apply to the tax imposed by section 4191 (medical device tax).
* * * * *

0
Par. 6. Section 48.6416(b)(2)-2 is amended by adding paragraph (a)(4) 
to read as follows:


Sec.  48.6416(b)(2)-2  Exportations, uses, sales and resales included.

    (a) * * *
    (4) Beginning on January 1, 2013, sections 6416(b)(2)(B), (C), (D), 
and (E)

[[Page 72939]]

do not apply to any tax paid under section 4191 (medical device tax).
* * * * *

Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
    Approved: November 30, 2012.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2012-29628 Filed 12-5-12; 8:45 am]
BILLING CODE P