Excise Tax on Designated Drugs, 31-40 [2024-31462]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 90, Number 1 (Thursday, January 2, 2025)]
[Proposed Rules]
[Pages 31-40]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-31462]


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Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

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Federal Register / Vol. 90, No. 1 / Thursday, January 2, 2025 / 
Proposed Rules

[[Page 31]]



DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 47

[REG-115560-23]
RIN 1545-BQ92


Excise Tax on Designated Drugs

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations relating to the 
excise tax on certain sales of designated drugs by manufacturers, 
producers, and importers during statutorily defined periods. The 
proposed regulations would provide substantive rules that relate to the 
imposition and calculation of the tax. The proposed regulations would 
affect manufacturers, producers, and importers of designated drugs that 
sell such drugs during statutorily defined periods.

DATES: Written or electronic comments and requests for a public hearing 
must be received by March 3, 2025. Requests for a public hearing must 
be submitted as prescribed in the ``Comments and Requests for a Public 
Hearing'' section.

ADDRESSES: Commenters are strongly encouraged to submit public comments 
electronically via the Federal eRulemaking Portal at https://www.regulations.gov (indicate IRS and REG-115560-23) by following the 
online instructions for submitting comments. Once submitted to the 
Federal eRulemaking Portal, comments cannot be edited or withdrawn. The 
Department of the Treasury (Treasury Department) and the IRS will 
publish for public availability any comments submitted to the IRS's 
public docket. Send paper submissions to: CC:PA:01:PR (REG-115560-23), 
Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin 
Station, Washington, DC 20044.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
contact James S. Williford or Jacob W. Peeples at (202) 317-6855 (not a 
toll-free number); concerning the submission of comments and requests 
for a public hearing, contact the Publications and Regulations Section 
of the Office of Associate Chief Counsel (Procedure and Administration) 
by phone at (202) 317-6901 (not a toll-free number) or by email at 
[email protected] (preferred).

SUPPLEMENTARY INFORMATION:

Authority

    This notice of proposed rulemaking contains proposed regulations 
that would amend 26 CFR part 47 (Designated Drugs Excise Tax 
Regulations) related to the excise tax imposed by section 5000D of the 
Internal Revenue Code (Code) on certain sales by manufacturers, 
producers, or importers of designated drugs (section 5000D tax). These 
proposed regulations are issued under the express delegation of 
authority granted to the Secretary of the Treasury or her delegate 
(Secretary) by section 5000D(h), which states: ``The Secretary shall 
prescribe such regulations and other guidance as may be necessary to 
carry out the provisions of this section.'' These proposed regulations 
are also issued under the express delegation of authority provided in 
section 7805(a), which authorizes the Secretary to prescribe all 
needful rules and regulations for the enforcement of the Code, 
including all rules and regulations as may be necessary by reason of 
any alteration of law in relation to internal revenue.

Background

    Sections 1191 through 1198 of the Social Security Act (SSA) (42 
U.S.C. 1320f to 1320f-7), added by sections 11001 and 11002 of Public 
Law 117-169, 136 Stat. 1818 (August 16, 2022), commonly known as the 
Inflation Reduction Act of 2022 (IRA), require the Secretary of Health 
and Human Services (HHS) to establish a Medicare prescription drug 
price negotiation program (Program) to negotiate maximum fair prices 
(MFPs) for certain high expenditure, single-source drugs covered by 
Medicare. Under the Program, the Secretary of HHS must, among other 
things: (1) publish a list of selected drugs in accordance with section 
1192 of the SSA; (2) enter into agreements with willing manufacturers 
of selected drugs in accordance with section 1193 of the SSA; and (3) 
negotiate MFPs for such selected drugs in accordance with section 1194 
of the SSA. Under section 1193(a)(3) of the SSA, manufacturers of 
selected drugs that choose to enter into agreements with the Secretary 
of HHS and that agree to an MFP commit to provide access to selected 
drugs at the negotiated prices to MFP-eligible individuals (as defined 
in section 1191(c)(2) of the SSA), as well as to pharmacies and other 
dispensers, hospitals, physicians, other providers of services, and 
suppliers with respect to MFP-eligible individuals.
    Section 5000D was added to a new chapter 50A of the Code by section 
11003 of the IRA and is effective for sales on and after August 16, 
2022. Section 5000D(a) imposes the section 5000D tax on the sale by the 
manufacturer, producer, or importer of any designated drug during a day 
described in section 5000D(b), referred to herein as a ``statutory 
period,'' with respect to such designated drug. In the case of a sale 
of a designated drug timed for the purpose of avoiding the section 
5000D tax, section 5000D(f)(2) authorizes the Secretary to treat such 
sale as occurring during a statutory period.
    Section 5000D(e)(1) provides that a ``designated drug'' is any 
``negotiation-eligible drug,'' as defined in section 1192(d) of the 
SSA, included on the list published under section 1192(a) of the SSA 
that is manufactured or produced in the United States, as defined in 
section 5000D(e)(2), or entered into the United States for consumption, 
use, or warehousing.
    Under section 5000D(a), the amount of section 5000D tax imposed on 
the sale of a designated drug during a statutory period is the amount 
that causes the ratio of (1) the section 5000D tax, divided by (2) the 
sum of the section 5000D tax and the price for which the designated 
drug was sold, when such ratio is expressed as a percentage, to equal 
the ``applicable percentage'' (as defined in section 5000D(d)):

