Boston University School of Law

Medical Devices Excise Tax (MDET) --
A Market-Specific VAT?

Richard Thompson Ainsworth
Andrew Shact
Gail Wasylyshyn

Boston University School of Law Working Paper 12-30
(June 18, 2012)


VATs flourish in complex, clearly defined markets.  New York discovered this when it converted its single-stage retail sales tax on hotel rooms, the Hotel Room Occupancy Tax (HROT), into a multi-stage European-style VAT.  The HROT VAT-conversion demonstrates that (a) in a clearly defined market where (b) a single stage tax is imposed on (c) only part of a complex supply chain that (d) losses attributable to supply-chain-fragmentation can be remedied by moving to a multi-stage VAT.

The Medical Devices Excise Tax (MDET) imposes as 2.3% excise tax on the sale by manufacturers, producers or importers of clearly identified medical devises under §4191 of the Internal Revenue Code (IRC).  The MDET is a single stage transaction tax levied on one segment of complex supply chain in a clearly defined market.  The major difference between MDET and (the former) HROT is that MDET is a single-stage manufacturers tax and the HROT a single stage retail tax.  The MDET and HROT simply reside at opposite ends of problematical supply chains.  

The MDET would benefit from being recast as a market-specific VAT.  This paper explains why, and how this can be achieved.

The Proposed Regulations represent a significant compromise in what Treasury perceived to be the major MTEC issue – how should the retail exemption be drafted?  There are at least four other major issues that need to be resolved before regulations are finalized, but on this point there is a compromise. 

The four most troubling unanswered questions in the proposed regulations are: 

(1) Double taxation.  Do the operation of the “further manufacturing” rules and the high incidence of kits, dual-purpose devices, and combination products in the medical device market create a situation where double taxation is likely?

(2) Related party pricing.  Will the traditional constructive price rules apply in the medical devices area?  Given the high incidence of related party transactions in the medical device market, and the probability that structured transactions among related parties may be designed by taxpayers to reduce exposure to the MDET, this issue has high revenue impact for the government.

(3) Title passage.  How should the title passage rules of Chapter 32 be incorporated into the MDET?  It seems unlikely that critical value added services and software will be reached if this rule remains in place for the MDET.

(4) Objective valuation.  Can the MDET depart from the objective valuation standard that is utilized in the manufacturers excise taxes of Chapter 32?  Can subjective valuation be used instead? 

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Richard Thompson Ainsworth Contact Information
LL.M. Tax Program
Boston University School of Law
765 Commonwealth Ave
Boston, MA 02215

Phone: (781) 773-1052

Andrew Shact Contact Information


Gail Wasylyshyn Contact Information


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