Focus, Health Care, and Manufacturing

Survey finds medical device makers confused about new tax

Beene Garter exec says understanding the excise tax will give firms a competitive advantage.

November 15, 2013
| By Pat Evans |
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medical device excise tax
A Beene Garter survey has found that many makers of medical devices are not up to speed on the industry’s new excise tax. Courtesy Thinkstock

A local accounting firm recently released its findings from a survey of 30 decision-makers at bio-medical manufacturers on the relatively new medical device excise tax, and the outlook is not good.

Beene Garter conducted the survey to see how the levy, which went into effect last Jan. 1, will affect the industry. The measure calls for a 2.3 percent tax on sales revenue, but there are a number of product exemptions that come into play.

The survey also was intended to further the firm’s knowledge of the industry’s new demands and how prepared middle market manufacturers are for the tax.

“The survey demonstrated there’s a large amount of companies (that) don’t have a full understanding,” Beene Garter partner Dan Lynn said. “There’s a high level of confusion about the tax and how to comply.”

Of those companies surveyed, more than 80 percent responded that medical device manufacturing makes up their only or primary function, and 77 percent listed they are recognized as medical equipment and supplies manufacturing on their tax returns.

The majority of businesses have been in operation between 11 and 50 years, while a significant portion — 18 percent — have been in business more than 50 years.

Sixty-eight percent of the businesses make between $5 million and $50 million annually, and 80 percent indicated their products are primarily made in the United States.

Of particular concern to Lynn, however, is that only 46 percent of the survey respondents said their companies are registered for the medical excise tax. Those that responded noted various reasons they did not register, including that all manufacturing is purposed for further manufacturing.

Lynn said many of the companies still are holding out hope a bill will be pushed through the legislature that repeals the new tax, but that is unlikely.

“Some were slow to comply,” he said. “There’s a lack of certainty, but they need to comply so they can avoid scrutiny and penalties.”

Lynn said many of the respondents — 69 percent — indicated they are “self-educated” in the medical device excise tax. Another 12.5 percent noted they were helped by a source within the company, such as an employee. Only 6.5 percent responded with “other,” which is where Beene Garter and similar consultants would be listed.

“A lot of the organizations aren’t properly informed. What happens is someone within the company takes the responsibility,” Lynn said. “Larger firms, they can have internal staffs devoted to research or hire consulting firms.”

About half of the respondents were “very aware” in their knowledge of retail, export and sales for further manufacturing exemptions. Nearly 20 percent of respondents noted they were “unaware” of the export exemptions.

“The takeaway was there is a general misunderstanding on exemptions,” Lynn said.

Nearly 63 percent of respondents said their companies know either “very well” or “extremely well” what is required under the provisions of the medical device excise tax. Another 25 percent said their companies only “somewhat” understand, and 12.5 percent responded with “slightly” understand. No one responded with “not at all.”

That’s good because Lynn said the IRS has essentially told companies it will be of no help.

Almost 75 percent said they at least somewhat understand how their companies specifically will be affected, while the rest said they were “unsure” of how their companies will be affected.

Fifty percent understand “very well” what their company needs to do to be in compliance, with another 12.5 percent understanding “extremely well.” The rest responded to only knowing slightly or somewhat their company needs to do.

To manage the burden of the tax, one-third said their solution would be to increase prices, with 30 percent saying they would pass the charges along to suppliers. Reducing product costs and hiring weren’t a popular option, with 7 percent and 6 percent, respectively, responding in that manner. Layoffs came in with 13 percent seeing it as the most effective solution.

Half of those responding said they expect to see an increase in sales next year, while the other half do not. Of those that expect a sales increase, however, 75 percent said they don’t expect that increase to offset the amount paid in the new tax.

More than 50 percent said their company’s discretionary spending will decrease, 20 percent said it would increase and 26 percent said it would stay the same.

Two-thirds of the companies said they have a method to track their sales, and 40 percent said they have a way to document and process the products that would be exempt.

The documentation process is important, Lynn said. If done improperly, it can lead to over- or under-compliance, where the companies end up paying too little or too much in taxes.

“At this point, it’s just important for the companies to understand and to have a documentation process in place,” Lynn said. “If they document and can defend their position, it gives them a competitive advantage.”

To see the survey results, go to beenegarter.com/marketing/BG.MDETSurveyResults.pdf.

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