Applicable Percentage = Tax/(Tax + Price)

    The applicable percentage ranges from 65 percent to 95 percent, 
depending on the number of days a sale

[[Page 32]]

is made after the start of a statutory period. Section 5000D(d).
    As noted previously, section 5000D(h) authorizes the Secretary to 
prescribe such regulations and other guidance as may be necessary to 
carry out the provisions of section 5000D. On August 28, 2023, the 
Treasury Department and the IRS published Notice 2023-52, 2023-35 
I.R.B. 650, announcing the Secretary's intent to issue proposed 
regulations addressing substantive and procedural issues related to 
section 5000D. Notice 2023-52 described certain rules that those 
proposed regulations would include and provided taxpayers with interim 
guidance.
    On October 2, 2023, the Treasury Department and the IRS published a 
notice of proposed rulemaking (REG-115559-23) in the Federal Register 
(88 FR 67690) proposing amendments to the Excise Tax Procedural 
Regulations under 26 CFR part 40 to address tax return filing and other 
procedural requirements related to the section 5000D tax applicable to 
returns filed for calendar quarters beginning on or after October 1, 
2023. On July 5, 2024, the Treasury Department and the IRS published a 
Treasury decision (T.D. 10003) in the Federal Register (89 FR 55507) 
finalizing, with minor modifications, the proposed amendments to 26 CFR 
part 40 and adding part 47 to 26 CFR.
    These proposed regulations would amend the Designated Drugs Excise 
Tax Regulations by providing substantive rules related to the section 
5000D tax, including rules consistent with the substantive rules 
described in Notice 2023-52. Specifically, these proposed regulations 
would provide definitions of certain terms, such as ``manufacturer, 
producer, or importer,'' ``sale,'' and ``price,'' and rules governing 
the imposition and calculation of the section 5000D tax. Concurrently 
with the filing for public inspection of these proposed regulations, 
the Treasury Department and the IRS are releasing Revenue Procedure 
2025-9 to provide a safe harbor that taxpayers may use to identify the 
subset of each sale in units of a designated drug made during a 
statutory period that is subject to the section 5000D tax. After its 
release, Revenue Procedure 2025-9 will be published in the Internal 
Revenue Bulletin (see Sec.  601.601(d) of the Statement of Procedural 
Rules (26 CFR part 601)).

Explanation of Provisions

    These proposed regulations are organized into two sections: 
proposed Sec.  47.5000D-2 (relating to definitions) and proposed Sec.  
47.5000D-3 (relating to the imposition and calculation of the section 
5000D tax).

