[Federal Register Volume 79, Number 144 (Monday, July 28, 2014)]
[Rules and Regulations]
[Pages 43631-43645]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-17697]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 51 and 602

[TD 9684]
RIN 1545-BJ39


Branded Prescription Drug Fee

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations, temporary regulations, and removal of 
temporary regulations.

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SUMMARY: This document contains final regulations that provide guidance 
on the annual fee imposed on covered entities engaged in the business 
of manufacturing or importing branded prescription drugs. This fee was 
enacted by section 9008 of the Patient Protection and Affordable Care 
Act, as amended by section 1404 of the Health Care and Education 
Reconciliation Act of 2010. This document also withdraws the Branded 
Prescription Drug Fee temporary regulations and contains new temporary 
regulations regarding the definition of controlled group that apply 
beginning on January 1, 2015. The final regulations and the new 
temporary

[[Page 43632]]

regulations affect persons engaged in the business of manufacturing or 
importing certain branded prescription drugs. The text of the temporary 
regulations in this document also serves as the text of proposed 
regulations set forth in a notice of proposed rulemaking (REG-123286-
14) on this subject in the Proposed Rules section in this issue of the 
Federal Register.

DATES: Effective Date: These regulations are effective on July 28, 
2014.
    Applicability Date: For dates of applicability, see Sec. Sec.  
51.11, 51.11T, and 51.6302-1(b).

FOR FURTHER INFORMATION CONTACT: Celia Gabrysh at (202) 317-6855 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION: 

Paperwork Reduction Act

    The collection of information contained in these regulations has 
been reviewed and approved by the Office of Management and Budget under 
control number 1545-2209. The collection of information in these final 
regulations is in Sec. Sec.  51.2(f)(2) and 51.7. Section 51.2(f)(2) 
requires consents to be maintained, in the case of a controlled group 
that is not an affiliated group, by the designated entity and each 
member of the controlled group. Section Sec.  51.7 requires a covered 
entity that chooses to dispute its preliminary fee calculation to 
provide certain information.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless the collection of 
information displays a valid control number.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by section 6103 of 
the Internal Revenue Code.

Background

    This document contains final regulations that provide guidance 
under section 9008 of the Patient Protection and Affordable Care Act, 
Public Law 111-148 (124 Stat. 119 (2010)), as amended by section 1404 
of the Health Care and Education Reconciliation Act of 2010, Public Law 
111-152 (124 Stat. 1029 (2010)) (collectively the ACA). All references 
in this preamble to section 9008 are references to section 9008 of the 
ACA. Section 9008 did not amend the Internal Revenue Code (Code) but 
cross-references specified Code sections.
    On November 29, 2010, the IRS released Notice 2010-71, 2010-50 IRB 
822, which proposed an approach to implementing the section 9008 fee 
and requested comments on the proposed approach. The proposed approach 
included an opportunity to report certain information to the IRS 
relevant to the fee calculation and provided that the IRS would provide 
each covered entity with notice of a preliminary fee calculation. This 
notice was modified and superseded by Notice 2011-9, 2011-6 IRB 459, 
which was released on January 14, 2011.
    On August 18, 2011, the Federal Register published temporary 
regulations relating to the fee on branded prescription drugs (TD 9544, 
76 FR 51245). The Federal Register also published on the same day a 
notice of proposed rulemaking (REG-112805-10, 76 FR 51310) cross-
referencing the temporary regulations (the proposed regulations).
    In response to the proposed regulations, the Department of the 
Treasury (Treasury Department) and the IRS received a variety of 
comments from the public. All written comments are available at 
www.regulations.gov or upon request. The Treasury Department and the 
IRS held a public hearing on November 9, 2012. After considering the 
public comments and the hearing testimony, the final regulations 
adopted by this Treasury decision are generally consistent with the 
proposed regulations and also reflect certain minor changes as 
described in this preamble. The corresponding temporary regulations are 
removed. The final regulations and the new temporary regulations are 
discussed in this preamble.
    All references to section 505 are references to section 505 of the 
Federal Food, Drug, and Cosmetic Act (21 U.S.C. 353(b)). Unless 
otherwise indicated, all other references to subtitles, chapters, 
subchapters, and sections in this preamble are references to subtitles, 
chapters, subchapters, and sections in the Code and related 
regulations. All references to ``fee'' in the final regulations are 
references to the fee imposed by section 9008 of the ACA.

Effect on Other Documents

    The following publications are obsolete as of July 28, 2014:
    Notice 2010-71, 2010-51 IRB 822, and Notice 2011-9, 2011-6 IRB 459.

Explanation of Provisions and Summary of Comments

Definitions

Manufacturer or Importer

    Section 9008(d)(1) defines covered entity as any manufacturer or 
importer with gross receipts from branded prescription drug sales. 
Section 9008(e) defines branded prescription drug sales to mean sales 
of branded prescription drugs to any specified government programs or 
pursuant to coverage under such programs. These programs are the 
Medicare Part B program, the Medicare Part D program, the Medicaid 
program, any program under which branded prescription drugs are 
procured by the Department of Veterans Affairs, any program under which 
branded prescription drugs are procured by the Department of Defense, 
and the TRICARE retail pharmacy program (collectively, the Programs).
    The temporary regulations defined a manufacturer or importer of a 
branded prescription drug as the person identified in the Labeler Code 
of the National Drug Code (NDC). The NDC is a unique identifier that is 
assigned to all drug products approved by the Food and Drug 
Administration (FDA), including a branded prescription drug. The 
Labeler Code is the first five numeric characters of the NDC or the 
first six numeric characters when the available five-character code 
combinations are exhausted.
    Commenters asked the IRS to allocate drug sales to an entity other 
than the person identified in the Labeler Code of a drug's NDC when a 
covered entity transfers a drug to another covered entity during the 
sales year or engages in a transaction, such as a reorganization or a 
bankruptcy, that results in a different entity selling the drug. The 
final regulations do not adopt this request. A rule that uses the 
Labeler Code to identify the manufacturer or importer of a branded 
prescription drug provides certainty for both covered entities and the 
IRS. The FDA maintains a database that is available on the FDA Web site 
with information about each NDC, including its Labeler Code, which is 
assigned by the FDA. The IRS refers to this database to identify the 
person in the NDC's Labeler Code. The IRS encourages covered entities 
to review and update their NDC data with the FDA to reflect changes in 
the manufacturer or importer of a branded prescription drug.

Covered Entity and Adjustment Amount

    To be a covered entity, a manufacturer or importer must have gross 
receipts from branded prescription drug sales. Section 9008(b)(1) 
requires the IRS to calculate each covered entity's fee each fee year 
using sales data from the preceding calendar year. Pursuant to section 
9008(g), the Centers for Medicare and Medicaid Services of the 
Department of Health and Human Services (CMS), the Department of

[[Page 43633]]

Veterans Affairs (VA), and the Department of Defense (DOD) 
(collectively, the Agencies) provide sales data to the IRS. For 
purposes of calculating the fee, the temporary regulations used the 
second calendar year preceding the fee year as the sales year. This 
rule is necessary because CMS cannot complete its data processing 
within the necessary time frame. The temporary regulations further 
provided that, because the use of the second preceding year as the 
sales year, rather than the immediately preceding year, may affect the 
amount of the fee paid by a covered entity, the annual fee due in every 
year after 2011 will include an adjustment amount. This amount will be 
added (or subtracted), as appropriate, to (or from) the fee otherwise 
payable by the covered entity in the fee year in which the adjustment 
is calculated. Because CMS cannot complete its data processing any 
earlier, the final regulations adopt this approach.
    A commenter asserted that, under the temporary regulations, a 
former covered entity may not be eligible for an adjustment amount if 
the entity does not have any sales in subsequent years and is, 
therefore, no longer a covered entity. According to the commenter, if a 
covered entity owes a fee in 2013 based on 2011 sales, but has no sales 
in 2012 or later years, then that entity would not qualify as a covered 
entity in 2014 because the temporary regulations do not provide a 
mechanism for the entity to receive an adjustment amount for 2013. The 
commenter suggested that if an adjustment amount results in a net 
credit to the covered entity's fee, the IRS should treat the adjustment 
amount as an overpayment. The final regulations do not adopt this 
suggestion. However, the final regulations clarify that an entity is 
treated as a covered entity for any year in which the entity has 
branded prescription drug sales and for any year for which those sales 
must be taken into account in calculating the fee and determining the 
adjustment amount. Therefore, an entity's status as a covered entity 
begins in the first year it has branded prescription drug sales to the 
Programs even though the fee does not take those sales immediately into 
account, and continues until all sales for that entity have been taken 
into account for both fee calculation and adjustment amount purposes.
    For example, assume that an entity had sales in 2011 with no sales 
in earlier or later years. The entity is a covered entity beginning in 
2011. The entity is not liable for a fee in 2011 or 2012 since those 
fee years are based on 2009 and 2010 sales, respectively. In 2013, the 
entity is liable for the fee based on its 2011 sales. Furthermore, the 
entity is liable for the adjustment amount for the difference between 
the 2012 fee for the entity computed using 2010 sales, which is $0, and 
what the 2012 fee would have been using 2011 sales. Even though the 
entity does not have any sales in 2012 or later years, it will continue 
to be a covered entity in 2014 because its 2011 sales must be taken 
into account for purposes of determining the adjustment amount relating 
to the 2013 fee that applies to the 2014 fee year. The entity will not 
be a covered entity after 2014 because its 2011 sales will not be taken 
into account after 2014. The final regulations include this example.

Controlled Group

    In accordance with the statute, the temporary regulations provided 
that a covered entity includes a controlled group. The temporary 
regulations defined the term controlled group to mean a group of at 
least two covered entities that are treated as a single employer under 
section 52(a), 52(b), 414(m), or 414(o). Under the final regulations, 
this definition applies through December 31, 2014. Therefore, this 
definition applies for purposes of determining who is in the controlled 
group through the 2016 fee year because the fee for the 2016 fee year 
is based upon data from the 2014 sales year. In this Treasury decision, 
the Treasury Department and the IRS are also issuing new temporary 
regulations (the 2014 temporary regulations), that define the term 
controlled group to mean a group of two or more persons, including at 
least one person that is a covered entity, that are treated as a single 
employer under section 52(a), 52(b), 414(m) or 414(o). This new 
definition applies beginning on January 1, 2015. Therefore, this 
definition applies for purposes of determining who is in the controlled 
group beginning with the 2017 fee year because the fee for the 2017 fee 
year is based upon data from the 2015 sales year. The broader 
definition of controlled group in the 2014 temporary regulations is 
supported by the statutory language and is consistent with how 
controlled group rules with similar statutory language are applied, 
including how controlled group is defined in Sec.  57.2(c)(1) for 
purposes of the health insurance providers fee under ACA section 9010. 
The Treasury Department and the IRS expect that the broader definition 
in the 2014 temporary regulations will primarily impact joint and 
several liability for the fee and will not otherwise affect the 
administration of the fee. The final regulations include conforming 
changes to the provision for joint and several liability to clarify 
that joint and several liability applies to all members of the 
controlled group under either definition of controlled group, whichever 
applies.

