IRS Releases Proposed ACA Fee Structure for Pharmaceutical Medical Device Manufactures

With implementation of the new device tax two years away, the Internal Revenue Service (IRS) is trying to determine which devices are exempt from the 2.3 percent excise tax. The tax, part of the Patient Protection and Affordable Care Act, will apply to most devices sold after Dec. 31, 2012. However, the statute exempts some devices, such as “eyeglasses, contact lenses, hearing aids, or ‘any other medical device determined by the Treasury Secretary to be of a type which is generally purchased by the general public at retail for individual use.”

Last month, the IRS provided guidance on the annual fee imposed on covered entities engaged in the business of manufacturing or importing branded prescription drugs. The guidance is divided into three parts:

–       Part I describes a proposed methodology for calculating the tax

–       Part II describes how the IRS will use this proposed methodology to provide each covered entity with a preliminary 2011 fee calculation. The IRS and Treasury Department intend that a covered entity’s preliminary fee calculation for 2011 will serve as a basis for comments by the covered entity on the proposed methodology. 

–       Part III solicits public comments on all aspects of the notice.

Proposed Methodology for Calculating the Fee     

An applicable fee amount for each year, beginning with 2011, will be allocated among covered entities with aggregate branded prescription drug sales of over $5 million to specified government programs or pursuant to coverage under such programs, including Medicare and Medicaid (CMS), Department of Defense (DOD), and Veterans Affairs (VA) (collectively, the Agencies).  

The applicable fee amount is allocated among the covered entities using a formula based on sales to the Programs. The sales data is to be provided by the Agencies. There are two years relevant to the calculation of the fee – the calendar year in which the fee must be paid (fee year) and the calendar year of the branded prescription drug sales, which will be used to determine the amount of the fee (sales year). 

The IRS and Treasury Department are proposing to use the second calendar year preceding the fee year as the sales year for purposes of calculating the section

fee. The annual fee for each covered entity is calculated by determining the ratio of (i) the covered entity’s branded prescription drug sales taken into account during the preceding calendar year to (ii) the aggregate branded prescription drug sales taken into account for all covered entities during the same year, and applying this ratio to the applicable amount as specified in the statute. 

“Sales taken into account” means sales exclusive of certain orphan drugs. The calculation of the fee in any given year is based on branded prescription drug sales in the immediately preceding calendar year.

The IRS and Treasury Department have determined that CMS is not expected to have complete data on branded prescription drug sales for the calendar year immediately preceding the fee year within the time frame necessary to administer the fee. Accordingly, the IRS and Treasury Department will calculate the fee based on the branded prescription drug sales data provided by the Agencies for the second calendar year preceding the fee year.  

Fee calculation

After receiving data from the Agencies and information from the covered entities, the IRS will calculate each covered entity’s branded prescription drug sales for each

Program. A covered entity’s branded prescription drug sales taken into account the sum of the covered entity’s branded prescription drug sales for all Programs

reduced by the appropriate percentages. The IRS will then calculate the aggregate branded prescription drug sales of all covered entities, which is the sum of all the covered entities branded prescription drug sales. 

To determine each covered entity’s fee, the IRS will divide each covered entity’s

branded prescription drug sales by the aggregate branded prescription drug sales of all covered entities and multiply that fraction by the applicable amount for the appropriate year.

The IRS will use this proposed methodology to provide each covered entity with a preliminary 2011 fee calculation.  The notification of the preliminary fee calculation will include the following: (1) the covered entity’s fee; (2) the covered entity’s branded prescription drug sales for each Program; (3) the covered entity’s branded prescription drug sales taken into account after application of section 9008(a)(2); and (4) the aggregate branded prescription drug sales taken into account for all covered entities.

To facilitate the preliminary 2011 fee calculation, companies must submit information described in the guidance to the IRS by January 20, 2011. The IRS will use the data and the sales data provided by the Agencies to calculate the preliminary fee and will send to each covered entity notification of its preliminary fee calculation by May 2, 2011. The IRS will send the final fee calculation to each covered entity by August 15, 2011.

The IRS and Treasury Department request comments on the procedures described above. The deadline for submission of comments is June 2, 2011. 

Written comments should be submitted to: Internal Revenue Service, CC:PA:LPD:PR(Notice 2010-71), Room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 20044. 

Comments may be transmitted electronically via the following e-mail address:

Notice.Comments@irscounsel.treas.gov. Include “Notice 2010-71” in the subject line of any electronic communications.