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Estimated Economic Impacts of the Two Year Moratorium on the Medical Device Excise Tax

We may be seeing an increase in activity from medical device manufacturers as a result of the Consolidated Appropriations Act, 2016 (Pub. L. 114-113) which lifted the Medical Device Excise Tax for two years beginning January 1, 2016. Since January 1, 2013, manufacturers and importers have been paying a 2.3 percent tax on the sale price of taxable medical devices (some exclusions include eyeglasses, contact lenses, hearing-aids, retail items, etc.).

“What most taxpayers don’t realize is, even though the 2.3 percent tax seems like a small number, it is significant to manufacturers,” states John Bolinder, VP marketing & communications at Nelson Laboratories.  “For a mid-size company in the $10 million to $50 million range that sells commodity items in a competitive MedTech market place, the profit margins are only 6 to 10 percent, so the effective tax is closer to 20 to 30 percent since the 2.3 percent tax is taken from top line revenue, not earnings. That is a tremendous erosion of earnings and capital for small and mid-size firms. Many firms had to make significant cuts in spending, R&D and payrolls to pay the tax. Hopefully legislators will realize how much of a burden this tax is to device manufactures and continue to assess alternatives so that MedTech companies can spend these funds on innovation and improving the quality of life.”

It is estimated by the Congressional Research Service that companies paid out $2.4 billion in 2014. What effect will this have on the medical device industry? Time will tell, but many manufacturers have already stated that they are increasing investments back into their companies which will fuel growth in the MedTech sector.