Designated Entity

    The temporary regulations required each controlled group that files 
a Form 8947, ``Report of Branded Prescription Drug Information,'' to 
have a designated entity. A designated entity is the person within the 
controlled group that acts on behalf of the controlled group with 
regard to the fee. The temporary regulations further provided that if 
the controlled group, without regard to foreign corporations included 
under section 9008(d)(2)(B), is also an affiliated group that files a 
consolidated return for federal income tax purposes, the designated 
entity is the common parent of the affiliated group identified on the 
tax return filed for the sales year. If the controlled group is not an 
affiliated group that files a consolidated return, the temporary 
regulations allowed the controlled group to select its designated 
entity. However, if the controlled group did not select a designated 
entity, the IRS would select a member of the controlled group as the 
designated entity.
    The final regulations modify the temporary regulations to better 
coordinate with the consolidated return regulations. Specifically, the 
final regulations provide that the designated entity of a controlled 
group, without regard to foreign corporations included under section 
9008(d)(2)(B), that is a consolidated group (within the meaning of 
Sec.  1.1502-1(h)) is the agent for the group (within the meaning of 
Sec.  1.1502-77).
    The temporary regulations required the designated entity to state 
under penalties of perjury that all the covered entities that are 
members of the controlled group have consented to the selection of the 
designated entity. The final regulations adopt this requirement and 
further require each member of the controlled group to maintain a 
record of its consent. The final regulations also require the 
designated entity to maintain a record of all of the members' consents. 
Under the final regulations, this consent requirement does not apply to 
a controlled group that is a consolidated group (within the meaning of 
Sec.  1.1502-1(h)). If a controlled group that is not a consolidated 
group does not select a designated entity, the final regulations 
provide that the IRS will select a designated entity and all covered 
entities in the controlled group

[[Page 43634]]

will be deemed to have consented to the IRS's selection of a designated 
entity.

Orphan Drug Sales

    Section 9008(e)(3) provides that the term branded prescription drug 
sales does not include sales of any drug or biological product with 
respect to which a credit was allowed for any taxable year under 
section 45C. Section 9008(e)(3) also provides that this exclusion does 
not apply with respect to any such drug or biological product after the 
date on which such drug or biological product is approved by the FDA 
for marketing for any indication other than the treatment of the rare 
disease or condition with respect to which such credit was allowed. In 
accordance with the statute, the temporary regulations generally 
defined the term orphan drug to mean any branded prescription drug for 
which any person claimed a section 45C credit and that credit was 
allowed for any taxable year. The temporary regulations further 
provided that an orphan drug does not include any drug for which there 
has been a final assessment or court order disallowing the full section 
45C credit taken for the drug. Additionally, in accordance with the 
statute, the temporary regulations provided that an orphan drug does 
not include any drug for any sales year after the calendar year in 
which the FDA approved the drug for marketing for any indication other 
than the treatment of a rare disease or condition for which a section 
45C credit was allowed, regardless of whether a section 45C credit was 
allowed for the drug before, in the same year as, or after this FDA 
approval.
    Commenters requested that the final regulations treat a drug as an 
orphan drug if the section 45C credit was ``allowable''; that is, the 
section 45C credit could have been claimed, but was not actually 
claimed. Another commenter requested that the final regulations extend 
orphan drug treatment to any drug for which the section 45C credit was 
allowable but for which a research tax credit under section 41 was 
claimed with respect to a taxable year ending on or before December 31, 
2010. Several commenters also reasoned that the statutory exception for 
orphan drugs should be extended to any drug that has been designated by 
the FDA as an orphan drug. Commenters also requested that the final 
regulations extend the orphan drug exclusion to drug sales for 
therapies that have only been approved to treat orphan diseases, and to 
all products that are FDA-approved for marketing solely for rare 
diseases and conditions. The final regulations do not adopt these 
suggestions because the plain language of section 9008(e)(3) requires 
that the drug be an orphan drug for which the section 45C credit was 
actually allowed rather than merely allowable. The terms ``allowed'' 
and ``allowable'' have separate and distinct meanings throughout the 
Code. For example, under section 1016(a)(2), a taxpayer may adjust 
basis to the extent the amount was ``allowed'' as a deduction in 
computing taxable income but not less than the amount ``allowable.'' 
\1\ In addition, the overwhelming weight of authority under the case 
law interprets the term ``allowed'' in the Code to require the taxpayer 
to have actually taken the amount into account for tax purposes.\2\ The 
FDA's mere classification of a drug as an orphan drug is not a 
determining factor because the plain language of section 9008(e)(3) 
applies the exclusion only to sales of drugs for which a section 45C 
credit was in fact allowed.
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    \1\ Likewise, under section 1250(b)(3), if a taxpayer can 
establish that the amount ``allowed'' as a deduction was less than 
the amount ``allowable,'' then the amount taken into account for 
purposes of a depreciation adjustment is the amount ``allowed.'' See 
also section 36B(c)(1)(D) and section 42(j)(5)(A)(i).
    \2\ See Virginian Hotel Corporation of Lynchburg v. Helvering, 
319 U.S. 523, 526 (1943); Flood v. United States, 33 F.3d 1174, 1178 
n.5 (9th Cir. 1994); Lenz v. Commissioner, 101 T.C. 260, 265 (1993); 
Hightower v. Commissioner, T.C. Memo 1982-559.
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    Commenters also requested that orphan drug status be given to a 
drug for which a section 45C credit was allowed, even though the drug 
had been subsequently approved by the FDA for marketing for an 
indication other than the treatment of a rare disease or condition for 
which a section 45C credit was allowed. The final regulations do not 
adopt this suggestion because the plain language of section 9008(e)(3) 
indicates that if a drug is ever approved for an indication other than 
the treatment of a rare disease or condition for which a section 45C 
credit was allowed, whether before, in the same year as, or after a 
section 45C credit was allowed for the drug, sales of that drug are not 
considered sales of an orphan drug beginning in the following sales 
year. However, a drug will retain its orphan drug status if the drug 
subsequently receives approval only for another indication for a rare 
disease or condition for which a section 45C credit was allowed.

Pre-1984 Generic Drugs

    Section 9008(e)(2)(A) defines the term branded prescription drug to 
include any prescription drug the application for which was submitted 
to the FDA under section 505(b). The final regulations track the 
statutory language in defining the term branded prescription drug. 
Neither the statute nor the final regulations specifically refer to or 
address the treatment of generic drugs.
    On September 24, 1984, Congress enacted the Drug Price Competition 
and Patent Restoration Act of 1984, Public Law 98-417 (1984) (the 1984 
Act). The 1984 Act added section 505(j) to provide an expedited 
approval process for generic drugs. Because an applicant submits an 
application for approval of a generic drug after the 1984 Act under 
section 505(j) rather than section 505(b), such a drug is not a branded 
prescription drug for purposes of the branded prescription drug fee.
    It has come to our attention that, before the 1984 Act, an 
applicant submitted an application for approval of any prescription 
drug under section 505(b), and no separate statutory process existed 
for approval of a generic drug. The Treasury Department and the IRS 
request comments on whether a special rule is appropriate regarding the 
treatment of generic drugs for which applications were submitted under 
section 505(b) prior to the 1984 Act, including comments on how to 
distinguish generic drugs for which applications were submitted under 
section 505(b) prior to the 1984 Act from other prescription drugs for 
which applications were submitted under section 505(b) prior to the 
1984 Act in a manner that is both administrable and consistent with 
section 9008. Any special rule regarding the treatment of these generic 
drugs would be prospective only.
    Comments with regard to this issue should be submitted in writing 
and can be mailed to the Office of Associate Chief Counsel 
(Passthroughs and Special Industries), Re: REG-112805-10, 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-112805-10).

Information Requested From Covered Entities

    The temporary regulations gave each covered entity the opportunity 
to provide information relevant to the determination of the fee by 
annually submitting Form 8947, including information regarding rebates. 
Commenters asked that CMS include all rebate data in its reports to the 
IRS, rather than have the IRS collect rebate data from the covered 
entities on Form 8947. CMS now includes rebate data for

[[Page 43635]]

Medicare and federal Medicaid in its reports. Therefore, the final 
regulations eliminate the provision for separate reporting of Medicare 
and federal Medicaid rebates by covered entities and Form 8947 no 
longer requests information on these rebates. However, CMS does not 
include Medicaid state supplemental rebate data. Until CMS can include 
Medicaid state supplemental rebate data in its reports to the IRS, 
covered entities will continue to have the opportunity to submit this 
rebate data on Form 8947. Therefore, the final regulations retain the 
provision that permits separate reporting of Medicaid state 
supplemental rebate data by covered entities.
    A commenter asked whether to include state-only pharmaceutical 
program rebates on Form 8947 as Medicaid Drug Rebates. According to 
CMS, state-only pharmaceutical programs are not part of the Medicaid 
Drug Rebate Program or the federal Medicaid program. Therefore, the 
final regulations specify that the Medicaid Drug Rebate Program's 
calculated branded prescription drug fee does not include state-only 
pharmaceutical sales or rebates. Accordingly, a covered entity may not 
report on its Form 8947 or error report a rebate paid by the covered 
entity in connection with a state-only pharmaceutical program.
    A commenter asked that the final regulations provide that a covered 
entity may submit an incomplete Form 8947. The final regulations do not 
adopt this suggestion. Submission of Form 8947 is voluntary. A covered 
entity that chooses to file Form 8947, however, must state, under 
penalties of perjury, that to the best of the filer's knowledge and 
belief, the information provided on Form 8947 is true, correct, and 
complete. As in the past, a covered entity may correct and supplement 
information it submitted on Form 8947, if necessary, by submitting one 
or more error reports as part of the dispute resolution process.

Information Provided by the Agencies

    Section 9008(g) requires each Program to calculate and provide 
sales data based on the methodologies described in section 9008(g). 
Section 9008(b)(3) requires the IRS to use the data provided by the 
Programs to calculate the fee. In accordance with the statute, the 
temporary regulations required the Agencies to provide data to the IRS 
on branded prescription drug sales that occurred during the sales year 
by Program and NDC. The temporary regulations also set forth the 
methodologies used by the Agencies for calculating the sales amounts 
for each Program.
    Commenters raised questions about the descriptions in the temporary 
regulations of the methodologies used by the Agencies, asked that these 
descriptions be clarified, suggested alternative methods of calculating 
Program sales data, and requested additional data. In response to these 
comments, the final regulations adopt certain suggestions to include 
revised descriptions of the data and computations the Agencies use to 
calculate branded prescription drug sales as described in the following 
sections for each Program. In addition, this preamble provides further 
background on the methodologies used by the Agencies as described in 
the following sections for each Program. Because the Agencies have the 
responsibility to compute and report the data described in the statute, 
the Treasury Department and the IRS coordinated extensively with the 
Agencies in preparing the additional background information in the 
preamble and the revised descriptions in the final regulations.