I. Definitions

    Proposed Sec.  47.5000D-2 would provide definitions necessary to 
clarify the application of section 5000D.
A. Applicable Percentage
    Proposed Sec.  47.5000D-2(b)(1) would incorporate the substance of 
the statutory definition of the term ``applicable percentage'' provided 
in section 5000D(d). Proposed Sec.  47.5000D-2(b)(1) would also clarify 
that, to determine the appropriate applicable percentage for a specific 
applicable sale, days described in section 5000D(b) are cumulative 
regardless of whether such days are consecutive.
B. Applicable Sale
    Proposed Sec.  47.5000D-2(b)(2) would define the term ``applicable 
sale'' to mean the sale transaction that is the subset of each sale in 
units of a designated drug, as defined in section 5000D(e)(1), by the 
manufacturer, producer, or importer that will be dispensed, furnished, 
or administered to MFP-eligible individuals, as defined in section 
1191(c)(2) of the Social Security Act (42 U.S.C. 1320f(c)(2)) and any 
regulations or guidance issued thereunder by the Secretary of HHS. As 
explained in part II.A of this Explanation of Provisions, the proposed 
definition of ``applicable sale'' would reflect the scope of the 
section 5000D tax provided by the statutory context of its enactment.
C. Manufacturer, Producer, or Importer
    The section 5000D tax is imposed on the sale of a designated drug 
by the ``manufacturer, producer, or importer'' of that designated drug. 
While the statute does not define ``manufacturer, producer, or 
importer,'' the language of section 5000D(a) makes clear that these 
terms are not limited to the persons directly responsible for the 
conduct that gives rise to statutory periods. Proposed Sec.  47.5000D-
2(b)(3)(i) would define the term ``manufacturer, producer, or 
importer'' to mean the person that makes the first sale (the definition 
of ``sale'' is explained in part I.F of this Explanation of Provisions) 
of units of a designated drug or, in the case of imports, the person 
that makes the first sale of such units after they are entered into the 
United States for consumption, use, or warehousing. See section 
5000D(e)(1). Under this proposed definition, the section 5000D tax 
would typically be imposed on persons colloquially considered drug 
makers (that is, persons that physically or chemically create units of 
a drug).
    The proposed definition of ``manufacturer, producer, or importer'' 
would also clarify that a sale of units of a designated drug would be 
the ``first sale'' if that sale precedes in time all other sales of 
those units. The ``first sale'' of any units of a designated drug would 
not, therefore, generally be the sale of such units to an MFP-eligible 
individual or other sales of such units that typically occur ``down'' 
or ``later'' in the supply chain that begins with the maker of a drug 
and ends with its ultimate user. For example, sales of units of a 
designated drug by a wholesaler, relabeler, repackager,\1\ retail 
pharmacy, healthcare provider, or other person that typically sells 
drugs or biological products ``down'' or ``later'' in the supply chain, 
would not, under most circumstances, be the first sale of those units 
and, consequently, such person would not be the manufacturer, producer, 
or importer with respect to such units for purposes of the section 
5000D tax. That designation would, under most circumstances, fall to a 
person ``up'' or ``earlier'' in the supply chain. If, however, a 
wholesaler, relabeler, repackager, retail pharmacy, healthcare 
provider, or other person were to make the first sale of units of a 
designated drug after entry into the United States for consumption, 
use, or warehousing, such person would be the manufacturer, producer, 
or importer with respect to such units for purposes of the section 
5000D tax.
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    \1\ The Treasury Department and the IRS understand that, for 
purposes of the SSA and regulations and guidance issued thereunder, 
relabelers and repackagers are considered ``manufacturers,'' and 
drugs, once relabeled or repackaged, new drugs. That regulatory 
regime is, however, nondeterminative with regard to the section 
5000D tax.
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    The first sale concept is consistent with almost a century of case 
law regarding the imposition of excise taxes on first or initial sales 
by manufacturers, producers, or importers. See, e.g., Indian Motorcycle 
Co. v. United States, 283 U.S. 570, 574 (1931) (``[T]he requirement 
that the tax be paid by `the manufacturer, producer, or importer' [. . 
.] is intended to be no more than a comprehensive and convenient mode 
of reaching all first or initial sales[.]''); Smith v. United States, 
319 F.2d 776, 778-79 (5th Cir. 1963) (excise tax is designed ``to 
impose a tax on the initial sale made in the United States by a 
manufacturer, producer, or importer''); Texas Truck Parts and Tire v. 
United States, 118 F.4th 687, 697 (5th Cir. 2024) (``Our reading of the 
relevant law comports with this principle, providing

[[Page 33]]

