Taxable Medical Devices, 6028-6038 [2012-2493]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 77, Number 25 (Tuesday, February 7, 2012)]
[Proposed Rules]
[Pages 6028-6038]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-2493]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 48

[REG-113770-10]
RIN 1545-BJ44


Taxable Medical Devices

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of Proposed Rulemaking and Notice of Public Hearing.

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SUMMARY: This document contains proposed regulations that provide 
guidance on the excise tax imposed on the sale of certain medical 
devices under section 4191 of the Internal Revenue Code, enacted by the 
Health Care and Education Reconciliation Act of 2010 in conjunction 
with the Patient Protection and Affordable Care Act. The proposed 
regulations affect manufacturers, importers, and producers of taxable 
medical devices. This document also provides a notice of public hearing 
on these proposed regulations.

DATES: Written or electronic comments must be received by May 7, 2012. 
Outlines of topics to be discussed at the public hearing scheduled for 
May 16, 2012, at 10 a.m., must be received by May 7, 2012.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-113770-10), Room 
5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-
113770-10), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue NW., Washington, DC, or sent electronically via the Federal 
eRulemaking Portal at https://www.regulations.gov (IRS REG-113770-10). 
The public hearing will be held on May 16, 2012, in the IRS Auditorium, 
beginning at 10 a.m., at the Internal Revenue Building, 1111 
Constitution Avenue NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Natalie Payne or Stephanie Bland, at (202) 622-3130; concerning 
submission of comments, the public hearing, and/or to be placed on the 
building access list to attend the public hearing, contact 
Oluwafunmilayo Taylor at (202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

Statutory Provisions

    This document contains proposed regulations that provide guidance 
on the excise tax imposed on the sale of certain medical devices under 
section 4191 of the Internal Revenue Code (Code), enacted by section 
1405 of the Health Care and Education Reconciliation Act of 2010, 
Public Law 111-152 (124 Stat. 1029 (2010)), in conjunction with the 
Patient Protection and Affordable Care Act, Public Law 111-148 (124 
Stat. 119 (2010)) (jointly, the ACA).
    Section 4191 imposes an excise tax on the sale of certain medical 
devices by the manufacturer, producer, or importer of the device in an 
amount equal to 2.3 percent of the sale price. Section 4191 applies to 
sales of taxable medical devices after December 31, 2012.
    Section 4191(b)(1) provides that, in general, a ``taxable medical 
device'' is any device, as defined in section 201(h) of the Federal 
Food, Drug & Cosmetic Act (FFDCA), (codified as amended at 21 U.S.C. 
301 et seq. (2006)), that is intended for humans. Section 201(h) of the 
FFDCA provides generally that the term ``device'' means an instrument, 
apparatus, implement, machine, contrivance, implant, in vitro reagent, 
or other similar or related article, including any component, part, or 
accessory, that is recognized in the official National Formulary, or 
the United States Pharmacopeia, or any supplement to them; intended for 
use in the diagnosis of disease or other conditions, or in the cure, 
mitigation, treatment, or prevention of disease; or intended to affect 
the structure or any function of the body, and that does not achieve 
its primary intended purposes through chemical action within or on the 
body and that is not dependent upon being metabolized for the 
achievement of its primary intended purposes.
    Section 4191(b)(2) provides that the term ``taxable medical 
device'' does not include eyeglasses, contact lenses, hearing aids, and 
any other medical device determined by the Secretary to be of a type 
that is generally purchased by the general public at retail for 
individual use.
    In addition, the ACA amended section 4221(a) to limit tax-free 
sales of taxable

[[Page 6029]]

medical devices to sales (i) for use by the purchaser for further 
manufacture, or for resale by the purchaser to a second purchaser for 
use by such second purchaser in further manufacture, and (ii) for 
export, or for resale by the purchaser to a second purchaser for 
export. The ACA makes a corresponding amendment to section 6416(b)(2) 
with regard to claims for refund.

Manufacturers Excise Tax Rules Generally

    The ACA added section 4191 to chapter 32, subtitle D of the Code, 
which relates to taxes imposed upon the sales of taxable articles by 
manufacturers, producers, and importers (commonly referred to as 
``manufacturers excise taxes''). Therefore, the existing rules 
governing chapter 32 apply to section 4191. The substantive regulations 
relating to manufacturers excise taxes are contained in part 48 
(Manufacturers and Retailers Excise Tax Regulations) of Title 26 of the 
Code of Federal Regulations (CFR). The procedural regulations governing 
manufacturers excise taxes are contained in part 40 (Excise Tax 
Procedural Regulations) of 26 CFR.
    The manufacturers excise tax rules are discussed in Part VII under 
``Explanation of Provisions,'' in this preamble. For additional 
information on the manufacturers excise tax rules generally, see 
chapter 5 of IRS Publication 510, ``Excise Taxes,'' available at https://www.irs.gov/publications/p510/ch05.html.

Notice 2010-89

    On December 27, 2010, the IRS published Notice 2010-89 (2010-52 IRB 
908) to request comments on the implementation and administration of 
the new tax under section 4191. The IRS and the Treasury Department 
received numerous comments in response to the notice and considered all 
comments in the drafting of the proposed regulations. The comments are 
discussed in more detail in this preamble. The IRS and the Treasury 
Department also consulted with the Food and Drug Administration (FDA) 
and the Centers for Medicare and Medicaid Services (CMS) in developing 
these regulations.

