Medical device taxation and the dental lab

March 21, 2012

While the massive healthcare reform bill recently signed into law by President Obama will affect all Americans in one way or another, it contains a provision that will have a direct impact on dental laboratories in their role as manufacturers of medical devices.

While the massive healthcare reform bill recently signed into law by President Obama will affect all Americans in one way or another, it contains a provision that will have a direct impact on dental laboratories in their role as manufacturers of medical devices.

Analysis by Reed Smith LLP and the NADL Executive Staff of the amended Health Care and Education Reconciliation Act of 2010 indicates the law will impose a 2.3% tax on the sale of finished medical devices, including final dental prosthetics, to be remitted by the "manufacturer, producer, or importer" of the device. The excise tax provisions apply regardless of the classification of the device, but do not apply to over-the-counter devices such as eyeglasses, contact lenses, or hearing aids.

According to Bennett Napier, NADL Co-Executive Director, "Any dental lab is subject to the tax. It's got uniform applicability, regardless of the size of the laboratory. If you sell $1 of medical devices, you've got a 2.3% tax on the $1." He points out that a previous version of the law was tiered so that labs with less that $5M annual sales would not be subject to the excise tax, but that was repealed in the reconciled version. "A small lab is just as subject to the tax as everybody."

Excise not sales

Napier emphasizes that the 2.3% is not a sales tax per se (as levied by individual states) but a federal excise tax. "Each state regulates [sales taxes] differently, and that's going to confuse a lot of people," he says. "In some states, they look at the finished device as tax exempt from a sales tax perspective because the end-user is a patient."

“Laboratory owners will need to decide for themselves from a business perspective how to handle this new added cost of the restoration. This is a new expense in making a restoration. Some dental laboratories may absorb the new cost and others may pass it on. That is a business decision for each individual dental laboratory to make,” says Napier.

He adds that it will be at the dentist's discretion how or if the increased cost of the final restoration is applied to the cost to patient.

Effect on imports

The excise tax is on the finished medical devices only and not on any individual components used to make the final product. For example, the tax would not be applied to a milled zirconia framework or remitted by an outsource lab providing the substructure, but it would be applied to a finished bridge, and the lab supplying it to the dentist would be responsible for the 2.3% tax on the cost to the dentist.

If a dentist were to send casework directly to an offshore laboratory and receive the final restoration from that foreign entity, then the dentist as the importer of the final product would remit the tax.

"If there is a broker taking possession of finished devices for multiple clients, lab or dentists, effectively it's likely they would be the one to remit the tax on the finished device," adds Napier.

Not just yet

Though lab owners need to be aware of the excise tax and how it will affect their business, the tax itself does not go into effect until 2013. In addition, the collection requirements have not been established either, which adds to the confusion and frustration. "The biggest unanswered question, because nobody has the answer, is how will the IRS implement this. What's the frequency of remitting the excise tax. They haven't even started to speculate how that will be done," says Napier.

In the meantime, Napier says that he and the NADL, as well as other trade organizations such as the Dental Trade Alliance, are lobbying on having the tax on finished medical devices repealed or amended by Congress.

But Napier is not optimistic about the law being changed before it goes into effect. "I'd say this particular element probably would not be subject to repeal, unless you see a large change with the Congressional elections in the fall. If the interim elections don't change the party makeup significantly, most of these prevailing elements of the law will stand."

About NADL

The National Association of Dental Laboratories is the unified voice of the dental laboratory industry supporting dentistry and serving the public interest by promoting high standards. NADL accomplishes this by providing programs, services and networking opportunities to meet the evolving technical, educational, professional and business needs of dental laboratories. For more information, please contact the NADL office at 800-950-1150, or visit www.nadl.org.