Medicare Part D

    The temporary regulations provided that, to determine branded 
prescription drug sales amounts for Medicare Part D, CMS will aggregate 
the ingredient cost reported in the ``Ingredient Cost Paid'' field and 
the units reported in the ``Quantity Dispensed'' field of the 
Prescription Drug Event (PDE) records at the NDC level for each sales 
year. Section 9008(g)(1)(A) requires Medicare Part D sales amounts to 
be reduced by ``any per-unit rebate, discount, or other price 
concession provided by the covered entity.''
    Commenters asked that the final regulations clarify how CMS 
determines these net sales amounts. The final regulations adopt this 
suggestion. The final regulations clarify that CMS will aggregate the 
``Ingredient Cost Paid'' field on the PDE records at the NDC level, 
reduced by discounts, rebates, and other price concessions provided by 
the covered entity. To obtain this information, CMS uses two main data 
sources to determine net sales amounts: the PDE records and the 
Detailed Direct and Indirect Remuneration (DIR) Report. CMS obtains 
information for these two data sources from Medicare Part D sponsors.
    The final regulations specifically define ``discounts, rebates, and 
other price concessions provided by the covered entity'' to include, in 
part, DIR. DIR is any and all rebates, subsidies, or other price 
concessions from any source (including manufacturers, pharmacies, 
enrollees, or any other person) that serve to decrease the costs 
incurred by the Medicare Part D sponsor (whether directly or 
indirectly) for the Medicare Part D drug. See 42 CFR 423.308. Thus, DIR 
includes discounts, chargebacks, rebates, cash discounts, free goods 
contingent on a purchase agreement, up-front payments, and coupons. DIR 
also includes goods in kind, free or reduced-price services, grants, 
legal judgment amounts, settlement amounts from lawsuits or other legal 
action, and other price concessions or similar benefits. However, DIR 
does not include price concessions that CMS does not consider to 
directly or indirectly impact drug costs incurred by the Medicare Part 
D sponsor.
    The final regulations further provide that DIR includes both DIR 
reported on the PDE records at the point of sale and DIR reported on 
the Detailed DIR Report. The temporary regulations provided that, if 
CMS does not have Medicare Part D rebate information for a sales year, 
then the IRS will reduce the branded prescription drug sales reported 
for Medicare Part D by rebates reported by covered entities on Form 
8947. This procedure was necessary for fee year 2011 because CMS did 
not have the information necessary to report Medicare Part D sales data 
net of DIR. To provide this data to the IRS at the individual drug 
level as the statute requires, CMS began to collect DIR at the NDC 
level from Medicare Part D sponsors for use in the 2012 fee year, which 
Medicare Part D sponsors report to CMS on the Detailed DIR Report. 
Medicare Part D sponsors also report DIR on the PDE records at the 
point of sale, though these amounts tend to be nominal. Therefore, 
since fee year 2012, CMS has been reporting its Medicare Part D sales 
data to the IRS net of all DIR by deducting from the Ingredient Cost 
both DIR reported on the PDE records at the point of sale and DIR 
reported on the Detailed DIR Report. The final regulations reflect this 
approach. As stated earlier in this preamble, the final regulations 
also eliminate the provision for separate reporting of Medicare Part D 
rebates by covered entities on Form 8947.
    A commenter requested that the final regulations clarify the 
treatment of coverage gap discount amounts. The final regulations adopt 
this suggestion effective for fee years beginning in 2014. The Medicare 
Part D coverage gap, also known as the ``donut hole,'' is a gap in 
prescription drug coverage that is being closed due to the Affordable 
Care Act. Part of closing the coverage gap is the Coverage Gap Discount 
Program

[[Page 43636]]

described in section 1860D-14A of the Social Security Act, which 
requires a 50-percent manufacturer-paid discount on covered brand-name 
drugs in certain instances. For fee years 2012 and 2013, CMS did not 
deduct coverage gap discount amounts from the Ingredient Cost. This 
comment, however, prompted CMS to recharacterize coverage gap discount 
amounts as a type of rebate, discount, or other price concession for 
purposes of the fee calculation. Therefore, beginning with the final 
fee calculation for fee year 2014, CMS will report Medicare Part D 
sales data to the IRS that is net of coverage gap discount amounts. The 
final regulations reflect this change.
    The final regulations also remove the reference to the ``Quantity 
Dispensed'' field of the PDE records. This field has no impact on sales 
because CMS totals the ingredient cost at the NDC level and determines 
DIR reported on the PDE records at the point of sale and DIR reported 
on the Detailed DIR Report at the NDC level. Thus, the unit of 
reference used by CMS is consistently at the NDC level.
    Commenters suggested that the final regulations require CMS to 
exclude sales in Puerto Rico in determining sales amounts for Medicare 
Part D. The final regulations do not adopt this suggestion. Section 
9008(g) requires each Agency to report to the IRS the total branded 
prescription drug sales for each covered entity for each Program. 
Section 9008 does not provide any exclusion for sales in Puerto Rico or 
any other territory. When calculating its branded prescription drug 
sales data for Medicare Part D, CMS includes sales, DIR reported on the 
PDE records at the point of sale, and DIR reported on the Detailed DIR 
Report for all sales in the United States and its territories, 
including the Commonwealth of Puerto Rico.

Medicare Part B

    The temporary regulations provided that CMS will determine branded 
prescription drug sales under Medicare Part B using two data sources. 
First, CMS will use the data reported by manufacturers pursuant to 
section 1847A(c) of the Social Security Act (42 U.S.C. 1395w-3a(c)) to 
calculate the annual weighted average sales price (ASP) for each 
Healthcare Common Procedure Coding System code (HCPCS code) for the 
sales year. Second, CMS will use the Medicare Part B National Summary 
Data File located at http://www.cms.gov/Research-Statistics-Data-and-Systems/Files-for-Order/NonIdentifiableDataFiles/PartBNationalSummaryDataFile.html to obtain the number of allowed 
billing units per HCPCS code for claims incurred during the sales year. 
The temporary regulations further provided separate detailed methods 
for CMS to use this data to determine Medicare Part B sales amounts 
depending on whether (1) the HCPCS code consists solely and exclusively 
of branded prescription drugs manufactured by a single entity, (2) the 
HCPCS code consists of a mixture of branded prescription drugs made by 
different manufacturers and/or a mixture of branded prescription and 
generic drugs, or (3) CMS is unable to establish a reliable proportion 
of sales attributable to each NDC assigned to the HCPCS code.
    Under the third method in the temporary regulations, if CMS is 
unable to establish a reliable proportion of sales attributable to each 
NDC assigned to the HCPCS code, CMS will calculate Medicare Part B 
sales by using Medicare Part D utilization percentages. A commenter 
requested that CMS develop a more accurate backup method. The final 
regulations do not adopt this suggestion. In CMS's view, the existing 
backup method is sufficiently reliable. Additionally, CMS did not 
anticipate frequent use of this approach and has not needed to use the 
backup method for any fee calculation to date. The final regulations 
do, however, include a more detailed explanation of how CMS uses HCPCS 
codes as well as an example.
    Commenters also expressed concern about whether Medicare Part B is 
capturing complete data on what are sometimes referred to as non-
separately payable drugs. Non-separately payable drugs may not be 
directly correlated with a single specific HCPCS code. Some non-
separately payable drugs are associated with more than one HCPCS code 
or are bundled with services, such as dialysis. CMS recognizes this 
concern and makes extensive effort to gather as complete a data set as 
possible. CMS will continue to work with the data available to capture 
non-separately payable drugs.

Medicaid

    The temporary regulations provided that CMS will determine branded 
prescription drug sales as the per-unit Average Manufacturer Price 
(AMP) less the Unit Rebate Amount (URA) that CMS calculates based on 
manufacturer-reported pricing data multiplied by the number of units 
reported billed by the states to manufacturers. Specifically, the 
temporary regulations provided that for any covered entity identified 
in the first five (or six) digits of an NDC during any of the four 
quarters of a sales year, CMS uses the following methodology to derive 
the branded prescription sales amounts that account for third-party 
payers:
    Step 1. Report total dollars per NDC for AMP minus URA, multiplied 
by the units reported by a state or states;
    Step 2. Determine the percentage of the total amount reimbursed 
that is the Medicaid amount of that reimbursement; and
    Step 3. Multiply the percentage of the Medicaid amount of that 
reimbursement by the dollar figure from step 1 (AMP minus URA, 
multiplied by units) to get the new adjusted sales dollar totals.
    The final regulations clarify that CMS will determine branded 
prescription drug sales as the per-unit AMP less the URA that CMS 
calculates based on manufacturer-reported pricing data multiplied by 
the number of units reported as paid by the states rather than as 
billed by the states.
    Commenters requested that the final regulations require Medicaid to 
use the per-unit ingredient cost paid to pharmacies by the states as 
provided in section 9008(g)(3) instead of AMP in computing total 
branded prescription drug sales. The final regulations do not adopt 
this suggestion. Medicaid does not have the ability to use the per-unit 
ingredient cost paid to pharmacies by the states because Medicaid 
systems are not designed to track drug sales data in this manner or 
obtain this type of detailed information from the states. Instead, 
Medicaid systems track drug sales data using AMP. AMP is the best 
alternative that Medicaid systems permit and serves as a reasonable 
proxy for the per-unit ingredient cost paid to pharmacies by the 
states.
    The temporary regulations provided that Medicaid branded 
prescription drug sales data will be based on the data reported to CMS 
during the sales year by covered entities and the states for drugs paid 
for by the states in the Medicaid Drug Rebate Program during the sales 
year. The final regulations clarify that the sales data is based on the 
data that covered entities report for the sales year rather than the 
data that covered entities report during the sales year because some 
reporting for a sales year may occur after that year ends.
    Commenters requested that the final regulations clarify the meaning 
of the phrase ``drugs paid for by the states in the Medicaid Drug 
Rebate Program'' and whether it includes units paid for under managed 
care organization plans. In response to this request, the final 
regulations specify that ``drugs paid for by the states in the Medicaid 
Drug Rebate Program'' includes all branded prescription drug units for 
which the states bill rebates to covered entities

[[Page 43637]]

under the Medicaid Drug Rebate Program. This program includes, but is 
not limited to, units paid for under various health care plans such as 
fee for service, managed care organizations, and drugs administered in 
a non-retail setting such as drugs administered in a physician's 
office, clinic, hospital or other setting. Under the Medicaid Drug 
Rebate Program, states provide the required utilization data. States 
report separate totals for each NDC for both fee-for-service and 
managed care organization utilization data. Also, as stated earlier in 
this preamble, the final regulations specify that the Medicaid Drug 
Rebate Program's calculated branded prescription drug fee does not 
include state-only pharmaceutical program sales or rebates.
    Commenters asked how a covered entity can ensure that a state has 
updated its Medicaid data files to accurately reflect state rebates. 
This issue is beyond the scope of these regulations. However, since 
2011, in the context of the dispute resolution process, CMS, IRS, and 
covered entities have devoted extensive resources to resolving 
discrepancies between a state's reported rebate data that CMS uses to 
compute Medicaid's branded prescription drug sales data for the IRS and 
the rebate data that covered entities receive from that state. To 
resolve these discrepancies on a timely basis, CMS has established a 
reconciliation process. To maximize the effectiveness of this 
reconciliation process, however, a covered entity must use the CMS 
reconciliation process in a timeframe that allows discrepancies to be 
resolved before CMS computes the branded prescription sales data that 
it sends the IRS for purposes of computing a covered entity's 
preliminary fee calculation. A covered entity's timely use of the CMS 
reconciliation process will help minimize, if not eliminate, the errors 
related to CMS's Medicaid data that a covered entity would otherwise 
include in its error report. The web address for this resource is 
http://medicaid.gov/Medicaid-CHIP-Program-Information/By-Topics/Benefits/Prescription-Drugs/Branded-Prescription-Drug.html. This CMS 
Medicaid Branded Prescription Drug Fee program Web page also has 
additional information regarding Medicaid sales data. Covered entities 
may email questions to CMS Medicaid regarding the data used in this 
program at MedicaidBPD@cms.hhs.gov with ``BPD'' in the email subject 
line.