Explanation of Provisions

I. Definition of ``Taxable Medical Device''
    Section 4191(b)(1) links the definition of ``taxable medical 
device'' to the definition of ``device'' in section 201(h) of the 
FFDCA. The FDA generally administers the provisions of the FFDCA, 
including section 201(h) and other provisions relating to medical 
devices.
    The FDA generally requires owners or operators of places of 
business (also called establishments) that are located in the United 
States, or in foreign countries that export devices to the United 
States, and that manufacture, prepare, propagate, compound, assemble, 
process, repackage, or relabel medical devices intended for human use 
to register their establishments and list their devices upon first 
entering into operation, and to update this information on an annual 
basis with the FDA. See sections 510(a)-(d), (i), and (j) of the FFDCA, 
21 CFR 807.20, and 21 CFR 807.21.
    Various commentators observed that the statutory definition of 
``taxable medical device'' leaves uncertainty as to which devices are 
included in the definition. The proposed regulations address this 
concern by providing that for purposes of the medical device excise 
tax, a device defined in section 201(h) of the FFDCA that is intended 
for humans means a device that is listed as a device with the FDA under 
section 510(j) of the FFDCA and 21 CFR part 807, pursuant to FDA 
requirements. The FDA listing requirements are longstanding. Further, 
device manufacturers must comply with these requirements as part of the 
FDA's device regulation process. Therefore, device manufacturers can be 
expected to know which devices fall within the definition.
    The FDA has promulgated classification regulations for 
approximately 1,700 different generic types of devices. Each 
classification regulation includes one or more product codes that 
describe a subcategory of the device type described in the regulation. 
Currently, manufacturers may, in certain circumstances, list multiple 
different devices that fall within the same product code under a single 
listing. Therefore, all devices that are listed under a single product 
code listing in conjunction with the FDA's device listing requirement 
are ``taxable medical devices'' unless they fall within an exemption 
under section 4191(b)(2).
    The proposed regulations also provide that if a device is not 
listed with the FDA but the FDA later determines that the device should 
have been listed as a device, the device will be deemed to have been 
listed as a device with the FDA as of the date the FDA notifies the 
manufacturer or importer in writing that corrective action with respect 
to listing is required.
II. The Retail Exemption
    Section 4191(b)(2) provides that the term ``taxable medical 
device'' does not include eyeglasses, contact lenses, hearing aids, and 
any other medical device determined by the Secretary to be of a type 
that is generally purchased by the general public at retail for 
individual use (the retail exemption).
    The FDA has grouped each of the 1,700 classification regulations 
into 16 medical specialties (21 CFR, parts 862-892). Each of these 
generic types of devices is assigned to one (or sometimes more than 
one) of three regulatory classes based on the level of control 
necessary to assure the safety and effectiveness of the device. The 
three classes of FDA devices are Class I (general controls), Class II 
(special controls), and Class III (pre-market approval). A number of 
device types that predate the enactment of the Medical Device 
Amendments to the Food, Drug, and Cosmetic Act of 1976 remain 
unclassified.
    With regard to the retail exemption, section 4191 makes no 
reference to the three regulatory classes. Further, the Joint Committee 
on Taxation's Technical Explanation of the ACA makes clear that the FDA 
regulatory classes do not, by themselves, determine whether a device 
falls within the retail exemption. Specifically, the Technical 
Explanation states, ``The exemption for such items is not limited by 
device class as defined in section 513 of the Federal Food, Drug, and 
Cosmetic Act.'' Rather, the Technical Explanation notes that the 
exemption could cover ``Class I items such as certain bandages and 
tipped applicators, Class II items such as certain pregnancy test kits 
and diabetes testing supplies, and Class III items such as certain 
denture adhesives and snake bite kits.'' The Technical Explanation also 
emphasizes that ``items would only be exempt if they are generally 
designed and sold for individual use.'' Joint Committee on Taxation, 
General Explanation of Tax Legislation Enacted in the 111th Congress 
(JCS-2-11), March 2011, at 366.
    The proposed regulations provide a facts and circumstances approach 
to evaluating whether a taxable medical device is of a type that is 
generally purchased by the general public at retail for individual use. 
Under the proposed regulations, a device is considered to be of a type 
generally purchased by the general public at retail for individual use 
if (i) the device is regularly available for purchase and use by 
individual consumers who are not medical professionals, and (ii) the 
device's design demonstrates that it is not

[[Page 6030]]

primarily intended for use in a medical institution or office, or by 
medical professionals. The proposed regulations provide a set of non-
exclusive factors for use in evaluating whether a taxable medical 
device is of a type that is generally purchased by the general public 
at retail for individual use. The proposed regulations also include a 
safe harbor provision.
    The proposed regulations provide a non-exclusive list of factors to 
be considered in determining whether a device is regularly available 
for purchase and use by individual consumers who are not medical 
professionals. Those factors are (i) whether consumers who are not 
medical professionals can purchase the device through retail businesses 
that also sell items other than medical devices, including drug stores, 
supermarkets, and similar vendors; (ii) whether consumers who are not 
medical professionals can safely and effectively use the device for its 
intended medical purpose with minimal or no training from a medical 
professional; and (iii) whether the device is classified by the FDA 
under Subpart D of 21 CFR Part 890 (Physical Medicine Devices).
    The proposed regulations also provide a non-exclusive list of 
factors to be considered in determining whether the design of a device 
demonstrates that it is primarily intended for use in a medical 
institution or office, or by medical professionals, and therefore not 
intended for purchase and use by individual consumers. Those factors 
are (i) whether the device generally must be implanted, inserted, 
operated, or otherwise administered by a medical professional; (ii) 
whether the cost to acquire, maintain, and/or use the device requires a 
large initial investment and/or ongoing expenditure that is not 
affordable for the average consumer; (iii) whether the device is a 
Class III device under the FDA system of classification; (iv) whether 
the device is classified by the FDA under certain parts or subparts of 
21 CFR; and (v) whether the device qualifies as durable medical 
equipment, prosthetics, orthotics, and supplies (DMEPOS) for which 
payment is available exclusively on a rental basis under the Medicare 
Part B payment rules and is an ``item requiring frequent and 
substantial servicing'' as defined in 42 CFR 414.222. With regard to 
the regulatory classifications incorporated into the fourth factor 
described in this preamble, the IRS and the Treasury Department have 
determined, based on all the facts and circumstances, that the 
overwhelming majority of product codes that fall within these 
regulatory categories do not include devices that are of a type 
generally purchased by the general public at retail for individual use.
    Whether a device is of a type generally purchased by the general 
public at retail for individual use is determined based on all relevant 
facts and circumstances. Thus, there may be relevant facts and 
circumstances in addition to the factors specifically identified in the 
proposed regulations.
    To provide greater certainty, the proposed regulations also include 
a safe harbor provision that identifies certain categories of taxable 
medical devices that the IRS and the Treasury Department have 
determined fall within the retail exemption. The safe harbor includes 
(i) devices that are identified in the FDA's IVD Home Use Lab Tests 
(Over-the-Counter Tests) database, available at https://www.accessdata.fda.gov/scripts/cdrh/cfdocs/cfIVD/Search.cfm; (ii) 
devices described as ``OTC'' or ``over the counter'' devices in the 
relevant FDA classification regulation heading; (iii) devices that are 
described as ``OTC'' or ``over the counter'' devices in the FDA's 
product code name, the FDA's device classification name, or the 
``classification name'' field in the FDA's device registration and 
listing database, available at https://www.accessdata.fda.gov/scripts/cdrh/cfdocs/cfrl/rl.cfm; and (iv) certain devices that qualify as 
DMEPOS for which payment is available on a purchase basis under 
Medicare Part B payment rules in accordance with the fee schedule 
published by CMS.
    The IRS and the Treasury Department recognize the challenges 
involved in applying a facts and circumstances test to the wide array 
of devices that are potentially subject to the medical device excise 
tax, including for smaller manufacturers or importers for which the 
application of the retail exemption may determine whether they are 
subject to the tax at all. The IRS and the Treasury Department intend 
through the rulemaking process to continue their efforts to find ways 
to make the test easier to apply to particular cases and to provide 
certainty with respect to a substantial majority of devices. To that 
end, comments are requested on additional factors, examples, or safe 
harbors that could be added to provide greater certainty for a larger 
number of devices. Comments are particularly requested on how to 
provide greater clarity with respect to taxable medical devices that 
are sold primarily or exclusively through specialty medical retailers 
that sell medical devices and related materials. Comments are also 
requested on whether the packaging and labeling of a taxable medical 
device, the terms and conditions of the manufacturer's warranty with 
respect to a device, and substantial sales of a device over the 
internet would be meaningful factors for use in establishing whether a 
device qualifies for the retail exception, and if so, how any such 
factor should be described and applied. Comments are also requested on 
other types of DMEPOS that should be considered for safe harbor 
treatment and how those items can be consistently and specifically 
identified. For example, ``inexpensive equipment,'' as defined in 42 
CFR 414.220(a)(1), appears to describe items that may meet the retail 
exception under an application of the facts and circumstances test. 
However, comments are requested on how devices that fall under the 
definition would be identified given that the CMS fee schedule 
categorizes ``inexpensive equipment'' together with other medical 
devices that appear not to fall within the retail exception.
    The IRS and the Treasury Department received numerous comments 
suggesting that it is not feasible to base the retail exception on 
quantitative data that compares the relative number of sales of a 
certain taxable medical device at retail to the number of sales of the 
device to doctors' offices, hospitals, and other medical and health 
care providers and institutions. Several commentators stated that for a 
given device, numerical data on the proportion of sales to retail 
purchasers and to non-retail purchasers is often not available to the 
manufacturers and importers of the device, even with respect to the 
devices that they manufacture or import. Further, the commentators 
noted that even if the data is available, a rule that looks to 
industry-wide data regarding the percentage of retail and non-retail 
sales of a device would require an ongoing, resource-intensive effort 
to collect industry-wide sales information, and would not provide 
certainty to stakeholders because the data may change from year to 
year. In light of these difficulties, the proposed regulations do not 
adopt a market data approach to the retail exception.
    One commentator suggested that the IRS and the Treasury Department 
provide a retail exception safe harbor based on a manufacturer's or 
importer's proportion of sales of a particular device at retail, 
compared to that manufacturer's or importer's overall sales of the 
device. Under this suggestion, if the retail sales of a particular 
device by a manufacturer or importer met or exceeded a certain ratio

