February 2012 Volume 8 Number 6

The IRS could levy a new excise tax on mobile technologies deemed “medical devices” by the FDA

By Catherine Barrett, Federal Working Group, Washington, DC1

AuthorBeginning January 1, 2013, the Internal Revenue Service (“IRS”) will impose a new annual 2.3 percent excise tax on medical devices as required by Section 1405 of the Patient Protection and Affordable Care Act (“PPACA”) of 2009.2 The purpose of the new 2.3 percent tax on medical devices is to help offset costs associated with expanding healthcare coverage under PPACA. The Congressional Budget Office estimates the new tax will generate approximately $20 billion in revenues for the federal government over ten years.3

Excise taxes are paid at point of purchase or are included in the price of the product for sale.4 In this case, the IRS intends to apply the 2.3 percent tax to manufacturers, producers or importers gross sales of medical devices.5 Industry opponents are alarmed because the tax will be applied to gross sales, not profits. Thus, a medical device manufacturer may not be profitable in a given year but will be subject to this tax since it is applied to gross sales revenues. Ultimately, the tax will be passed along to consumers who will pay a higher price for medical devices at point of sale.

The Medical Device Manufacturers Association, the U.S. Chamber of Commerce, the National Association of Manufacturers, the National Federation of Independent Business, and the National Venture Capital Association represent a sampling of industries that will be impacted by the 2.3 percent tax.6 The Medical Device Manufacturers Association, which represents more than 400 medical device companies,is aware of and opposed to the new tax.

But industry representatives from telecommunications service providers, mobile app developers and other technology companies may not be aware that they too may be subject to this new 2.3 percent tax on gross sales.7 For example, “a mobile phone could become a regulated medical device if the manufacturer, through its words and deeds, conveys an intention that the phone be used in medical applications.”8 If the Food and Drug Administration (“FDA”) expands its definition of medical devices to include mobile technologies, as is expected later this year,9 the new tax may also apply to ‘‘mobile medical apps’’ that meet the FDA’s definition of ‘‘device’’ in section 201(h) of the Federal Food, Drug, and Cosmetic Act (“FD&C Act”) (21 U.S.C. 321); and either (1) Is used as an accessory to a regulated medical device; or (2) Transforms a mobile platform into a regulated medical device.10 Thus, telecommunication companies such as Samsung, Apple and Motorola are likely to face a new 2.3 percent tax on gross sales of mobile phones deemed “medical devices” by the FDA. Companies that develop mobile applications, such as Apple and MyFirstMobileApp.com, may also be subject to the new tax on the gross sales of medical device apps.

An estimated 2.2 million people already use remote patient monitoring technologies at home to manage various health conditions, according to Berg Insight, a Swedish research firm.11 Since one out of four adults in the United States uses mobile phones to access health information, it is likely a majority of Americans will someday use smart phones, iPads, tablets and other mobile devices to access health data and manage their health conditions.12 Thus, the impact of the FDA’ expanded definition of “medical devices” will translate into a higher per unit cost to consumers using mobile technologies to adapt to the changing healthcare delivery model.


Catherine Barrett is a principal consultant at the Federal Working Group in Washington, DC and a policy fellow with the e-Health Initiative, a nonprofit representing private and public sector stakeholders committed to improving healthcare through the use of Health Information Technology (“HIT”). She received her JD and MBA from the American University Washington College of Law and Kogod School of Business, respectively. She is currently working with federal clients to help implement PPACA. She is also enrolled in the George Washington University School of Medicine Public Health and Health Services graduate certificate program in Health Information Privacy and Security. She may be reached at cbarrett@federalworking.com.

2 Section 1405 of PPACA specifically excludes “eyeglasses, contact lenses, hearing aids, and any other medical device determined by the Secretary [of HHS] to be of a type which is generally purchased by the general public at retail for individual use.’’ Section 4191, Patient Protection and Affordable Care Act of 2009 (Pub. L. No. 111-148), available at http://www.healthreform.gov/documents/section1404_brandname.pdf.

Congressional Budget Office, “H.R. 4872, Reconciliation Act of 2010 (Final Health Care Legislation)”, March 20, 2010 at http://www.cbo.gov/doc.cfm?index=11379.


IRS, “Excise Tax”, January 12, 2012 at http://www.irs.gov/businesses/small/article/0,,id=99517,00.html.


IRS, “Request for Comments Regarding the Excise Tax on Medical Devices”, Notice 2010-89, December 27, 2010 at http://www.irs.gov/irb/2010-52_IRB/ar13.html


The Medical Device Manufacturers Association, “Broad Coalition Urges Congressional Leaders to Repeal Medical Device Tax” July 18, 2011 at http://www.medicaldevices.org/node/1039




Thompson, Bradley M., “Comments to FDA’s Draft Guidance on Mobile Medical Applications: Docket No. FDA-2011-D-0530”, October 19, 2011, at http://mhealthregulatorycoalition.org/wp-content/uploads/2010/06/MRC-Comments-on-FDA-Draft-MMA-Guidance.pdf.


FDA, “Draft Guidance for Industry and Food and Drug Administration Staff - Mobile Medical Applications”, July 21, 2011 at http://www.fda.gov/medicaldevices/deviceregulationandguidance/guidancedocuments/ucm263280.htm


Products that are built with or consist of computer and/or software components or applications are subject to regulation as devices when they meet the definition of a device in section 201(h) of the FD&C Act. That provision defines a device as ‘‘… an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent …,’’ that is ‘‘… intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment, or prevention of disease, in man…’’ or ‘‘… intended to affect the structure or any function of the body of man or other animals ….’’ Draft Guidance for Industry and Food and Drug Administration; Mobile Medical Applications; Availability, 76 Fed. Reg. 43,689 (July 21, 2011), available at http://www.gpo.gov/fdsys/pkg/FR-2011-07-21/pdf/2011-18537.pdf.


Berg Insight, “Berg Insight says 2.2 million patients are remotely monitored today”, December 23, 2011 at http://www.berginsight.com/News.aspx?m_m=6.


Manhattan Research, “More Than One Quarter of US Adults Use Their Mobile Phones for Health Information and Tools,” October 19, 2011 at http://manhattanresearch.com/News-and-Events/Press-Releases/mhealth-mobile-health-trends-2011. Manhattan Research conducts annual research studies covering eHealth trends among healthcare professionals and consumers in the Americas, Europe, and Asia.

The ABA Health eSource is distributed automatically to members of the ABA Health Law Section . Please feel free to forward it! Non-members may also sign up to receive the ABA Health eSource.