Department of Veterans Affairs

    The temporary regulations provided that VA will provide, by NDC, 
the total amount paid (net of refunds and rebates, when they are 
associated with a specific NDC) for each branded prescription drug 
procured by VA for its beneficiaries during the sales year. For this 
purpose, a drug is procured on the invoice (billing) date. The 
temporary regulations further provided that the basis of this 
information will be national procurement data reported during the sales 
year by VA's Pharmaceutical Prime Vendor to the VA Pharmacy Benefits 
Management Service and National Acquisition Center.
    A commenter requested that the final regulations require that the 
amount of the IFF and CRF be excluded from VA sales either by requiring 
VA to exclude these amounts from its sales data or by allowing a 
covered entity to report these amounts on its Form 8947. The final 
regulations do not adopt this suggestion. According to VA, these 
amounts are part of the total price VA pays to its Pharmaceutical Prime 
Vendor and are properly included in the sales amount.
    A commenter requested that the final regulations confirm that VA 
sales data does not include DOD, Coast Guard, Indian Health, or other 
purchases made under the Federal Supply Schedule. VA does not include 
in its sales data purchases made by other agencies. Because the 
methodology in the regulations is already limited to purchases made by 
VA, the final regulations do not need further clarification.

Department of Defense

    The temporary regulations provided that, for DOD programs other 
than TRICARE, DOD will provide, by Labeler Code, the manufacturer's 
name, the NDC, brand name, and the amount paid (net of rebates or 
refunds) for each branded prescription drug procured by DOD during the 
sales year. For this purpose, a drug is procured based upon the date it 
was ordered.
    A commenter requested that the final regulations require that the 
amount of the Industrial Funding Fee (IFF) and the Cost Recovery Fee 
(CRF) be excluded from DOD sales, either by requiring DOD to exclude 
these fees from its sales data or by allowing a covered entity to 
report these fees on its Form 8947. The IFF and CRF are administrative 
fees that are added to the cost of purchasing under the Federal Supply 
Schedule and National Contract Service. The final regulations do not 
adopt this suggestion. According to DOD, these fee amounts are part of 
the total price DOD pays to procure a drug and are properly included in 
the sales amount.

TRICARE

    The temporary regulations provided that DOD will provide, by 
Labeler Code, the manufacturer's name, the NDC, brand name, and the 
amount paid (net of rebates or refunds) for each branded prescription 
drug procured by DOD through the TRICARE retail pharmacy program 
(TRICARE) during the sales year. For TRICARE, a drug is procured based 
upon the date it was dispensed. The amount paid is based on the 
submitted ingredient cost paid, aggregated by NDC, for eligible TRICARE 
claims submitted during the program year, minus any refunds or rebates 
for the corresponding claims.
    Commenters expressed concern that TRICARE's drug sales overlap with 
DOD and VA and asked that the final regulations address this perceived 
overlap. The final regulations do not adopt this suggestion. No overlap 
exists because TRICARE only reports sales from its retail pharmacy 
network, which is distinct from sales reported by DOD and VA. TRICARE, 
DOD, and VA separately maintain and report their own drug sales data.
    Section 51.4T(f) described the TRICARE and DOD methodologies for 
calculating sales data. Section 51.4(f) continues to describe the DOD 
methodology. A new subsection, Sec.  51.4(g), describes the TRICARE 
methodology.
Fee Calculation Including Adjustment
    As stated earlier in this preamble, because the use of the second 
preceding year as the sales year, rather than the immediately preceding 
year, may affect the amount of the fee paid by a covered entity, the 
temporary regulations provided that the annual fee due in every year 
after 2011 will include an adjustment amount. This adjustment amount 
will be added (or subtracted), as appropriate, to (or from) the fee 
otherwise payable by the covered entity in the fee year in which the 
adjustment is calculated.
    A commenter asked that the final regulations provide for a separate 
dispute resolution process for the adjustment amount after the final 
fee calculation because errors reported in the dispute resolution 
process may not be resolved in time to be reflected in the final fee 
calculation. The final regulations do not adopt this suggestion. The 
adjustment amount is part of the preliminary fee calculation. 
Therefore, each covered entity has an opportunity to raise disputes 
regarding the adjustment amount during the existing dispute resolution 
process. Moreover, an adjustment to one covered entity's

[[Page 43638]]

final fee calculation would necessitate a recalculation of each covered 
entity's prior final fee calculation because the fee is an allocated 
fee. The final regulations clarify that the IRS will not make 
adjustments to a final fee calculation.
    Because the amount of the fee under the temporary regulations was 
based on sales from the second preceding year, commenters suggested 
that the final regulations allow a covered entity to reduce its fee 
liability in the same year that the covered entity experiences an event 
that would significantly reduce its sales to the Programs and make 
corresponding adjustments in future years. Such events may include a 
drug recall, a loss of patent exclusivity, or bankruptcy. The final 
regulations do not adopt this suggestion. The statute requires the IRS 
to determine each covered entity's branded prescription drug sales on 
the basis of reports submitted by the Agencies and to uniformly apply 
the fee determination rules to each covered entity's sales data. The 
methodology adopted in the final regulations ensures that the 
applicable fee amount is appropriately apportioned among the covered 
entities.
    In accordance with section 9008(f)(1), the temporary regulations 
treated the fee as an excise tax for purposes of subtitle F. A 
commenter suggested that the final regulations provide for interest 
payments for adjustment amounts that are credited to a covered entity. 
The final regulations do not adopt this suggestion. Instead, the final 
regulations clarify that an adjustment amount itself is neither an 
overpayment nor an underpayment, but rather a component of the current 
year's fee. Thus, for purposes of section 6601, any increase in the 
current year's fee resulting from any adjustment amount, along with the 
remainder of the fee, is treated as due on the due date for the current 
year's fee. Conversely, for purposes of section 6611, any adjustment 
amount that decreases the current year's fee is treated as a payment 
towards the current fee amount made on the due date of the current fee 
year.
    Commenters asked that the final regulations clarify whether a 
covered entity must file Form 843, ``Claim for Refund and Request for 
Abatement,'' to request that the IRS calculate an adjustment amount 
when a covered entity anticipates that it is entitled to a positive 
adjustment amount. As stated earlier in this preamble, a positive 
adjustment amount is not an overpayment. Accordingly, in response to 
this comment, the final regulations clarify that a covered entity does 
not file Form 843 to obtain an adjustment amount. The IRS automatically 
calculates adjustment amounts. Additionally, the final regulations 
clarify that if a covered entity's adjustment amount reduces the fee 
below zero and results in an amount due to the covered entity for the 
fee year, the IRS will automatically pay this amount due to the covered 
entity.
    Another commenter suggested that the final regulations clarify 
whether the period of limitations on filing a claim set forth in 
section 6511 applies to the adjustment amount. Under the final 
regulations, section 6511 applies to the fee, but not separately to the 
adjustment amount, because the adjustment amount is merely a component 
of the fee. For purposes of section 6511, any adjustment amount that 
decreases the current year's fee is treated as a payment towards the 
current fee amount made on the due date of the current fee year.
Notification and Payment of Fee
    The temporary regulations provided that, no later than August 31st 
of each fee year, the IRS will send each covered entity its final fee 
calculation for that fee year. Several commenters suggested that the 
IRS send the final fee notice in an electronic format. The final 
regulations do not adopt this suggestion because it is outside the 
scope of these regulations. However, the final regulations do not 
prohibit the IRS from using an electronic format for the final fee 
notice. Moreover, at the time these comments were submitted, the IRS 
was already sending a covered entity's sales data with its preliminary 
fee notice on a separate CD-ROM in Microsoft Excel format to each 
covered entity that timely requested it. After receiving these 
comments, the IRS began also sending a covered entity's sales data with 
its final notice on a separate CD-ROM in Microsoft Excel format if the 
entity had made a timely request for the CD-ROM to be sent with its 
preliminary fee notice. More information about the manner for notifying 
covered entities of their preliminary and final fee calculations is 
contained in Notice 2014-42.
    In accordance with section 9008(a)(2), the temporary regulations 
provided that each covered entity must pay its final fee by September 
30th of the fee year. A commenter suggested that the final regulations 
clarify whether section 7503 applies to the deadline for fee payment. 
Section 7503 provides that if the last day for performing an act 
required under the authority of the internal revenue laws falls on a 
Saturday, Sunday, or a legal holiday, the performance of the act is 
timely if the act is performed on the next succeeding day that is not a 
Saturday, Sunday, or a legal holiday. The final regulations do not 
provide a special rule because section 9008(f)(1) and the final 
regulations treat the fee as an excise tax for purposes of subtitle F. 
Therefore, section 7503 applies to the deadline for fee payment.
Dispute Resolution Process
    The temporary regulations provided for a dispute resolution process 
that allows a covered entity to submit error reports in response to the 
preliminary fee calculation for the IRS to consider before performing 
the final fee calculation. The temporary regulations described the 
information that covered entities must submit. The final regulations 
adopt these provisions with the following minor changes that will allow 
the IRS to more accurately process a covered entity's disputes.
    The temporary regulations required that a Form 2848, ``Power of 
Attorney and Declaration of Representative'' must be filed with an 
error report. The final regulations clarify that a Form 2848 is 
required only when the representative is not an employee of the covered 
entity who is authorized under section 6103 or designated on Form 8947 
to discuss the information reported on Form 8947.
    The temporary regulations required the name, telephone number, and 
email address (if available) of one or more employees or 
representatives with whom errors may be discussed. The final 
regulations also require a fax number.
    For Program errors, the temporary regulations required a covered 
entity to submit a separate error report for each Program with the 
asserted errors. For non-Program errors, the temporary regulations 
required a covered entity to submit one error report with all of the 
non-Program errors. To streamline the error reporting process, the 
final regulations require a covered entity to combine both Program and 
non-Program errors on a single error report, with each asserted error 
on a separate line.

Availability of IRS Documents

    The IRS notices, the revenue procedure, and the temporary 
regulations cited in this preamble are published in the Internal 
Revenue Bulletin and are available at www.irs.gov. The temporary 
regulations are also available in the Code of Federal Regulations.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866, as

[[Page 43639]]

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. It is hereby certified that the 
collection of information in these final regulations will not have a 
significant economic impact on a substantial number of small entities. 
This certification is based on the fact that the only collection burden 
imposed by these regulations is the requirement to maintain a record of 
consent to the selection of a designated entity, and this collection 
burden applies only to designated entities of controlled groups, which 
tend to be large corporations, and their members. Therefore, a 
Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 
U.S.C. chapter 6) is not required. Pursuant to section 7805(f), the 
notice of proposed rulemaking was submitted to the Chief Counsel for 
Advocacy of the Small Business Administration for comment on its impact 
on small business, and no comments were received.