[[Page 6031]]

or percentage, as compared to overall sales by the manufacturer or 
importer of that device, then all sales of the device would be exempt 
from tax. The proposed regulations do not adopt this approach to the 
retail exception because the suggested safe harbor could result in 
inconsistent treatment of different manufacturers of the same device. 
The language of section 4191 applies the retail exception to types of 
devices, not to manufacturers and importers based on the nature of 
their distributions or sales.
    Some commentators suggested that if the manufacturer or importer is 
able to determine that a particular taxable medical device is sold to 
consumers at retail, no tax should be imposed on any sale of that 
device, even if the device is not of a type that is generally purchased 
by the general public at retail for individual use. Such an approach 
would be contrary to the language of the statute. Therefore, the 
proposed regulations do not adopt this approach.
III. Veterinary Devices
    The definition of ``device'' in section 201(h) of the FFDCA 
includes devices used in veterinary medicine. However, the definition 
of ``taxable medical device'' under section 4191 limits taxable medical 
devices to devices described in section 201(h) of the FFDCA that are 
``intended for humans.'' The proposed regulations further limit the 
definition of ``taxable medical device'' to devices that are listed 
with the FDA. Under existing FDA regulations, a device intended for use 
exclusively in veterinary medicine must be labeled as such and is not 
subject to several pre-market and post-market provisions of the FFDCA, 
including the listing requirement. Therefore, under the proposed 
regulations, devices intended for use exclusively in veterinary 
medicine are not ``taxable medical devices.''
    A commentator has noted, however, that many medical devices used in 
veterinary practices are also used in human medicine. The commentator 
suggested that if the manufacturer can demonstrate that a device is 
sold for use in veterinary medicine, the excise tax should not be 
imposed on that sale. The proposed regulations do not adopt this 
suggestion because the statutory language does not limit the definition 
of ``taxable medical device'' to devices intended exclusively for 
humans. Therefore, a device that is intended for humans but that is 
also intended for use or used in veterinary medicine is a ``taxable 
medical device'' if it is listed as a device with the FDA pursuant to 
FDA requirements, and does not fall within an exemption under section 
4191(b)(2), such as the retail exemption.
IV. Dual Use Devices

Devices That Have Medical and Non-Medical Uses

    Many commentators expressed concern over the potential taxation of 
devices that have both medical and non-medical uses, such as latex 
gloves, and requested that the excise tax not be imposed on the sale of 
devices for non-medical uses.
    Section 4191 imposes a tax upon the sale of a taxable medical 
device by the manufacturer, unless the sale is for export or further 
manufacture. In most instances, the manufacturer does not sell directly 
to the end user of the device. Therefore, the manufacturer does not 
typically know the identity of the end user at the time of sale. 
Further, commentators suggest that manufacturers would have difficulty 
tracking their products through the supply chain and determining the 
ultimate destination of their products once they are sold to a 
distributor. Commentators also stated that, in some cases, after the 
manufacturer sells a device to a distributor, the distributor may 
package and label the device for sale for non-medical uses.
    Under the proposed regulations, the definition of ``taxable medical 
device'' is tied to the FDA's listing requirements for devices. 
Therefore, a device that is listed with the FDA pursuant to FDA 
requirements is a ``taxable medical device,'' unless it falls within an 
exemption under section 4191(b)(2), such as the retail exemption.

