Section 3. CONSTRUCTIVE SALE

PRICE

(a) Overview of Constructive Sale Price . Section 4216 provides rules for determining “price” for purposes of chapter 32. Those rules treat the price for which a manufacturer sells a taxable article to an independent wholesale distributor, subject to certain adjustments, as the applicable price for purposes of imposing the tax. In general, when a manufacturer sells a taxable article to a purchaser other than an independent wholesale distributor, § 4216(b) and the regulations thereunder prescribe rules for constructing a sale price that approximates the price an independent wholesale distributor would pay to the manufacturer for an identical article. In such situations, tax is imposed on the constructive sale price as determined under § 4216(b).

The IRS and the Treasury Department recognize that the medical device industry encompasses a diverse group of manufacturers that produce a broad range of articles. The IRS and the Treasury Department also recognize that many manufacturers in the medical device industry do not sell to independent wholesale distributors, and they may employ more than one distribution chain according to industry practice related to a particular article. Further, the IRS and the Treasury Department recognize that current published guidance relating to the constructive sale price rules does not address some of the types of distribution chains regularly employed in the medical device industry. In addition, Rev. Rul. 80–273, 1980–2 C.B. 315, which provides a mechanism for computing the constructive sale price where the articles are sold at retail by manufacturers who do not sell like articles to wholesale distributors, does not by its terms apply to § 4191.

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Section 4: SPECIAL CHAPTER 32 RULES APPLICABLE TO THE MEDICAL DEVICE EXCISE TAX

(a) Sale to Hospital or Doctor’s Office Treated as Sale at Retail for Purposes of Determining Price

(1) Overview. Section 48.4216(b)–1(c)(1) of the regulations defines “sale at retail” as the sale of an article to a purchaser who intends to use the article, or to lease it to another person, rather than resell it. Section 48.4216(b)–1(c)(2) defines “retailer” as a person engaged in the business of selling articles at retail. Therefore, a sale to a retailer is a sale of an article to a person engaged in the business of selling articles at retail. Medical institutions and offices, such as hospitals and doctor’s offices, purchase taxable articles that are used to treat patients. Sometimes an article is completely consumed on the premises of a medical institution or office and other times the articles leave the medical institution or office with the patient. Under the definitions described above, it is unclear whether a sale of an article to a medical institution or office is a sale at retail or a sale to a retailer.

(2) Interim Rule . Until the IRS and the Treasury Department issue further guidance, the IRS will treat the sale of a taxable article to a medical institution or office as a “sale at retail.”

(b) Licenses (1) Overview. In response to the proposed regulations, one commenter requested clarification on whether the licensing of software that is a taxable medical device is a taxable event for purposes of § 4191. That commenter requested that the IRS and the Treasury department treat the licensing of software as a lease.

Under existing chapter 32 rules, the manufacturers excise tax generally attaches upon the sale or use of a taxable article by the manufacturer. See § 48.0–2(b). Section 4217(a) provides that the lease of a taxable article by the manufacturer is considered a sale. Neither the existing chapter 32 rules nor the final regulations address the issue of whether the licensing of a taxable article, such as software that is a taxable medical device, is a taxable event.

(2) Interim Rule . Until the IRS and the Treasury Department issue further

(B) Interim Rule . Until the IRS and the Treasury Department issue further guidance, the constructive sale price for this distribution chain, determined pursuant to § 4216(b)(1)(A), is 75% of the actual selling price after taking into account the adjustments provided by § 4216(a). No further adjustments under § 4216 are allowed. See Rev. Rul. 80–273, 1980–2 C.B. 315.

(2) Sales to unrelated retailers; no regu- lar sales to independent wholesale distrib- utors.

(A) Description . In this distribution chain, the manufacturer sells taxable articles to unrelated retailers. The manufacturer does not regularly sell its taxable articles to independent wholesale distributors.

(B) Interim Rule . Until the IRS and the Treasury Department issue further guidance, the constructive sale price for this distribution chain is 90% of the lowest price for which the articles are sold to unrelated retailers. This computation is made without adjustment for any exclusion (except for the tax imposed on such article) or readjustment under § 4216(a) and (e) and § 6416(b)(1). See Rev. Rul. 82–211, 1982–2 C.B. 296. (3) Sales to related retailer; no regu- lar sales to independent wholesale distrib- utors.

(A) Description . In this distribution chain, the manufacturer sells taxable articles to a related retailer. The related retailer sells the articles at retail to unrelated end-users. The manufacturer and related retailer do not regularly sell the articles to independent wholesale distributors.

(B) Interim Rule . Until the IRS and the Treasury Department issue further guidance, the constructive sale price for this distribution chain, determined pursuant to § 4216(b)(1)(C), is 75% of the product of 95% and the actual selling price (that is, the price at which the article is sold to a person that is not a member of the group of companies that are related to the manufacturer). The 5% discount is an allowance for the exclusions from the selling price otherwise allowed under § 4216(a). See Rev. Rul. 82–211. The additional 25% discount adjusts the selling price to approximate the selling price to an independent wholesale distributor. See Rev. Rul. 80–273. No further adjustments under § 4216 are allowed.