Drafting Information

    The principal author of these regulations is Celia Gabrysh, Office 
of the Associate Chief Counsel (Passthroughs and Special Industries). 
However, other personnel from the Treasury Department and the IRS 
participated in their development.

List of Subjects

26 CFR Part 51

    Drugs, Reporting and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR parts 51 and 602 are amended as follows:

PART 51--BRANDED PRESCRIPTION DRUG FEE

0
Paragraph 1. The authority citation for part 51 continues to read as 
follows:

    Authority: 26 U.S.C. 7805; sec. 9008, Public Law 111-347 (124 
Stat. 119).
    Section 51.8 also issued under 26 U.S.C. 6302(a).
    Section 51.6302-1 also issued under 26 U.S.C. 6302(a).


0
Par. 2. Section 51.1 is added to read as follows:


Sec.  51.1  Overview.

    (a) The regulations in this part 51 are designated ``Branded 
Prescription Drug Fee Regulations.''
    (b) The regulations in this part 51 provide guidance on the annual 
fee imposed on covered entities engaged in the business of 
manufacturing or importing branded prescription drugs by section 9008 
of the Patient Protection and Affordable Care Act (ACA), Public Law 
111-148 (124 Stat. 119 (2010)), as amended by section 1404 of the 
Health Care and Education Reconciliation Act of 2010 (HCERA), Public 
Law 111-152 (124 Stat. 1029 (2010)). All references in these 
regulations to section 9008 are references to section 9008 of the ACA, 
as amended by section 1404 of HCERA. Unless otherwise indicated, all 
other section references are to sections in the Internal Revenue Code. 
All references to ``fee'' in these regulations are references to the 
fee imposed by section 9008.
    (c) Section 9008(b)(4) sets an applicable fee amount for each year, 
beginning with 2011, that will be apportioned among covered entities 
with aggregate branded prescription drug sales of over $5 million to 
government programs or pursuant to coverage under such programs. 
Generally, each covered entity is liable for a fee in each fee year 
that is based on its sales of branded prescription drugs in the sales 
year that corresponds to the fee year in an amount determined by the 
Internal Revenue Service (IRS) under the rules of this part.


Sec.  51.1T  [Removed]

0
Par. 3. Section 51.1T is removed.

0
Par. 4. Section 51.2T is revised to read as follows:


Sec.  51.2T  Explanation of terms (temporary).

    (a) Through (e)(2) [Reserved]. For further guidance see Sec.  
51.2(a) through (e)(2).
    (3) Controlled Group. The term controlled group means a group of 
two or more persons, including at least one person that is a covered 
entity, that is treated as a single employer under section 52(a), 
52(b), 414(m), or 414(o).
    (e)(4) through (m) [Reserved]. For further guidance see Sec.  
51.2(e)(4) through (m).
    Par. 5. Section 51.2 is added to read as follows:


Sec.  51.2  Explanation of terms.

    (a) In general. This section explains the terms used in this part 
for purposes of the fee imposed by section 9008 on branded prescription 
drugs.
    (b) Agencies. The term Agencies means--
    (1) The Centers for Medicare and Medicaid Services of the 
Department of Health and Human Services (CMS);
    (2) The Department of Veterans Affairs (VA); and
    (3) The Department of Defense (DOD).
    (c) Branded prescription drug--(1) In general. The term branded 
prescription drug means--
    (i) Any prescription drug the application for which was submitted 
under section 505(b) of the Federal Food, Drug, and Cosmetic Act (21 
U.S.C. 355(b)) (FFDCA); or
    (ii) Any biological product the license for which was submitted 
under section 351(a) of the Public Health Service Act (42 U.S.C. 
262(a)).
    (2) Prescription drug. The term prescription drug means any drug 
that is subject to section 503(b) of the FFDCA.
    (d) Branded prescription drug sales. The term branded prescription 
drug sales means sales of branded prescription drugs to any government 
program or pursuant to coverage under any such government program. 
However, the term does not include sales of orphan drugs.
    (e) Covered entity--(1) In general. The term covered entity means 
any manufacturer or importer with gross receipts from branded 
prescription drug sales including--
    (i) A single-person covered entity; or
    (ii) A controlled group.
    (2) Single-person covered entity. The term single-person covered 
entity means a covered entity that is not affiliated with a controlled 
group.
    (3) Controlled group-- (i) On or before December 31, 2014. The term 
controlled group means a group of at least two covered entities that 
are treated as a single employer under section 52(a), 52(b), 414(m), or 
414(o).
    (ii) After December 31, 2014. For guidance regarding the definition 
of controlled group after December 31, 2014, see Sec.  51.2T(e)(3).
    (4) Special rules for controlled groups. For purposes of paragraph 
(e)(3) of this section (related to controlled groups)--
    (i) A foreign entity subject to tax under section 881 is included 
within a group under section 52(a) or 52(b); and
    (ii) A person is treated as being a member of a controlled group if 
it is a member of the group on the end of the day on December 31st of 
the sales year.
    (5) Covered entity status--(i) Rule. An entity's status as a 
covered entity begins in the first fee year in which the entity has 
branded prescription drug sales and continues each subsequent fee year 
until there are no remaining branded prescription drug sales for that 
entity to be taken into account as described in Sec.  51.5(c) or used 
to calculate the

[[Page 43640]]

adjustment amount described in Sec.  51.5(e).

    (ii)

    Example.  The following example illustrates the rule of 
paragraph (e)(5)(i) of this section:
    (A) Facts. Entity A is a manufacturer with gross receipts of 
more than $5 million from branded prescription drugs sales in 2011. 
Entity A does not have any gross receipts from branded prescription 
drug sales before or after 2011.
    (B) Analysis. Entity A is a covered entity beginning in 2011 
because it had gross receipts from branded prescription drug sales 
in 2011. For the 2011 fee year, Entity A does not owe a fee because 
the 2011 fee is based on sales data from the 2009 sales year. For 
the 2012 fee year, Entity A does not owe a fee because the 2012 fee 
is based on sales data from the 2010 sales year. Entity A continues 
to be a covered entity for the 2012 fee year because its branded 
prescription drug sales from the 2011 sales year have not yet been 
taken into account as described in Sec.  51.5(c) and used to 
calculate the adjustment amount described in Sec.  51.5(e). For the 
2013 fee year, Entity A continues to be a covered entity because a 
portion of its branded prescription drug sales from the 2011 sales 
year are taken into account as described in Sec.  51.5(c) for 
purposes of computing the 2013 fee. For the 2013 fee year, Entity A 
is also liable for the adjustment amount described in Sec.  51.5(e) 
for the difference between its 2012 fee computed using sales data 
from the 2010 sales year, which is $0, and what the 2012 fee would 
have been using sales data from the 2011 sales year. For the 2014 
fee year, Entity A continues to be a covered entity because a 
portion of its branded prescription drug sales for the 2011 sales 
year are used to calculate the adjustment amount described in Sec.  
51.5(e). Therefore, for the 2014 fee year, Entity A will receive an 
adjustment amount for the difference between its 2013 fee computed 
using sales data from the 2011 sales year, and what the 2013 fee 
would have been using sales data from the 2012 sales year, which is 
$0. After the 2014 fee year, there are no remaining branded 
prescription drug sales to be taken into account as described in 
Sec.  51.5(c) or used to calculate the adjustment amount described 
in Sec.  51.5(e) for Entity A. Accordingly, Entity A is not a 
covered entity after the 2014 fee year.

    (f) Designated entity--(1) In general. The term designated entity 
means the person within a controlled group that is designated to act 
for the controlled group regarding the fee by--
    (i) Filing Form 8947, ``Report of Branded Prescription Drug 
Information'';
    (ii) Receiving IRS communications about the fee for the group;
    (iii) Filing an error report for the group, if applicable, as 
described in Sec.  51.7; and
    (iv) Paying the fee to the government.
    (2) Selection of designated entity--(i) Controlled group selection 
of a designated entity. Except as provided in paragraph (f)(2)(ii) of 
this section, the controlled group may select a person as the 
designated entity by filing Form 8947 in accordance with the form 
instructions. The designated entity must state under penalties of 
perjury that all members of the controlled group have consented to the 
selection of the designated entity. The designated entity must maintain 
a record of all member consents. Each member of a controlled group must 
maintain a record of its consent to the controlled group's selection of 
the designated entity.
    (ii) Requirement for affiliated groups; agent for the group. If the 
controlled group, without regard to foreign corporations included under 
section 9008(d)(2)(B), is also an affiliated group whose common parent 
files a consolidated return for federal income tax purposes, the 
designated entity is the agent for the group (within the meaning of 
Sec.  1.1502-77 of this title).
    (iii) IRS selection of a designated entity. Except as provided in 
paragraph (f)(2)(ii) of this section, if a controlled group does not 
select a designated entity as provided in paragraph (f)(2)(i) of this 
section, the IRS will select a member of the controlled group as the 
designated entity for the controlled group. If the IRS selects the 
designated entity, then all members of that controlled group will be 
deemed to have consented to the IRS's selection of the designated 
entity.
    (g) Fee year. The term fee year means the calendar year in which 
the fee for a particular sales year must be paid to the government.
    (h) Government programs. The term government programs (collectively 
``Programs''), means--
    (1) The Medicare Part B program;
    (2) The Medicare Part D program;
    (3) The Medicaid program;
    (4) Any program under which branded prescription drugs are procured 
by the Department of Veterans Affairs;
    (5) Any program under which branded prescription drugs are procured 
by the Department of Defense; and
    (6) The TRICARE retail pharmacy program.
    (i) Manufacturer or importer. The term manufacturer or importer 
means the person identified in the Labeler Code of the National Drug 
Code (NDC) for a branded prescription drug.
    (j) NDC. The term NDC means the National Drug Code. The NDC is a 
unique identifier that is assigned to all drug products approved by the 
Food and Drug Administration (FDA), including a branded prescription 
drug. The Labeler Code is the first five numeric characters of the NDC 
or the first six numeric characters when the available five-character 
code combinations are exhausted.
    (k) Orphan drugs--(1) In general. Except as provided in paragraph 
(k)(2) of this section, the term orphan drug means any branded 
prescription drug for which any person claimed a section 45C credit and 
that credit was allowed for any taxable year.
    (2) Exclusions. The term orphan drug does not include--
    (i) Any drug for which there has been a final assessment or court 
order disallowing the full section 45C credit taken for the drug; or
    (ii) Any drug for any sales year after the calendar year in which 
the FDA approved the drug for marketing for any indication other than 
the treatment of a rare disease or condition for which a section 45C 
credit was allowed, regardless of whether a section 45C credit was 
allowed for the drug before, in the same year as, or after this FDA 
designation.
    (3) FDA marketing approval for treatment of another rare disease or 
condition. If a drug has prior FDA marketing approval for the treatment 
of a rare disease or condition for which a section 45C credit was 
allowed, and the FDA subsequently gives the drug marketing approval for 
the treatment of another rare disease or condition for which another 
section 45C credit was also allowed, the drug retains its status as an 
orphan drug provided the FDA has never approved the drug for marketing 
for any indication other than the treatment of a rare disease or 
condition for which a section 45C credit was allowed.
    (4) Examples. The following examples illustrate the rules of this 
paragraph (k):