``Research Use Only'' Devices

    Several commentators stated that they manufacture devices that are 
used in clinical medicine to diagnose disease in humans, as well as in 
industrial laboratory work and laboratory research. Those commentators 
further stated that when sold for non-medical purposes, such devices 
are labeled ``Research Use Only.'' The comments suggest that, although 
the devices labeled ``Research Use Only'' are physically suitable for 
clinical use, FDA regulations prohibit the use of devices with this 
label in a clinical setting for human medical purposes. The 
commentators requested that sales of devices that are labeled 
``Research Use Only'' be exempt from the medical device excise tax 
because of the intended use of such devices.
    The proposed regulations define ``taxable medical device'' as any 
device that is listed as a device with the FDA pursuant to FDA 
requirements. Under 21 CFR 807.65(f) of the FDA regulations, persons 
that ``manufacture, prepare, propagate, compound, or process devices 
solely for use in research, teaching, or analysis and do not introduce 
such devices into commercial distribution'' are exempt from the FDA's 
registration and listing requirements. See section 510(g) of the FFDCA. 
Accordingly, a device that is sold for use in research that is not 
listed because it satisfies the requirements of 21 CFR 807.65(f) is not 
a ``taxable medical device'' under the proposed regulations. In 
contrast, a device that is sold for use in research that is listed with 
the FDA pursuant to FDA requirements, such as a device not solely used 
in research or one that is introduced into commercial distribution, is 
a ``taxable medical device'' under the proposed regulations, unless it 
falls within an exemption under section 4191(b)(2), such as the retail 
exemption.
V. Devices Approved by the FDA for Limited Use--Investigational Devices
    Several commentators requested an exemption for devices that are 
subject to an Investigational Device Exemption (IDE). The FDA permits 
the distribution of certain devices that the FDA has not yet approved 
for marketing under an IDE. See 21 CFR part 812 for the FDA's 
regulatory provisions regarding the IDE. Devices under an IDE are 
exempt from the FDA's listing requirements. Accordingly, a device 
subject to an IDE is not a ``taxable medical device'' under the 
proposed regulations.
VI. Dental Instruments and Equipment
    A commentator requested that the proposed regulations provide a 
blanket exclusion for dental instruments and equipment. The proposed 
regulations do not adopt this suggestion. There is no statutory basis 
for treating dental devices differently from other taxable medical 
devices. Many dental instruments and equipment items are subject to the 
FDA's listing requirement. Accordingly, those devices that are listed 
as devices with the FDA pursuant to FDA requirements are ``taxable 
medical devices'' under the proposed regulations, unless they fall 
within an exemption under section 4191(b)(2), such as the retail 
exemption.
VII. Manufacturers Excise Tax Rules Generally; Application to Taxable 
Medical Devices
    The ACA added section 4191 to chapter 32; therefore, the existing 
rules governing chapter 32 apply to the medical device excise tax. 
Those rules are longstanding. They are contained in statutory and 
regulatory provisions, and have been developed further through

[[Page 6032]]

revenue rulings, other published guidance, and case law.
    Several commentators requested clarification on the existing 
manufacturers excise tax rules. This section provides an overview of 
the rules and addresses some of the manufacturers excise tax issues 
raised by commentators.

Liability for Tax; Definition of ``Manufacturer'' and ``Importer''

    In general, the manufacturer or importer of a taxable article is 
liable for the tax upon the sale of the article. Under chapter 32, the 
lease or use of a taxable article by the manufacturer is generally 
treated as a sale.
    The term ``manufacturer'' means any person who produces a taxable 
article from scrap, salvage, or junk material, or from new or raw 
material, by processing, manipulating, or changing the form of an 
article or by combining or assembling two or more articles. A 
manufacturer that sells a taxable article in knockdown (that is, 
unassembled) condition is considered the manufacturer and is liable for 
tax on the sale of the article. For chapter 32 purposes, the term 
``manufacturer'' also includes an ``importer.'' The importer of a 
taxable article is any person who brings the article into the United 
States from a source outside the United States, or withdraws an article 
from a customs bonded warehouse for sale or use in the United States. 
See Sec.  48.0-2(a)(4) for the definitions of the terms 
``manufacturer'' and ``importer.''
    If more than one person is involved in the manufacture or 
importation of an item, such as a contract manufacturing arrangement, 
the determination of which person is the manufacturer or the importer 
is based on the facts and circumstances of the arrangement. The 
substance rather than the form of the transaction is determinative. See 
Rev. Rul. 58-134 (1958-1 CB 395), Rev. Rul. 60-42 (1960-1 CB 474), and 
Polaroid v. U.S., 235 F2d. 276 (1st Cir. 1956), for rules regarding the 
determination of which party is the manufacturer for chapter 32 
purposes. See Rev. Rul. 68-197 (1968-1 CB 455) and Rev. Rul. 82-40 
(1982-1 CB 175) for rules regarding the determination of which party is 
the importer for chapter 32 purposes.
    Some commentators suggested that, in determining who is liable for 
the tax, the IRS and the Treasury Department should apply either the 
section 954 contract manufacturing rules or the FDA's registration and 
listing rules under 21 CFR part 807. The proposed regulations do not 
adopt these suggestions. As noted above, the existing chapter 32 
framework includes definitions of ``manufacturer'' and ``importer.'' 
Section 4191 does not provide alternate definitions for those terms. 
Accordingly, the definitions of ``manufacturer'' and ``importer'' under 
chapter 32 apply to section 4191.

Taxable Event

    Generally, the manufacturers excise tax attaches when the title to 
the taxable article passes from the manufacturer to a purchaser. When 
title passes is dependent upon the intention of the parties as gathered 
from the contract of sale and the attendant circumstances. In the case 
of a sale on credit, the tax attaches whether or not the purchase price 
is actually paid. In the case of conditional or installment sales of a 
taxable article, the tax attaches to each partial payment. See Sec.  
48.0-2(b) for the general rules regarding the attachment of tax.
    Section 4218 imposes tax on certain uses of an article by the 
article's manufacturer. The tax attaches at the time the use begins. 
Under Sec.  48.4218-1(b), generally, if the manufacturer of a taxable 
article uses the article for any purpose other than in the manufacture 
of another taxable article, then the manufacturer is liable for tax on 
the article as if the manufacturer had sold it. However, if a 
manufacturer uses a taxable article in the testing of another article 
of its own manufacture, the use of the taxable article by the 
manufacturer is not a taxable use. See Rev. Rul. 76-119 (1976-1 CB 
345). Section 48.4218-5 provides rules on how to calculate the price on 
which the tax is imposed in cases of the taxable use of an article by 
the manufacturer.
    Several commentators requested guidance on whether taxable medical 
devices that are used as demonstration products are subject to the 
medical device excise tax. The provision or use of a taxable medical 
device as a demonstration product may constitute a taxable sale or use, 
depending on the facts and circumstances of the arrangement. For 
example, Rev. Rul. 72-563 (1972-2 CB 568) holds that a manufacturer has 
sold an article when it provides the article ``free of charge'' to 
another person for promotional purposes. In addition, Rev. Rul. 60-290 
(1960-2 CB 331) holds that the use of a taxable article by its 
manufacturer for demonstration purposes is a taxable use for purposes 
of section 4218.

Leases

    Under section 4217(a), the lease of a taxable article by the 
manufacturer is considered a sale. If, at the time of making the lease, 
the manufacturer is in the business of selling the same type and model 
of article in arm's length transactions, the tax attaches to each lease 
payment until the cumulative total of the tax payments equals the total 
tax. If, however, at the time of making the lease, the manufacturer is 
not engaged in the business of selling the same type and model of 
article in arm's length transactions, the tax attaches to each lease 
payment if the article is leased by the manufacturer. See section 
4216(c), section 4217(b), Sec.  48.4216(c)-1, and Sec.  48.4217-2 for 
the rules regarding the attachment and payment of tax in the context of 
leases.
    Under Sec.  48.4217-1, the term ``lease'' means a contract or 
agreement, written or verbal, that gives the lessee an exclusive, 
continuous right to the possession or use of a particular article for a 
period of time. The term includes any renewal or extension of a lease, 
or any subsequent lease of the article.