(4) Sales to related reseller that leases and sells at retail.

(A) Description . In this distribution chain, the manufacturer sells taxable articles to a related reseller. The related reseller sells the articles at retail to unrelated end-users, and also leases articles to unrelated end-users.

(B) Interim Rule . Until the IRS and the Treasury Department issue further guidance, the constructive sale price for this distribution chain, determined pursuant to § 4216(b)(1)(C), is 75% of the product of 95% and the actual selling price (that is, the price at which the article is sold to a person that is not a member of the group of companies that are related to the manufacturer). The 5% discount is an allowance for the exclusions from the selling price otherwise allowed under § 4216(a). See Rev. Rul. 82–211. The additional 25% discount adjusts the selling price to approximate the selling price to an independent wholesale distributor. See Rev. Rul. 80–273. No further adjustments under § 4216 are allowed.

(5) Sales to related reseller that only leases at retail; no regular sales to inde- pendent wholesale distributors.

(A) Description . In this distribution chain, the manufacturer sells taxable articles to a related reseller. The related reseller leases the articles to unrelated endusers, but does not sell articles at retail. The manufacturer and related reseller do not regularly sell the articles to independent wholesale distributors.

(B) Interim Rule . Until the IRS and the Treasury Department issue further guidance, the price for this distribution chain is the actual selling price to the related reseller, provided that the selling price to the related reseller reasonably approximates the fair market price of the article within the meaning of § 4216.

(c) Applicability to other taxes imposed by chapter 32 of the Code . Until the IRS and the Treasury Department issue further guidance, all manufacturers subject to the taxes imposed by chapter 32 of the Code may apply the rules provided in this section to determine the constructive sale price of taxable articles under chapter 32 to the extent that any statute or other published guidance do not already provide rules addressing a particular fact pattern or situation.

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(1) Allocation . When an importer sells a convenience kit that is a taxable medical device, and also sells all of the individual taxable medical devices and nontaxable articles that are included in the convenience kit, the taxable portion of the sale price of such convenience kit may be determined by applying to the importer’s sale price of the convenience kit the ratio that the importer’s separate sale price of the taxable medical devices in the convenience kit bears to the sum of the sale prices of both the taxable medical devices and nontaxable articles in the convenience kit.

When an importer sells a convenience kit that is a taxable medical device, but does not sell all of the individual taxable medical devices and nontaxable articles that are included in the convenience kit, the taxable portion of the sale price of such convenience kit may be determined by applying to the importer’s sale price of the convenience kit the ratio that the cost to the importer of the taxable medical devices in the convenience kit bears to the sum of the cost to the importer of both the taxable medical devices and nontaxable articles in the convenience kit. The importer may determine the cost of the taxable medical devices and the nontaxable articles in the convenience kit by any reasonable method. Thus, if the cost of the taxable medical devices represents half of the total cost to the importer of the convenience kit, the tax applies to half of the price charged by the importer upon the sale of the convenience kit.

(2) Alternative to Allocation . In lieu of allocation, the importer of a convenience kit that is a taxable medical device may pay tax on the entire price for which the importer sells the convenience kit.

Section 6: DEPOSIT PENALTY RELIEF

(a) Overview . Section 6302 of the Code authorizes the IRS to establish the mode and time for collecting certain taxes, including the taxes imposed by chapter 32. Section 40.6302(c)–1(a) of the Excise Tax Procedural Regulations requires manufacturers that are liable for excise taxes to make semimonthly deposits of tax during the period in which the tax liability is incurred.

The deposit for a tax imposed by chapter 32 for each semimonthly period must not be less than 95% of the amount of net tax liability incurred during the semi

guidance, the IRS will treat a license of a taxable medical device as a lease of that taxable medical device as of the date both parties entered into the license agreement. Accordingly, the rules under §§ 4216(c) and 4217, and §§ 48.4216(c)–1(a), 48.4216(c)–1(e), 48.4217–1, and 48.4217–2 apply. (c) Excise Tax Treatment of Donations of Taxable Medical Devices to Organiza- tions Described in § 170(c)

(1) Overview. The existing chapter 32 rules do not specifically address whether a donation of a taxable article constitutes a taxable use under § 4218. The IRS and the Treasury Department will continue to study this issue.

(2) Interim Rules . Until the IRS and the Treasury Department issue further guidance, taxpayers may rely on the following rules relating to the donation of medical devices:

(A) Non-taxable use . The donation of a taxable medical device by the manufacturer of the device to an eligible donee will not constitute a taxable use as defined in § 4218 of the Code. However, if at the time of donation, the manufacturer has reason to believe that the donation is not being made to an eligible donee or that the article donated will be resold by the eligible donee, the manufacturer is not relieved from the liability for the tax imposed by § 4191.

(B) Eligible donee . For purposes of this safe harbor, an eligible donee is an entity described in § 170(c) of the Code.

(C) Subsequent sales of donated arti- cles . The rules of § 4219 (related to the application of tax in case of sales by other than the manufacturer) apply to an eligi- ble donee that receives a donated taxable medical device and subsequently sells the taxable medical device.