    Example 1:  Allowance of section 45C credit and later FDA 
marketing approval of drug for an indication other than the 
treatment of a rare disease or condition. (i) Facts. Drug A is a 
branded prescription drug that was not on the market before 2011. In 
2011, a covered entity claimed a section 45C credit for its 
qualified clinical testing expenses related to Drug A. There was no 
final IRS assessment or court order that disallowed the full credit 
for Drug A. In 2012, the FDA approved Drug A for marketing for an 
indication other than the treatment of the rare disease or condition 
for which the section 45C credit was allowed and this indication was 
not for another rare disease or condition for which a section 45C 
was allowed.
    (ii) Analysis. In 2011 and 2012, Drug A is an orphan drug 
because: first, it was a branded prescription drug for which a 
person claimed a section 45C credit and for which that credit was 
allowed for a taxable year; second, there was not a final assessment 
or court order disallowing the full credit taken for the drug; and 
third, before 2012, the FDA did not approve the drug for marketing 
for any indication other than the treatment of a

[[Page 43641]]

rare disease or condition for which a section 45C credit was 
allowed. However, Drug A is not an orphan drug for the 2013 sales 
year or later sales years because in 2012 the FDA approved Drug A 
for marketing for an indication other than the treatment of the rare 
disease or condition for which the section 45C credit was allowed 
and this indication was not for treatment of another rare disease or 
condition for which a section 45C credit was allowed.
    Example 2:  FDA marketing approval of drug for an indication 
other than the treatment of a rare disease or condition and later 
allowance of section 45C credit. (i) Facts. Drug B is a branded 
prescription drug that was not on the market before 2011. In 2011, 
FDA approved Drug B for marketing for the treatment of a rare 
disease or condition and also approved Drug B for marketing for an 
indication other than the treatment of a rare disease or condition. 
In 2012, a covered entity claimed a section 45C credit for its 
qualified clinical testing expenses related to Drug B. There was no 
final IRS assessment or court order that disallowed the full credit 
for Drug B.
    (ii) Analysis. In 2011, Drug B is not an orphan drug because no 
section 45C credit was allowed and because the FDA approved Drug B 
for an indication other than the treatment of a rare disease or 
condition. In 2012, although the covered entity was allowed a 
section 45C credit for its qualified clinical testing expenses 
related to Drug B and there was no final IRS assessment or court 
order that disallowed the full credit, Drug B still is not an orphan 
drug because the FDA had approved the drug in 2011 for marketing for 
an indication other than the treatment of a rare disease or 
condition for which a section 45C credit was allowed in 2012. Thus, 
Drug B is not an orphan drug for the 2012 sales year or later sales 
years.
    Example 3:  Allowance of section 45C credit and subsequent 
allowance of section 45C credit with no intervening FDA marketing 
approval of drug for an indication other than the treatment of a 
rare disease or condition for which a section 45C credit was 
allowed. (i) Facts. Drug C is a branded prescription drug that was 
not on the market before 2010. In 2010, a covered entity claimed a 
section 45C credit for its qualified clinical testing expenses 
related to Drug C. In 2012, a covered entity claimed an additional 
section 45C credit for its qualified clinical testing expenses 
related to Drug C for marketing for the treatment of a rare disease 
or condition different than the one for which the section 45C credit 
was claimed in 2010. There was no final IRS assessment or court 
order that disallowed the full credit for Drug C in 2010 or 2012. 
The FDA has not approved Drug C for an indication other than the 
treatment of a rare disease or condition for which a section 45C was 
allowed.
    (ii) Analysis. In 2010 and 2011, Drug C is an orphan drug 
because: first, it was a branded prescription drug for which a 
person claimed a section 45C credit and for which that credit was 
allowed for a taxable year; second, there was not a final assessment 
or court order disallowing the full credit taken for the drug; and 
third, FDA had not approved the drug for marketing for any 
indication other than the treatment of a rare disease or condition 
for which a section 45C credit was allowed. In 2012, Drug C retains 
its orphan drug status because another section 45C credit was 
allowed and the FDA did not approve Drug C for marketing for any 
indication other than the treatment of another rare disease or 
condition for which a section 45C credit was allowed. Thus, Drug C 
is an orphan drug for the 2013 sales year.

    (l) Sales taken into account. The term sales taken into account 
means branded prescription drug sales after application of the 
percentage adjustment table in section 9008(b)(2) (relating to annual 
sales less than $400,000,001). See Sec.  51.5(a)(3).
    (m) Sales year. The term sales year means the second calendar year 
preceding the fee year. Thus, for example, for the fee year of 2014, 
the sales year is 2012.

0
Par. 6. Section 51.3 is added to read as follows:


Sec.  51.3  Information requested from covered entities.

    (a) In general. Annually, each covered entity may submit a 
completed Form 8947, ``Report of Branded Prescription Drug 
Information,'' in accordance with the instructions for the form. 
Generally, the form solicits information from covered entities on NDCs, 
orphan drugs, designated entities, rebates, and other information 
specified by the form or its instructions.
    (b) Due date. Form 8947 must be filed by the date prescribed in 
guidance in the Internal Revenue Bulletin.


Sec.  51.3T  [Removed]

0
Par. 7. Section 51.3T is removed.

0
Par. 8. Section 51.4 is added to read as follows:


Sec.  51.4  Information provided by the Agencies.

    (a) In general. For each sales year, the IRS will compile a list of 
branded prescription drugs by NDC using the data submitted on Forms 
8947 and in error reports submitted as part of the dispute resolution 
process (described in Sec.  51.7) and, after applying appropriate due 
diligence, will provide this list to the Agencies. The Agencies will 
provide data to the IRS on branded prescription drug sales that 
occurred during the sales year by Program and NDC. The Agencies will 
provide data for use in preparing the preliminary fee calculation 
(described in Sec. Sec.  51.5 and 51.6) and may revise or supplement 
that data following review of error reports submitted as part of the 
dispute resolution process. The calculation methodology for calculating 
the sales amounts for each Program, including any reasonable estimation 
techniques and assumptions that the Agencies expect to use, is 
described in this section.
    (b) Medicare Part D--(1) In general. CMS will determine branded 
prescription drug sales under Medicare Part D by aggregating the 
ingredient cost reported in the ``Ingredient Cost Paid'' field on the 
Prescription Drug Event (PDE) records at the NDC level, reduced by 
discounts, rebates, and other price concessions provided by the covered 
entity, for each sales year. CMS will only include PDE data that Part D 
sponsors have submitted by the PDE submission deadline (within 6 months 
after the end of the sales year) and that CMS has approved for 
inclusion in the Part D payment reconciliation.
    (2) Discounts, rebates, and other price concessions--(i) In 
general. For purposes of paragraph (b)(1) of this section, the term 
discounts, rebates, and other price concessions means:
    (A) Any direct and indirect remuneration (DIR) (within the meaning 
of paragraph (b)(2)(B) of this section), which includes any DIR 
reported on the PDE records at the point of sale and any DIR reported 
on a Detailed DIR Report (within the meaning of paragraph (b)(2)(C) of 
this section); and
    (B) Any coverage gap discount amount (within the meaning of 
paragraph (b)(2)(D) of this section).
    (ii) Direct and indirect remuneration. For purposes of paragraph 
(b)(2)(A)(i) of this section, the term direct and indirect remuneration 
(DIR) has the same meaning as found in the definition of actually paid 
in 42 CFR 423.308.
    (iii) Detailed DIR Report. For purposes of paragraph (b)(2)(A)(i) 
of this section, the term Detailed DIR Report means the report 
containing any DIR (within the meaning of paragraph (b)(2)(B) of this 
section) that is collected yearly from Part D sponsors at the NDC 
level.
    (iv) Coverage gap discount amount. For purposes of paragraph 
(b)(2)(A)(ii) of this section, the term coverage gap discount amount 
means a 50-percent manufacturer-paid discount on certain drugs under 
the Coverage Gap Discount Program described in section 1860D-14A of the 
Social Security Act.
    (c) Medicare Part B--(1) In general. CMS will determine branded 
prescription drug sales under Medicare Part B using the following two 
data sources:
    (i) CMS will use data reported by manufacturers pursuant to section 
1847A(c) of the Social Security Act to calculate the annual weighted 
average sales price (ASP) for each Healthcare Common Procedure Coding 
System (HCPCS) code for the sales year.

[[Page 43642]]

    (ii) CMS will use the Medicare Part B National Summary Data File 
located at http://www.cms.gov/NonIdentifiableDataFiles/03_PartBNationalSummaryDataFile.asp to obtain the number of allowed 
billing units per HCPCS code for claims incurred during the sales year.
    (2) Calculation--(i) In general. Using the data described in 
paragraph (c)(1) of this section, CMS will determine branded 
prescription drugs sales under Medicare Part B as described in 
paragraphs (c)(3), (4), and (5) of this section. CMS reports sales 
amounts per HCPCS billing code, not per NDC. Therefore, a covered 
entity's total Part B sales amounts for all NDCs in a given HCPCS 
billing code appears under only one NDC in each HCPCS billing code and 
the covered entity's remaining NDCs in the HCPCS billing code are 
listed with a sales amount of zero.
    (ii) Example of a Part B sales report:

------------------------------------------------------------------------
                                                                Part B
                   HCPCS                           NDC          amount
------------------------------------------------------------------------
J9876......................................    12345-6789-01    $789,000
                                               12345-6789-02           0
                                               12345-6789-03           0
                                               12345-6800-80           0
                                               12345-6800-90           0
------------------------------------------------------------------------