Sale Price

    The tax imposed under section 4191 is based on the price for which 
a taxable medical device is sold. Under section 48.4216(a)-1(a), the 
price for which a taxable article is sold includes the total 
consideration paid for the device, whether that consideration is in the 
form of money, services, or other things.
    The taxable sale price of a taxable article also includes, among 
other things, any charge for coverings or containers (regardless of 
their nature), and any charge incident to placing the article in a 
condition to be packed and ready for shipment. However, the taxable 
sale price excludes (i) the manufacturers excise tax, whether or not it 
is stated as a separate charge; (ii) the actual cost of transportation, 
delivery, insurance, installation, and other expenses incurred by the 
manufacturer or importer in placing the article in the hands of the 
purchaser pursuant to a bona fide sale (the costs of transportation of 
goods to a warehouse before their bona fide sale are not excludable); 
(iii) discounts, rebates, and similar allowances actually granted to 
the purchaser; (iv) local advertising charges; and (v) charges for 
warranty paid at the purchaser's option. See section 4216(a) and Sec.  
48.4216(a)-1 for the rules regarding the charges included in sale 
price. See sections 4216(a) and (e), Sec.  48.4216(a)-2, Sec.  
48.4216(e)-1, Sec.  48.4216(e)-2, and Sec.  48.4216(e)-3 for the rules 
regarding exclusions from sale price.
    The basic sale price rules assume that the manufacturer sells the 
taxable article in an arm's length transaction (that is, in a 
transaction between two unrelated parties) to a wholesale distributor 
that then sells the taxable article to a retailer

[[Page 6033]]

that resells to consumers. However, if a manufacturer sells a taxable 
article other than to a wholesale distributor or at less than a fair 
market arm's length price, the taxable sale price is determined on a 
constructive sale price rather than the actual sale price. The 
constructive sale price rules are set forth in section 4216(b), in 
Sec.  48.4216(b)-1, Sec.  48.4216(b)-2, Sec.  48.4216(b)-3, and Sec.  
48.4216(b)-4 of the regulations, and in numerous revenue rulings.
    If a purchaser of a taxable article returns the article to the 
manufacturer under a warranty as to its quality or service and the 
manufacturer replaces the article with a new taxable article free of 
charge or at a reduced price, the tax on the new article is computed on 
the actual amount, if any, paid to the manufacturer for the new 
article. See Sec.  48.4216(a)-3(b) for the rules regarding replacements 
under warranty.
    Several commentators requested clarification on how the sale price 
rules work in the context of taxable medical devices, particularly with 
regard to ``bonus'' goods and rebates. These commentators indicated 
that rebates are a common practice in the medical device industry. 
Under existing manufacturers tax rules, if a manufacturer sells taxable 
articles at the regular price and includes some of the same articles as 
a bonus, the tax imposed under section 4191 applies to the total price 
charged for the entire order. With regard to rebates, Sec.  48.4216(a)-
3(c) provides that the tax must be based on the original price of the 
taxable article, unless the rebate has been made prior to the close of 
the period for which the tax is returned. However, if a manufacturer 
subsequently allows a rebate for taxable articles on which tax has been 
paid, the manufacturer is entitled to a credit or refund for that 
portion of the tax that is proportionate to the part of the price that 
is rebated. See Rev. Rul. 68-659 (1968-2 CB 511) and Rev. Rul. 69-73 
(1969-1 CB 284) for applications of the rules regarding bonus goods, 
free goods, and rebates. See Sec.  48.4216(a)-3(c) for rules regarding 
readjustments in sale price for discounts, rebates, and bonuses.

Sales by Persons Other Than the Manufacturer

    If title to, or ownership of, a taxable article passes from the 
manufacturer to a transferee by operation of law (such as through an 
inheritance or as part of the sale of a business) or as a result of any 
transaction not taxable under chapter 32, tax attaches to the sale of 
the article by the transferee to the same extent and in the same manner 
as if the transferee were the manufacturer of the article. See section 
4219 and Sec.  48.4219-1 for the rules regarding transfers of title to 
taxable articles by operation of law.

Tax-Free Sales for Further Manufacture and Export

    Under section 4221(a), the tax imposed by section 4191 does not 
apply to the sale of taxable medical devices for use by the purchaser 
for further manufacture (or for resale by the purchaser to a second 
purchaser for further manufacture) or for export (or for resale for 
export).
    Under Sec.  48.4221-2(b), an article is sold for use in further 
manufacture if the article is sold for use by the purchaser as material 
in the production of, or as a component part of, another article 
taxable under chapter 32. Section 48.4221-2 sets forth rules governing 
tax-free sales of articles to be used or resold for further 
manufacture.
    Under Sec.  48.0-2(a)(10), an article is exported if the article is 
severed from the mass of things belonging within the United States with 
the intention of uniting it with the mass of things belonging within 
some foreign country or within a possession of the United States. 
Section 48.4221-3 sets forth rules regarding tax-free sales of articles 
for export.
    To make a tax-free sale for further manufacture or export, the 
manufacturer, the first purchaser, and in some cases the second 
purchaser must be registered by the IRS. A manufacturer or purchaser 
applies for registration by filing a Form 637, ``Application for 
Registration (For Certain Excise Tax Activities),'' in accordance with 
the instructions on the form. See Sec.  48.4222(a)-1 for the 
registration requirements for tax-free sales. Foreign purchasers of 
articles sold or resold for export are exempt from the registration 
requirement. See Sec.  48.4222(b)-1(b).
    Generally, the purchaser of a taxable article must provide the 
purchaser's registration number to the manufacturer and certify the 
exempt purpose for which the article will be used. The information must 
be in writing and may be noted on the purchase order or other document 
furnished by the purchaser to the manufacturer in connection with the 
sale. See Sec.  48.4221-1(c).
    A credit or refund of the manufacturers excise tax may be available 
if a tax-paid article is exported or used for an exempt purpose, such 
as further manufacture. See 6416 and the corresponding regulations for 
the conditions to allowance of a claim for credit or refund of tax and 
for the documentation required to support a claim for credit or refund.

Procedural Rules

    Part 40 of 26 CFR contains the procedural rules applicable to 
manufacturers excise taxes with regard to returns, deposits, and 
payments.
    Subtitle F of the Code contains the procedural rules applicable to 
``internal revenue taxes'' (including manufacturers excise taxes) with 
regard to assessment, collection, penalties, overpayments, refunds, and 
statutes of limitations.
VIII. Other Issues Raised in Comments on Notice 2010-89

Kits

    Several commentators requested clarification on the taxation of 
kits, often referred to as ``convenience kits.'' In general, a 
convenience kit is two or more different medical devices, or a 
combination of medical devices and other items, packaged together for 
the convenience of the user.
    According to commentators, a number of different types of 
businesses, including device manufacturers and distributors, engage in 
the practice of creating such convenience kits. A manufacturer may 
assemble a kit containing a combination of items that it manufactures 
and items that it purchases from other manufacturers, importers, or 
distributors. A kit may also be assembled by a distributor that 
purchases the items contained in the kit from one or more manufacturers 
or importers. Some kits are designed to be used by medical or health 
care professionals for the performance of a particular medical 
procedure. Other kits are available to the general public at retail, 
such as first aid kits and home pregnancy test kits.
    Several commentators expressed concern over the potential for 
double taxation when one or more taxable medical devices are included 
in a kit. Some commentators suggested that tax should not be imposed on 
both the taxable medical devices used as components of the kit and the 
kit itself. Other commentators recommended imposing tax on the taxable 
medical devices included in the kit, but not on the assembled kit. 
Other commentators suggested that the assembly of a kit does not 
constitute manufacture because the items included in the kit are not 
transformed.
    Under the proposed regulations, a kit is a ``taxable medical 
device'' if the kit is listed as a device with the FDA pursuant to FDA 
requirements. The proposed regulations define ``kit'' as a set of two 
or more articles packaged in a single bag, tray, or box for the 
convenience of the end user.

