While Congress passed a last-minute deal to stall the "fiscal cliff" and delay Medicare cuts to providers just in time for the new year, medical device manufacturers' worries were seemingly lost in the hoopla. In other words, the medical device tax is happening.

The 2.3 percent excise tax on device sales goes into effect this month, despite aggressive lobbying by manufacturers and even some political victories, such as the passage of a repeal bill in the House of Representatives over the summer (however, it was never taken up by the Senate).

Manufacturers fret the $20 to $30 billion tax will cost the industry thousands of jobs, but they have vowed to keep fighting on. Stephen J. Ubl, president of Advamed, a trade group, said in a statement Wednesday that the "effort to repeal the medical device tax will continue."
Meanwhile, groups representing medical imaging equipment manufacturers and resellers say they're still struggling to understand all the ins and outs of the tax, in part because the final regulations were published just under a month ago by the Internal Revenue Service.

Specifically for medical imaging OEMs, two main issues appear to stick in their craws: parts taxation and the grandfathering-in of old leases. Dealers who exclusively sell used equipment, however, apparently will be mostly untouched by the tax.

Unequal taxation?

According to the final rules, all products registered as medical devices with the Food and Drug Administration, with the exception of stuff sold at retail stores, are subject to the tax, including parts and even software.

But one sticking-point for manufacturers is the way in which replacement parts are taxed. As the tax applies to devices registered with the FDA, the manufacturers worry that an "unequal taxation" regimen could obtain where two companies selling the same part would be taxed differently.

For instance, in an example given by the Medical Imaging & Technology Alliance, an OEM trade lobby, imagine two companies, both of which sell diagnostic X-ray tube housing. If one company sells it as a stand-alone replacement part and labels it for medical use, it would have to register the item with the FDA. Thus, the product would be liable for the tax. But if another company sells the exact same part, but only as a component of an imaging system, it might not have to register it separately and thus could potentially avoid the tax for it (although presumably the part's value would be included, at some level, on the tax levied on the system as a whole).

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