    (3) HCPCS code; single entity. For each HCPCS code consisting 
solely and exclusively of branded prescription drugs (as identified by 
their respective NDCs) manufactured by a single entity, CMS will 
multiply the annual weighted ASP by the total number of allowed billing 
units paid during the sales year to determine the total sales for all 
NDCs associated with the HCPCS code attributed to Medicare Part B.
    (4) HCPCS code; multiple manufacturers and/or multiple drugs--(i) 
Step one. For each HCPCS code consisting of a mixture of branded 
prescription drugs made by different manufacturers and/or a mixture of 
branded prescription and generic drugs, CMS will determine--
    (A) The annual weighted ASP for the HCPCS code;
    (B) The total number of allowed billing units paid by Medicare Part 
B for each HCPCS code during the sales year;
    (C) The names of the entities engaged in manufacturing each NDC 
assigned to the HCPCS code; and
    (D) Those entities (if any) identified in paragraph (c)(4)(C) of 
this section that are manufacturing branded prescription drugs assigned 
to the HCPCS code.
    (ii) Step two. Using the information from paragraph (c)(4)(i) of 
this section, CMS will then do the following:
    (A) Calculate the proportion of sales, expressed as a percentage, 
attributed to each NDC assigned to the HCPCS code by determining the 
percentage of total sales reported to CMS by each manufacturer of 
NDC(s) that are assigned to the HCPCS code. For example, if HCPCS code 
JXXXX contains three drugs with a total of $310,000 sales reported by 
manufacturers to CMS for the sales year, and $100,000 was reported for 
Drug A, $200,000 was reported for Drug B, and $10,000 was reported for 
Drug C, the proportion of sales attributed to each NDC will be 32.26 
percent for Drug A, 64.52 percent for Drug B, and 3.22 percent for Drug 
C; and
    (B) For each NDC, multiply the product of the annual weighted ASP 
and the total allowed billing units paid by Medicare Part B for the 
HCPCS code by the proportion of sales calculated in paragraph 
(c)(4)(ii)(A) of this section to determine the sales reportable to the 
IRS (that is, percentage x (annual weighted ASP x allowed units) = 
total sales reported to IRS for the NDC). The sales for each 
manufacturer's NDCs assigned to a HCPCS code are summed and the total 
sales for each manufacturer's NDCs in a HCPCS code will be reported to 
the IRS.
    (5) HCPCS code; unable to establish a reliable proportion of sales. 
If CMS is unable to establish a reliable proportion of sales 
attributable to each NDC assigned to the HCPCS code using the method 
described in paragraph (c)(4)(ii)(A) of this section, CMS will use 
Medicare Part D utilization percentages in lieu of the proportion of 
sales determined under paragraph (c)(4)(ii)(A) of this section to 
perform the calculation described in paragraph (c)(4)(ii)(B) of this 
section.
    (d) Medicaid. (1) CMS will determine the branded prescription drug 
sales for Medicaid as the per-unit Average Manufacturer Price (AMP) 
less the Unit Rebate Amounts (URA) that CMS calculates based on 
manufacturer-reported pricing data multiplied by the number of units 
reported billed by states to manufacturers. This data will be based on 
the data reported to CMS for the sales year by covered entities and the 
states for drugs paid for by the states in the Medicaid Drug Rebate 
Program for the sales year. The data will include all branded 
prescription drug units for which the states bill rebates to covered 
entities under the Medicaid Drug Rebate Program. This program includes, 
but is not limited to, units paid for under various health care plans 
such as fee for service, managed care organizations, and drugs 
administered in a non-retail setting such as drugs administered in a 
physician's office, clinic, hospital or other setting. The Medicaid 
Drug Rebate Program's calculated branded prescription drug fee does not 
include state-only pharmaceutical program sales or rebates.
    (2) For any covered entity identified in the first five (or six) 
digits of an NDC during any of the four quarters of a sales year, CMS 
will use the following methodology to derive the sales figures that 
account for third-party payers, such as Medicare Part B:
    (i) Report total dollars per NDC for AMP minus URA multiplied by 
the units reported by a state or states.
    (ii) Determine the percentage of the total amount reimbursed that 
is the Medicaid amount of that reimbursement. For example, if the total 
amount reimbursed is $100,000, and the Medicaid amount reimbursed is 
$20,000, then the percentage is 20 percent.
    (iii) Multiply the percentage of the Medicaid amount of that 
reimbursement (in the example in paragraph (d)(2)(ii) of this section, 
20 percent) by the dollar figure derived from paragraph (d)(2)(i) of 
this section (AMP minus URA multiplied by units) to get the new 
adjusted sales dollar totals.
    (e) Department of Veterans Affairs. VA will determine branded 
prescription drug sales to VA by providing, by NDC, the total amount 
paid (net of refunds and rebates, when they are associated with a 
specific NDC) for each branded prescription drug procured by VA for its 
beneficiaries during the sales year. For this purpose, a drug is 
procured on the invoice (billing) date. The basis of this information 
will be national procurement data reported during the sales year by 
VA's Pharmaceutical Prime Vendor to the VA Pharmacy Benefits Management 
Service and National Acquisition Center. VA sales data includes the 
Industrial Funding Fee and the Cost Recovery Fee because these amounts 
are part of the price VA pays to its Pharmaceutical Prime Vendor to 
procure a drug.
    (f) Department of Defense. DOD will determine branded prescription 
drug sales to DOD (for DOD programs other than the TRICARE retail 
pharmacy program) by providing, by Labeler Code, the manufacturer's 
name, the NDC, brand name, and the amount paid (net of rebates and or 
refunds) for each branded prescription drug procured by DOD (for DOD 
programs other than the TRICARE retail pharmacy program) during the 
sales year. For DOD programs other than the TRICARE retail pharmacy 
program, a drug is procured based upon the date it was ordered. DOD 
includes the Industrial Funding Fee and the Cost Recovery Fee in its 
drug sales data

[[Page 43643]]

because these amounts are part of the price DOD pays to procure a drug.
    (g) TRICARE. DOD will determine branded prescription drug sales to 
DOD for the TRICARE retail pharmacy program by providing, by Labeler 
Code, the manufacturer's name, the NDC, brand name, and the amount paid 
(net of rebates or refunds) for each branded prescription drug procured 
by DOD through the TRICARE retail pharmacy program during the sales 
year. For the TRICARE retail pharmacy program, a drug is procured based 
upon the date it was dispensed. The amount paid is based on the 
submitted ingredient cost paid, aggregated by NDC, for eligible TRICARE 
retail pharmacy claims submitted during the program year, minus any 
refunds or rebates for the corresponding claims.


Sec.  51.4T  [Removed]

0
Par. 9. Section 51.4T is removed.

0
Par. 10. Section 51.5 is added to read as follows:


Sec.  51.5  Fee calculation.

    (a) Fee components--(1) In general. For every fee year, the IRS 
will calculate a covered entity's total fee as described in this 
section. The IRS will determine a covered entity's total fee by 
applying, if applicable, the adjustment amount described in paragraph 
(e) of this section to the entity's allocated fee described in 
paragraph (d) of this section.
    (2) Calculation of branded prescription drug sales. Each covered 
entity's allocated fee for any fee year is equal to an amount that 
bears the same ratio to the applicable amount as the covered entity's 
branded prescription drug sales taken into account during the sales 
year bears to the aggregate branded prescription drug sales of all 
covered entities taken into account during the sales year.
    (3) Applicable amount. The applicable amounts for fee years are--

------------------------------------------------------------------------
                      Fee year                         Applicable amount
------------------------------------------------------------------------
2011................................................      $2,500,000,000
2012................................................       2,800,000,000
2013................................................       2,800,000,000
2014................................................       3,000,000,000
2015................................................       3,000,000,000
2016................................................       3,000,000,000
2017................................................       4,000,000,000
2018................................................       4,100,000,000
2019 and thereafter.................................       2,800,000,000
------------------------------------------------------------------------

    (4) Sales taken into account. A covered entity's branded 
prescription drug sales taken into account during any calendar year are 
as follows:

------------------------------------------------------------------------
                                                           Percentage of
                                                              branded
 Covered entity's branded prescription drug sales during   prescription
               the calendar year that are:                  drug sales
                                                            taken into
                                                            account is:
------------------------------------------------------------------------
Not more than $5,000,000................................               0
More than $5,000,000 but not more than $125,000,000.....              10
More than $125,000,000 but not more than $225,000,000...              40
More than $225,000,000 but not more than $400,000,000...              75
More than $400,000,000..................................             100
------------------------------------------------------------------------

    (b) Determination of branded prescription drug sales. The IRS will 
compile each covered entity's branded prescription drug sales for each 
Program by NDC. Each NDC will be attributed to the covered entity 
identified in the Labeler Code as of the end of the day on December 
31st of the sales year. For a covered entity that is a controlled 
group, this includes all NDCs in which a member of the covered entity 
is identified. For this purpose, the IRS may revise the list of NDCs as 
a result of information received in the dispute resolution process, and 
the data the IRS uses to produce the final fee calculation will include 
any revisions provided by the Agencies at the completion of the dispute 
resolution process. Each covered entity's branded prescription drug 
sales will be reduced by its Medicaid state supplemental rebate amounts 
in the following manner. If CMS has Medicaid state supplemental rebate 
information for a sales year, CMS will report to the IRS branded 
prescription drug sales for Medicaid net of Medicaid state supplemental 
rebates. If CMS does not have complete Medicaid state supplemental 
rebate information for a sales year, the IRS will reduce the branded 
prescription drug sales that CMS reported for Medicaid by Medicaid 
state supplemental rebates reported by the covered entities on Form 
8947.
    (c) Determination of sales taken into account. (1) For each sales 
year and for each covered entity, the IRS will calculate sales taken 
into account. The resulting number is the numerator of the ratio 
described in paragraph (d)(1) of this section.
    (2) For each sales year, the IRS will calculate the aggregate 
branded prescription drug sales taken into account for all covered 
entities. The resulting number is the denominator of the ratio 
described in paragraph (d)(2) of this section.
    (d) Allocated fee calculation. For each covered entity for each fee 
year, the IRS will calculate the entity's allocated fee by multiplying 
the applicable amount from paragraph (a)(2) of this section by a 
fraction--
    (1) The numerator of which is the covered entity's branded 
prescription drug sales taken into account during the sales year 
(described in paragraph (c)(1) of this section); and
    (2) The denominator of which is the aggregate branded prescription 
drug sales taken into account for all covered entities during the same 
year (described in paragraph (c)(2) of this section).
    (e) Adjustment amount--(1) In general. In addition to the allocated 
fee computed under paragraph (d) of this section, the IRS will also 
automatically calculate for each covered entity an adjustment amount. 
An adjustment amount reflects the difference between the allocated fee 
determined for the covered entity in the immediately preceding fee 
year, using data from the second calendar year preceding that fee year, 
and what the allocated fee would have been for that entity for the 
immediately preceding fee year using data from the calendar year 
immediately preceding that fee year. For example, for 2014, the 
adjustment amount for a covered entity will be the difference between 
the entity's 2013 allocated fee, using 2011 data, and what the 2013 
allocated fee would have been using 2012 data. Although the adjustment 
reflects a revision of the prior year's fee based on data from the year 
immediately preceding the prior fee year, the adjustment is only taken 
into account by adding it to or subtracting it from the allocated fee 
computed under paragraph (d) of this section for the current fee year 
to arrive at the total fee for the current fee year. An adjustment 
amount is treated as a component of the current year's fee. For 
purposes of section 6601, any increase in the allocated fee computed 
under paragraph (d) of this section for the current fee year resulting 
from any adjustment amount, along with the remainder of the fee, is 
treated as a fee liability due on the due date for the current year's 
fee. For purposes of sections 6511 and 6611, any adjustment amount that 
decreases the allocated fee computed under paragraph (d) of this 
section for the current fee year is treated as a payment towards the 
current fee liability made on the due date of the current fee year.
    (2) Amounts paid to a covered entity because of an adjustment 
amount. If a covered entity's adjustment amount reduces the fee 
computed under paragraph (d) of this section below zero and results in 
an amount due to the covered entity for the fee year, the IRS will pay 
this amount due to the covered

[[Page 43644]]

entity. A covered entity does not file Form 843, Claim for Refund and 
Request for Abatement, to receive this amount owed to a covered entity.


Sec.  51.5T  [Removed]

0
Par. 11. Section 51.5T is removed.

0
Par. 12. Section 51.6 is added to read as follows:


Sec.  51.6  Notice of preliminary fee calculation.