[[Page 6034]]

    Moreover, the existing manufacturers excise tax rules apply to kits 
in determining who is liable for the tax and which sale is subject to 
tax. Under these existing rules, if a manufacturer sells a taxable 
medical device to a distributor that uses the device to produce a kit 
that is a distinct taxable medical device, the distributor's assembly 
of the kit constitutes further manufacture because the distributor has 
created a new taxable article. The proposed regulations clarify that if 
a kit is a taxable medical device, then the use of other taxable 
medical devices in the assembly of the kit constitutes further 
manufacture by the person who assembles the kit.
    In some circumstances, the manufacturer may make a tax-free sale of 
a taxable medical device to the distributor for use in the production 
or assembly of a kit; tax will attach, however, upon the sale of the 
kit by the distributor. If the manufacturer sells a taxable medical 
device to the distributor for use in the production or assembly of a 
kit at a tax-included price, the distributor may be eligible to claim a 
credit or refund for the overpayment of tax pursuant to section 
6416(b)(3). The rules regarding tax-free sales for further manufacture 
and the credit and refund provisions of section 6416(b)(3) provide a 
mechanism for avoiding double taxation when a taxable medical device is 
included in a kit that is also a taxable medical device. See Sec.  
48.4221-2(b) for the circumstances under which a taxable article is 
sold for use in further manufacture. See section 4221 and Sec.  
48.4221-1, Sec.  48.4221-2, Sec.  48.4222(a)-1, and Sec.  48.4223-1 for 
the rules regarding tax-free sales for further manufacture.
    Generally, under Sec.  48.4216(a)-1(e), if a taxable and nontaxable 
article are sold by the manufacturer as a unit, the tax attaches to 
that portion of the unit that is properly allocable to the taxable 
article. In the case of a kit that is a separate taxable medical 
device, the taxable and nontaxable articles used in the kit's 
production or assembly have lost their identity as separate articles. 
Accordingly, the proposed regulations clarify that the provisions of 
Sec.  48.4216(a)-1(e) do not apply to the sale of kits that are 
separate taxable medical devices. The proposed regulations further 
clarify that under such circumstances, the entire sale price of the kit 
is subject to tax under section 4191.

Associated Devices and Components of Devices

    Several commentators requested clarification on the tax treatment 
of an associated or secondary device that is sold with a primary 
device, such as a monitor that is sold as part of an x-ray system. 
Commentators also requested information on the tax treatment of 
components of a device.
    Under the proposed regulations, the definition of ``taxable medical 
device'' is tied to the FDA's listing requirements for devices. 
Therefore, associated devices or components that are listed as devices 
with the FDA pursuant to FDA requirements are ``taxable medical 
devices'' for purposes of section 4191, unless they fall within an 
exemption under section 4191(b)(2), such as the retail exemption. 
However, if a manufacturer uses an associated device or component in 
creating a new device that must be listed with the FDA, then the rules 
under section 4221 and the corresponding regulations regarding further 
manufacture apply.

Combination Products

    Combination products are therapeutic and diagnostic products that 
combine drugs, devices, and/or biological products. See 21 CFR 3.2(e). 
The IRS and the Treasury Department received a comment regarding 
combination products consisting of a device component and a drug 
component, such as prefilled syringes and inhalers. The commentator 
suggested that the sale of a combination product should not be subject 
to the medical device tax if its drug component is taken into account 
in computing the branded prescription drug (BPD) fee enacted under 
section 9008 of the ACA. The commentator suggested that the combination 
product be subject to either the BPD fee or the medical device tax, but 
not both, based on the FDA's determination of a combination product's 
primary mode of action.
    The ACA enacted both the medical device excise tax and the BPD fee, 
but provided no coordination between the provisions. Under the proposed 
regulations, the definition of ``taxable medical device'' is tied to 
the FDA's listing requirements for devices. In general, the annual BPD 
fee is allocated among covered entities engaged in the business of 
manufacturing or importing branded prescription drugs with aggregate 
branded prescription drug sales of over $5 million to specified 
government programs. See section 9008 of the ACA and 26 CFR part 51. 
For this purpose, each branded prescription drug is identified based on 
its National Drug Code (NDC). Based on consultation with the FDA, the 
IRS and the Treasury Department anticipate that few, if any, 
combination products will be subject to both the medical device excise 
tax and the BPD fee. The IRS and the Treasury Department request 
comments on the extent to which combination products may be subject to 
the medical device excise tax and taken into account in computing the 
BPD fee, and the mechanisms by which any such impact could be avoided.

Contracts for Medical Software and IT Systems

    A commentator requested transition relief for sales contracts for 
medical software and IT systems. According to the commentator, sellers 
of software and IT systems frequently provide medical devices, such as 
medical device data systems, under long-term, multi-year contracts. 
Under these contracts, the manufacturer often delivers software and IT 
systems in stages, with partial payments due at various times during 
the contract term. The commentator requested that contracts, leases, 
and other agreements entered into before January 1, 2013, not be 
subject to the medical device excise tax, even if payments on the 
contract are received after December 31, 2012.
    The proposed regulations apply the existing manufacturers excise 
tax rules for sales contracts. Under section 4216 and Sec.  48.4216(c)-
1(b), generally, when a taxable article is sold under an installment 
payment contract with title reserved in the seller, or under another 
arrangement that creates a security interest and under which payments 
are to be made in installments, tax is computed and paid on each 
payment made by the purchaser. The tax payable with each payment is a 
percentage of each payment based on the rate of the tax, if any, in 
effect on the date the payment is due.
    The proposed regulations do not adopt the request for transition 
relief. The statute was enacted on March 30, 2010, with an effective 
date of January 1, 2013. The statute did not provide an exception or 
special rule for sales pursuant to contracts in existence prior to the 
effective date of the tax. The proposed regulations track the statute.

