The Obamacare Medical Device Tax is Not Working as Planned

August 21, 2014

The Treasury Inspector General for Tax Administration released a report this week on significant challenges with enforcing the Affordable Care Act’s Medical Device Tax.

The medical device tax is a 2.3 percent excise tax on the sale price of qualifying medical devices. Generally, taxable medical devices are things like pacemakers and defibrillators. The tax explicitly exempts things like eye glasses, contact lenses, or things generally purchased directly by consumers.

The two major issues is that the medical device tax is raising about 25 percent less revenue than expected and that taxpayers seem to be having trouble complying with the complex tax.

According to the report, the IRS processed 5,107 returns and raised $913 million between January 2013 and June 2013. The original estimates were much higher. The IRS first estimated receiving between 9,000 and 15,000 returns and $1.2 billion during that period.

These are collections about 23 percent below original estimates.

First Half of 2013 Return Filings and Medical Device Tax Revenues

 

IRS Estimates

Actual

Returns

9,000 - 15,000

5,107

Revenues

$1.2 billion

$913.4 million

Source: Treasury Inspector General for Tax Administration

In addition, TIGTA found that there was a high amount of error both on the part of businesses and the IRS.

According to the TIGTA review of medical device tax returns, there was a total of $41.6 million in overpayments, and $76.2 million in underpayments.

The IRS had similar problems with the tax. The IRS’s errors amounted to $706,753 in erroneous penalties for underpayment. In other words, the IRS assessed penalties on 219 businesses that had actually made proper payments. That being said, the IRS has since reversed most of those penalties.

This kind of error isn’t that surprising for the medical device tax. The tax is surprisingly complex with a number of “specific exemptions, other safe harbors, and retail exemptions,” so not all businesses that sell, or manufacture devices need to pay the tax. This reasonably leads to confusion on both the IRS’s and the business’ side over who should be paying the tax.

High compliance and administration costs, low revenues coupled with a gross receipts tax base does not make for good tax policy.

For more on the medical device tax: Here and here.

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