    (a) Content of notice. For each sales year, the IRS will make a 
preliminary calculation of the fee for each covered entity as described 
in Sec.  51.5. The IRS will notify each covered entity of its 
preliminary fee calculation for that sales year. The notification to a 
covered entity of its preliminary fee calculation will include--
    (1) The covered entity's allocated fee;
    (2) The covered entity's branded prescription drug sales, by NDC, 
by Program;
    (3) The covered entity's branded prescription drug sales taken into 
account after application of Sec.  51.5(a)(4);
    (4) The aggregate branded prescription drug sales taken into 
account for all covered entities;
    (5) The covered entity's adjustment amount calculated as described 
in Sec.  51.5(e); and
    (6) A reference to the fee dispute resolution procedures set forth 
in guidance published in the Internal Revenue Bulletin.
    (b) Time of notice. The IRS will send each covered entity notice of 
its preliminary fee calculation by the date prescribed in guidance 
published in the Internal Revenue Bulletin.


Sec.  51.6T  [Removed]

0
Par. 13. Section 51.6T is removed.

0
Par. 14. Section 51.7 is added to read as follows:


Sec.  51.7  Dispute resolution process.

    (a) In general. Upon receipt of its preliminary fee calculation, 
each covered entity will have an opportunity to dispute this 
calculation by submitting to the IRS an error report as described in 
this section. The IRS will provide its final determination with respect 
to error reports no later than the time the IRS provides a covered 
entity with a final fee calculation.
    (b) Error report information. To assert that there have been one or 
more errors in the drug sales data reported by a Program, the 
mathematical calculation of the fee, the rebate data, the listing of an 
NDC for an orphan drug, or any other error, a covered entity must 
submit an error report with each asserted error reported on a separate 
line. The report must include the following information--
    (1) Entity name, address, and Employer Identification Number (EIN) 
as previously reported on the Form 8947;
    (2) The name, telephone number, fax number, and email address (if 
available) of one or more employees or representatives of the entity 
with whom the IRS may discuss the claimed errors. If the representative 
is not an employee of the covered entity who is authorized under 
section 6103 or designated on Form 8947 to discuss the information 
reported on Form 8947 with the IRS, a Form 2848, ``Power of Attorney 
and Declaration of Representative,'' must be filed with the error 
report;
    (3) For an error in the drug sales data reported by a Program, the 
name of the Program that reported the data, the NDC, the specific 
amount of sales data disputed, the proposed corrected amount, an 
explanation of why the Agency should use the proposed corrected data 
instead, and documentation of any Program drug sales data or other 
information used to establish the existence of any errors.
    (4) For a mathematical calculation error, the specific calculation 
element(s) that the entity disputes and its proposed corrected 
calculation;
    (5) For a rebate data error, the NDC for the drug to which it 
relates; a discussion of whether the data used in the preliminary fee 
calculation matches previously reported Form 8947 data on rebates; and, 
if the data used in the preliminary fee calculation does match the Form 
8947 data, an explanation of why the Form 8947 data was erroneous and 
why the IRS should use the proposed corrected data instead;
    (6) For the listing of an NDC for an orphan drug, the name and NDC 
of the orphan drug; a discussion of whether the data used in the 
preliminary fee calculation matches previously reported Form 8947 data 
on orphan drugs; and, if the data used in the preliminary fee 
calculation does match the Form 8947 data, an explanation of why the 
Form 8947 data was erroneous and why the IRS should use the proposed 
corrected data instead;
    (7) For any other asserted error, an explanation of the nature of 
the error, how the error affects the fee calculation, an explanation of 
how the entity established that an error occurred, the proposed 
correction to the error, and an explanation of why the IRS or Agency 
should use the proposed corrected data instead;
    (8) If an entity is using data to establish the existence of an 
error and that data was not reported on Form 8947 or contained in the 
notification of the preliminary fee calculation, a description of what 
the data is, how the entity acquired the data, and who maintains it; 
and
    (9) Documentation of any rebate and orphan drug data, or other 
information used to establish the existence of any errors.
    (c) Form, manner, and timing of submission. Each covered entity 
must submit its error report(s) in the form and manner that is 
prescribed in guidance published in the Internal Revenue Bulletin. This 
guidance will also prescribe the date by which each covered entity must 
submit its report(s).
    (d) Finality. A covered entity must assert any basis for contesting 
its preliminary fee calculation during the dispute resolution period. 
In the interest of providing finality to the fee calculation process, 
the IRS will not accept an error report after the end of the dispute 
resolution period or alter the final fee calculation on the basis of 
information provided after the end of the dispute resolution period.


Sec.  51.7T  [Removed]

0
Par. 15. Section 51.7T is removed.

0
Par. 16. Section 51.8 is added to read as follows:


Sec.  51.8  Notification and payment of fee.

    (a) Notification of final fee calculation. No later than August 
31st of each fee year, the IRS will send each covered entity its final 
fee calculation for that year. In any fee year, the IRS will base its 
final fee calculation on data provided to it by the Agencies as 
adjusted pursuant to the dispute resolution process. The notification 
to a covered entity of its final fee calculation will include--
    (1) The covered entity's allocated fee;
    (2) The covered entity's adjustment amount calculated as described 
in Sec.  51.5;
    (3) The covered entity's branded prescription drug sales, by NDC, 
by Program;
    (4) The covered entity's branded prescription drug sales taken into 
account after application of Sec.  51.5(a)(4);
    (5) The aggregate branded prescription drug sales taken into 
account for all covered entities; and
    (6) The final determination with respect to error reports.
    (b) Differences in preliminary fee calculation and final fee 
calculation. A covered entity's final fee calculation may differ from 
the covered entity's preliminary fee calculation because of changes 
made pursuant to the dispute resolution process described in Sec.  
51.7. Even if a covered entity did not file an

[[Page 43645]]

error report described in Sec.  51.7, a covered entity's final fee may 
differ from a covered entity's preliminary fee because of a change in 
data reported by the Agencies after resolution of error reports, 
including a change in the aggregate prescription drug sales figure. A 
change in aggregate prescription drug sales data can affect each 
covered entity's fee because each covered entity's fee is a fraction of 
the aggregate fee collected from all covered entities. A covered 
entity's final fee may also differ from its preliminary fee calculation 
because the data used in the preliminary fee calculation may have 
contained inaccurate branded prescription drug sales information that 
was corrected or updated at the conclusion of the dispute resolution 
process.
    (c) Payment of final fee. Each covered entity must pay its final 
fee by September 30th of the fee year. For a controlled group, the 
payment must be made using the designated entity's EIN as reported on 
Form 8947. The fee must be paid by electronic funds transfer as 
required by Sec.  51.6302-1. There is no tax return to be filed for the 
fee.
    (d) Joint and several liability. In the case of a controlled group 
that is liable for the fee, all members of the controlled group are 
jointly and severally liable for the fee. Accordingly, if a controlled 
group's fee is not paid, the IRS will separately assess each member of 
the group for the full amount of the controlled group's fee.


Sec.  51.8T  [Removed]

0
Par. 17. Section 51.8T is removed.

0
Par. 18. Section 51.9 is added to read as follows:


Sec.  51.9  Tax treatment of fee.

    (a) Treatment as an excise tax. The fee imposed by section 9008 is 
treated as an excise tax for purposes of subtitle F of the Internal 
Revenue Code (Code) (sections 6001-7874). Thus, references in subtitle 
F to ``taxes imposed by this title,'' ``internal revenue tax,'' and 
similar references, are also references to the fee imposed by section 
9008. For example, the fee imposed by section 9008 is assessed (section 
6201), collected (sections 6301, 6321, and 6331), enforced (section 
7402 and 7403), subject to examination and summons (section 7602), and 
subject to confidentiality rules (section 6103) in the same manner as 
taxes imposed by the Code.
    (b) Deficiency procedures. The deficiency procedures of sections 
6211-6216 do not apply to the fee imposed by section 9008.
    (c) Limitation on assessment. The IRS must assess the amount of the 
fee for any fee year within three years of September 30th of that fee 
year.
    (d) Application of section 275. The fee is treated as a tax 
described in section 275(a)(6) (relating to taxes for which no 
deduction is allowed).


Sec.  51.9T  [Removed]

0
Par. 19. Section 51.9T is removed.

0
Par. 20. Section 51.10 is added to read as follows:


Sec.  51.10  Refund claims.

    Any claim for a refund of the fee must be made by the person that 
paid the fee to the government and must be made on Form 843, ``Claim 
for Refund and Request for Abatement,'' in accordance with the 
instructions for that form.


Sec.  51.10T  [Removed]

0
Par. 21. Section 51.10T is removed.

0
Par. 22. Section 51.11T is revised to read as follows:


Sec.  51.11T  Effective/applicability date.

    (a) through (b) [Reserved]. For further guidance see Sec.  51.11(a) 
through (b).
    (c) Section 51.2T(e)(3) applies to any fee on branded prescription 
drug sales that is due on or after January 1, 2015.
    (d) The applicability of Sec.  51.2T(e)(3) expires on July 24, 
2017.

0
Par. 23. Section 51.11 is added to read as follows:


Sec.  51.11  Effective/applicability date.

    (a) Except as otherwise provided in this section, Sec. Sec.  51.1 
through 51.10 apply on and after July 28, 2014.
    (b) Section 51.2(e)(3) applies on July 28, 2014 through December 
31, 2014.
    (c) [Reserved]. For further guidance see Sec.  51.11T(c).


Sec.  51.12T  [Removed]

0
Par. 24. Section 51.12T is removed.

0
Par. 25. Section 51.6302-1 is added to read as follows:


Sec.  51.6302-1  Method of paying the branded prescription drug fee.

    (a) Fee to be paid by electronic funds transfer. Under the 
authority of section 6302(a), the fee imposed on branded prescription 
drug sales by section 9008 and Sec.  51.5 must be paid by electronic 
funds transfer as defined in Sec.  31.6302-1(h)(4)(i) of this title, as 
if the fee were a depository tax. For the time for paying the fee, see 
Sec.  51.8.
    (b) Effective/applicability date. This section applies on and after 
July 28, 2014.


Sec.  51.6302-1T  [Removed]

0
Par. 26. Section 51.6302-1T is removed.

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

0
Par. 27. The authority citation for part 602 continues to read as 
follows:

    Authority:  26 U.S.C. 7805.


0
Par. 28. In Sec.  602.101, paragraph (b) is amended by:
0
1. Removing the entry for 51.8T from the table; and
0
2. Adding entries, in numerical order, for 51.2(f)(2)(ii) and 51.7 to 
the table to read as follows:


Sec.  602.101  OMB Control numbers.

* * * * *
    (b) * * *

------------------------------------------------------------------------
                                                            Current OMB
   CFR part or section where identified and described       Control No.
------------------------------------------------------------------------
 
                                * * * * *
51.2(f)(2)(ii)..........................................       1545-2209
51.7....................................................       1545-2209
 
                                * * * * *
------------------------------------------------------------------------


John Dalrymple,
Deputy Commissioner for Services and Enforcement.
    Approved: July 22, 2014.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2014-17697 Filed 7-24-14; 4:15 pm]
BILLING CODE 4830-01-P