Availability of IRS Documents

    The IRS notice and revenue rulings cited in this preamble are 
published in the Internal Revenue Cumulative Bulletin and are available 
from the Superintendent of Documents, P.O. Box 979050, St. Louis, MO 
63197-9000.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866, as supplemented by Executive Order

[[Page 6035]]

13563. Therefore, a regulatory assessment is not required. It also has 
been determined that section 553(b) of the Administrative Procedure Act 
(5 U.S.C. chapter 5) does not apply to these regulations, and because 
these regulations do not impose a collection of information on small 
entities, the provisions of the Regulatory Flexibility Act (5 U.S.C. 
chapter 6) do not apply. Pursuant to section 7805(f) of the Code, this 
notice of proposed rulemaking has been submitted to the Chief Counsel 
for Advocacy of the Small Business Administration for comment on its 
impact on small business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written (a signed original and eight 
(8) copies) or electronic comments that are submitted timely to the 
IRS. The IRS and the Treasury Department request comments on the 
clarity of the proposed regulations and how they may be made easier to 
understand. All comments will be available for public inspection and 
copying.
    A public hearing has been scheduled for May 16, 2012, at 10 a.m., 
in the IRS Auditorium, Internal Revenue Service, 1111 Constitution 
Avenue NW., Washington, DC. Due to building security procedures, 
visitors must enter at the Constitution Avenue entrance. In addition, 
all visitors must present photo identification to enter the building. 
Because of access restrictions, visitors will not be admitted beyond 
the immediate entrance area more than 30 minutes before the hearing 
starts. For information about having your name placed on the building 
access list to attend the hearing, see the FOR FURTHER INFORMATION 
CONTACT section of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments at the hearing must submit electronic or 
written comments by May 7, 2012 and an outline of the topics to be 
discussed and the time to be devoted to each topic (signed original and 
eight (8) copies) by May 7, 2012. A period of 10 minutes will be 
allotted to each person for making comments. An agenda showing the 
schedule of speakers will be prepared after the deadline for receiving 
outlines has passed. Copies of the agenda will be available free of 
charge at the hearing.

Drafting Information

    The principal author of these regulations is Natalie Payne, Office 
of the Associate Chief Counsel (Passthroughs and Special Industries). 
However, other personnel from the IRS and the Treasury Department 
participated in their development.

List of Subjects in 26 CFR Part 48

    Excise taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 48 is proposed to be amended as follows:

PART 48--MANUFACTURERS AND RETAILERS EXCISE TAXES

    Paragraph 1. The authority citation for part 48 is amended by 
adding entries in numerical order to read in part as follows:

    Authority:  26 U.S.C. 7805. * * *

    Section 48.4191-1 also issued under 26 U.S.C. 4191. Section 
48.4191-2 also issued under 26 U.S.C. 4191(b)(2).


Sec.  48.0-1  [Amended]

    Par. 2. The fourth sentence of Sec.  48.0-1 is amended by removing 
the language ``and sporting goods'' and adding ``sporting goods, and 
taxable medical devices'' in its place.
    Par. 3. Subpart L, consisting of Sec. Sec.  48.4191-1 and 48.4191-
2, is added to read as follows:

Subpart L--Taxable Medical Devices

Sec.
48.4191-1 Imposition and rate of tax.
48.4191-2 Taxable medical device.


Sec.  48.4191-1  Imposition and rate of tax.

    (a) Imposition of tax. Under section 4191(a), tax is imposed on the 
sale of any taxable medical device by the manufacturer, producer, or 
importer of the device. For the definition of the term taxable medical 
device, see Sec.  48.4191-2.
    (b) Rate of tax. Tax is imposed on the sale of a taxable medical 
device at the rate of 2.3 percent of the price for which the device is 
sold. For the definition of the term price, see section 4216 and 
Sec. Sec.  48.4216(a)-1 through 48.4216(e)-3.
    (c) Liability for tax. The manufacturer, producer, or importer 
making the sale of a taxable medical device is liable for the tax 
imposed by section 4191(a). For rules relating to the determination of 
who the manufacturer, producer, or importer is for purposes of section 
4191, see Sec.  48.0-2(a)(4). For the definition of the term sale, see 
Sec.  48.0-2(a)(5). For rules relating to the lease of an article by 
the manufacturer, producer, or importer, see section 4217 and Sec.  
48.4217-1 through Sec.  48.4217-2. For rules relating to the use of an 
article by the manufacturer, producer, or importer, see section 4218 
and Sec.  48.4218-1 through Sec.  48.4218-5.
    (d) Procedural rules. For the procedural rules relating to section 
4191, see part 40 of this chapter.
    (e) Tax-free sales for further manufacture or export. For rules 
relating to tax-free sales of taxable medical devices for further 
manufacture or export, see section 4221 and Sec.  48.4221-1 through 
Sec.  48.4221-3.
    (f) Effective/applicability date. This section applies to sales of 
taxable medical devices on and after January 1, 2013.


Sec.  48.4191-2  Taxable medical device.

    (a) Taxable medical device--(1) In general. A taxable medical 
device is any device, as defined in section 201(h) of the Federal Food, 
Drug, and Cosmetic Act, that is intended for humans. For purposes of 
this section, a device defined in section 201(h) of the Federal Food, 
Drug, and Cosmetic Act that is intended for humans means a device that 
is listed as a device with the Food and Drug Administration (FDA) under 
section 510(j) of the Federal Food, Drug, and Cosmetic Act and 21 CFR 
part 807, pursuant to FDA requirements.
    (2) Devices that should have been listed with the FDA. If a device 
is not listed as a device with the FDA but the FDA determines that the 
device should have been listed as a device, the device will be deemed 
to be listed as a device with the FDA as of the date the FDA notifies 
the manufacturer or importer in writing that corrective action with 
respect to listing is required.
    (b) Exemptions--(1) In general. The term taxable medical device 
does not include eyeglasses, contact lenses, hearing aids, and any 
other device of a type that is generally purchased by the general 
public at retail for individual use (the retail exception).
    (2) Retail exemption. A device will be considered to be of a type 
generally purchased by the general public at retail for individual use 
if it is regularly available for purchase and use by individual 
consumers who are not medical professionals, and if the design of the 
device demonstrates that it is not primarily intended for use in a 
medical institution or office or by a medical professional. Whether a 
device is of a type described in the preceding sentence is evaluated 
based on all the relevant facts and circumstances. Factors relevant to 
this evaluation are listed in paragraphs (b)(2)(i) and (ii) of this 
section. There may be facts and circumstances that are relevant in 
evaluating whether a device is of a type generally purchased by the 
general public at retail for individual use in

