ACA’s Medical Device Tax Falls Short of Expected Revenue in 2013

The Affordable Care Act's medical device tax generated $913.4 million in revenue in the first half of 2013, which is short of the $1.2 billion the Internal Revenue Service estimated it would receive, according to a report released Tuesday by the Treasury Inspector General for Tax Administration, The Hill reports (Schroeder, The Hill, 8/19).

Background

In order to help fund the ACA, the law established a 2.3% tax on the sale of medical devices that are primarily used by physicians and hospitals, such as CT scan machines and pacemakers. The tax went into effect in January 2013. Companies that are subject to the tax must file quarterly tax forms with IRS (AP/Modern Healthcare, 8/19).

Reasons for Shortfall

The report stated that while IRS has worked to educate businesses about the tax, it "faces challenges to definitively identify manufacturers subject to the medical device excise tax reporting and payment requirements."

In addition, the report found instances in which IRS was both over- and under-paid for the tax.

The report also noted several mistakes IRS had made in collecting funds owed under the tax. Although electronic tax returns automatically check to make sure taxes paid match the amount of a company's reported medical device sales, IRS does not have a similar system in place to check paper returns, according to the report. Specifically, the report found 276 errors in the 5,100 collected forms, resulting in discrepancies worth $117.8 million (The Hill, 8/19).

Further, the report found that IRS mistakenly assessed 219 tax penalties totaling more than $700,000 during a grace period from the tax between March 31 and June 30. IRS reversed 133 of the penalties, while the remaining 86 were flagged for IRS to reverse and apologize to the affected taxpayers, according to the Washington Times (Howell, Washington Times, 8/19).

Recommendations

To address these issues, the report recommended that IRS improve its compliance rules for the tax and implement tools that will improve accuracy. The report also said IRS should go back and check forms that contained errors.

Reaction

IRS said it agreed with the recommendations made in the report (The Hill, 8/19). The agency added it is revising its tax forms to help curb future errors (AP/Modern Healthcare, 8/19).

Meanwhile, Republican lawmakers cited the report as proof the ACA's medical device tax is failing and should be repealed. Sen. Orrin Hatch (R-Utah) said, "Everything from this ill-conceived tax's structure to its implementation has been a disaster," adding, "[T]he only real way to fix this tax is to repeal it."

According to The Hill, some GOP legislators are looking to try to repeal the measure in a tax package at the end of the year (The Hill, 8/19).

The medical device industry also called for the tax's repeal. AdvaMed, the industry's biggest trade group, said the tax hinders job creation, reduces medical innovation investments and increases health care costs (AP/Modern Healthcare, 8/19).