[[Page 6036]]

addition to those described in paragraphs (b)(2)(i) and (ii) of this 
section. The fact that a device is of a type that requires a 
prescription is not a factor in the determination of whether or not the 
device falls under the retail exemption.
    (i) Regularly available for purchase and use by individual 
consumers. The following factors suggest that a device is of a type 
that is regularly available for purchase and use by individual 
consumers who are not medical professionals:
    (A) Consumers who are not medical professionals can purchase the 
device through retail businesses that also sell items other than 
medical devices, such as drug stores, supermarkets, and similar 
vendors.
    (B) Consumers who are not medical professionals can use the device 
safely and effectively for its intended medical purpose with minimal or 
no training from a medical professional.
    (C) The device is classified by the FDA under Subpart D of 21 CFR 
part 890 (Physical Medicine Devices).
    (ii) Primarily for use in a medical institution or office or by a 
medical professional. The following factors suggest that the device is 
designed primarily for use in a medical institution or office or by a 
medical professional:
    (A) The device generally must be implanted, inserted, operated, or 
otherwise administered by a medical professional.
    (B) The cost to acquire, maintain, and/or use the device requires a 
large initial investment and/or ongoing expenditure that is not 
affordable for the average consumer.
    (C) The device is a Class III device under the FDA system of 
classification.
    (D) The device is classified by the FDA under--
    (1) 21 CFR part 862 (Clinical Chemistry and Clinical Toxicology 
Devices), 21 CFR Part 864 (Hematology and Pathology Devices), 21 CFR 
part 866 (Immunology and Microbiology Devices), 21 CFR part 868 
(Anesthesiology Devices), 21 CFR part 870 (Cardiovascular Devices), 21 
CFR part 874 (Ear, Nose, and Throat Devices), 21 CFR part 876 
(Gastroenterology--Urology Devices), 21 CFR Part 878 (General and 
Plastic Surgery Devices), 21 CFR part 882 (Neurological Devices), 21 
CFR part 886 (Ophthalmic Devices), 21 CFR part 888 (Orthopedic 
Devices), or 21 CFR part 892 (Radiology Devices);
    (2) Subpart B, Subpart D, or Subpart E of 21 CFR part 872 (Dental 
Devices);
    (3) Subpart B, Subpart C, Subpart D, Subpart E, or Subpart G of 21 
CFR part 884 (Obstetrical and Gynecological Devices); or
    (4) Subpart B of 21 CFR part 890 (Physical Medicine Devices).
    (E) The device qualifies as durable medical equipment, prosthetics, 
orthotics, and supplies for which payment is available exclusively on a 
rental basis under the Medicare Part B payment rules, and is an ``item 
requiring frequent and substantial servicing'' as defined in 42 CFR 
414.222.
    (iii) Safe Harbor. The following devices will be considered to be 
of a type generally purchased by the general public at retail for 
individual use:
    (A) Devices that are included in the FDA's online IVD Home Use Lab 
Tests (Over-the-Counter Tests) database, available at https://www.accessdata.fda.gov/scripts/cdrh/cfdocs/cfIVD/Search.cfm.
    (B) Devices that are described as ``OTC'' or ``over the counter'' 
devices in the relevant FDA classification regulation heading.
    (C) Devices that are described as ``OTC'' or ``over the counter'' 
devices in the FDA's product code name, the FDA's device classification 
name, or the ``classification name'' field in the FDA's device 
registration and listing database, available at https://www.accessdata.fda.gov/scripts/cdrh/cfdocs/cfrl/rl.cfm.
    (D) Devices that qualify as durable medical equipment, prosthetics, 
orthotics, and supplies, as described in Subpart C of 42 CFR Part 414 
(Parenteral and Enteral Nutrition) and Subpart D of 42 CFR Part 414 
(Durable Medical Equipment and Prosthetic and Orthotic Devices), for 
which payment is available on a purchase basis under Medicare Part B 
payment rules, and are--
    (1) ``Prosthetic and orthotic devices,'' as defined in 42 CFR 
414.202, that do not require implantation or insertion by a medical 
professional;
    (2) ``Parenteral and enteral nutrients, equipment, and supplies'' 
as defined in 42 CFR 411.351 and described in 42 CFR 414.102(b);
    (3) ``Customized items'' as described in 42 CFR 414.224;
    (4) ``Therapeutic shoes,'' as described in 42 CFR 414.228(c); or
    (5) Supplies necessary for the effective use of DME, as described 
in section 110.3 of chapter 15 of the Medicare Benefit Policy Manual 
(Centers for Medicare and Medicaid Studies Publication 100-02).
    (iv) Examples. The following examples illustrate the rules of this 
paragraph (b).

    Example 1.  X manufactures non-sterile absorbent tipped 
applicators. X sells the applicators to distributors Y and Z, which, 
in turn, sell the applicators to medical institutions and offices, 
medical professionals, and to retail establishments. The FDA 
requires manufacturers and importers of non-sterile absorbent tipped 
applicators to list the applicators as a device with the FDA. The 
applicators are classified by the FDA under 21 CFR part 880 (General 
Hospital and Personal Use Devices) and product code KXF. Absorbent 
tipped applicators do not fall within a retail exception safe harbor 
set forth in paragraph (b)(2)(iii) of this section. Therefore, the 
determination of whether the absorbent tipped applicators are 
devices of a type generally purchased by the general public at 
retail for individual use must be made on a facts and circumstances 
basis. Individual consumers who are not medical professionals can 
regularly purchase the absorbent tipped applicators at drug stores, 
supermarkets, cosmetic supply stores and other similar 
establishments, and can use the applicators safely and effectively 
for their intended medical purpose without training from a medical 
professional. Further, the absorbent tipped applicators do not need 
to be implanted, inserted, operated, or otherwise administered by a 
medical professional, do not require a large investment and/or 
ongoing expenditure, are not a Class III device, are not classified 
by the FDA under a category described in paragraph (b)(2)(ii)(D) of 
this section, and are not ``items requiring frequent and substantial 
servicing'' as defined in 42 CFR 414.222. Thus, the applicators have 
multiple factors that tend to show they are regularly available for 
purchase and use by individual consumers and none of the factors 
that tend to show they are designed primarily for use in a medical 
institution or office or by medical professionals. Based on the 
totality of the facts and circumstances, the applicators are devices 
that are of a type that are generally purchased by the general 
public at retail for individual use.
    Example 2.  X manufactures adhesive bandages. X sells the 
adhesive bandages to distributors Y and Z, which, in turn, sell the 
bandages to medical institutions and offices, medical professionals, 
and to retail establishments. The FDA requires manufacturers and 
importers of adhesive bandages to list the bandages as a device with 
the FDA. The adhesive bandages are classified by the FDA under 21 
CFR part 880 (General Hospital and Personal Use Devices) and product 
code KGX. Adhesive bandages do not fall within a retail exception 
safe harbor set forth in paragraph (b)(2)(iii) of this section. 
Therefore, the determination of whether the adhesive bandages are 
devices of a type generally purchased by the general public at 
retail for individual use must be made on a facts and circumstances 
basis. Individual consumers who are not medical professionals can 
regularly purchase the adhesive bandages at drug stores, 
supermarkets and other similar establishments, and can use the 
adhesive bandages safely and eff