that Texas Truck is liable for the excise tax upon the initial sale in 
the United States.'').
    Proposed Sec.  47.5000D-2(b)(3)(ii) would clarify that the proposed 
definition of ``manufacturer, producer, or importer'' would apply 
independently of whether the sale in question occurs during a statutory 
period, meaning that the person that makes the first sale of a unit of 
a designated drug is the manufacturer, producer, or importer of that 
unit, to the exclusion of others in the supply chain, even if such sale 
is not taxable. See the example provided in proposed Sec.  47.5000D-
2(c)(2).
D. Sale Prior to Publication of Selected Drug List
    Under proposed Sec.  47.5000D-2(b)(3)(iii), a person that would 
meet the definition of ``manufacturer, producer, or importer'' but for 
the timing of the publication of the list of selected drugs published 
under section 1192(a) of the SSA would be considered a manufacturer, 
producer, or importer for purposes of the section 5000D tax. As 
illustrated in the example provided in proposed Sec.  47.5000D-2(c)(3), 
this proposed rule would ensure that subsequent sales by other persons, 
``down'' or ``later'' in the supply chain, that take possession of a 
drug or biological product prior to the publication of that list are 
not subject to taxation if such drugs or biological products become 
designated drugs while in such persons' possession.
E. Price
    Under section 5000D(a)(2), the section 5000D tax is calculated, in 
part, by reference to the price of the designated drug sold during a 
statutory period; however, section 5000D does not define the term 
``price'' for this purpose. Proposed Sec.  47.5000D-2(b)(4) would 
define ``price'' broadly,\2\ capturing all amounts (other than the 
amount of the section 5000D tax) required by a manufacturer, producer, 
or importer to be paid as consideration for, or otherwise as a 
condition of, a sale of the subset of units of such sale that comprise 
an applicable sale. Because, as explained in part II.A of this 
Explanation of Provisions, section 5000D(a) imposes a tax only on sales 
of designated drugs dispensed, furnished, or administered to MFP-
eligible individuals, the price charged by the manufacturer, producer, 
or importer for such units would generally be the relevant price for 
purposes of determining the section 5000D tax. For purposes of this 
proposed definition, it would be immaterial that any amount 
constituting the price may be paid to a person other than the 
manufacturer, producer, or importer, or that it may be separately 
billed to the buyer as an amount earmarked for expenses incurred or to 
be incurred on such buyer's behalf.
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    \2\ ``Price,'' as defined in proposed Sec.  47.5000D-2(b)(4), 
does not apply beyond section 5000D.
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    Rebates and other price adjustments are common in the prescription 
drug supply chain. To account for such adjustments, proposed Sec.  
47.5000D-2(b)(4)(ii) would allow a manufacturer, producer, or importer 
to adjust the amount charged in an applicable sale, for purposes of 
calculating the section 5000D tax, to reflect bona fide discounts, 
rebates, or allowances that are connected to that applicable sale and 
either paid to the buyer in such applicable sale, credited to the 
account of such buyer, or reimbursed to a third party for the benefit 
of such buyer by such manufacturer, producer, or importer. Under the 
proposed rule, a bona fide discount, rebate, or allowance would be made 
when the amount actually paid by, or charged against the account of, 
the buyer in the applicable sale is reduced by subsequent transactions 
between the parties. For example, a wholesaler chargeback paid by a 
manufacturer, producer, or importer to reflect a discounted sale of 
drugs ``downstream'' by the wholesaler would constitute a bona fide 
discount, rebate, or allowance, provided that such chargeback is 
connected to the applicable sale giving rise to the section 5000D tax 
liability (and not any other sale, ongoing sales generally, or any 
other goods or services) and reduces the amount paid by, or charged 
against the account of, the buyer in that applicable sale (and not any 
other sale).
    Proposed Sec.  47.5000D-2(b)(4)(iii) would provide that the amount 
of any bona fide discount, rebate, or allowance described in Sec.  
47.5000D-2(b)(4)(ii) that may be used to reduce the amount charged for 
an applicable sale is limited to the percentage of a sale that 
constitutes such applicable sale. See Identification of Applicable 
Sales in part II.C of this Explanation of Provisions.
    Proposed Sec.  47.5000D-2(b)(4)(ii) and (iii) are intended to 
reflect the amount charged for the applicable sale in light of industry 
practices related to bona fide discounts, rebates, and allowances. The 
Treasury Department and the IRS request comments on other types of 
discounts, rebates, or allowances, including discounts, rebates, and 
allowances occurring at other points in the supply chain, that should 
be considered or treated as price adjustments under proposed Sec.  
47.5000D-2(b)(4)(ii) and (iii).
    Proposed Sec.  47.5000D-2(b)(4)(iv) would provide the method for 
allocating the amount described in proposed Sec.  47.5000D-
2(b)(4)(iii)--that is, the amount by which any bona fide discount, 
rebate, or allowance reduces the amount charged in an applicable sale--
between tax and price. This proposed rule would treat an applicable 
sale, including the extent to which the amount charged includes price 
and tax, as provided in Sec.  47.5000D-3(b)(2)(i), as though such 
applicable sale was initially made at the adjusted price.
    Proposed Sec.  47.5000D-2(c)(6) would provide an example of a price 
adjustment under proposed Sec.  47.5000D-2(b)(4)(ii) and (iii) and the 
allocation required under proposed Sec.  47.5000D-2(b)(4)(iv).
F. Sale
    Proposed Sec.  47.5000D-2(b)(5) would define ``sale'' as any 
agreement by which substantial incidents of ownership in units of a 
designated drug serve, in whole or in part, as consideration.

II. Imposition and Calculation of Tax

    Proposed Sec.  47.5000D-3 would provide rules relating to the 
imposition and calculation of the section 5000D tax.
A. Imposition of Tax
    Proposed Sec.  47.5000D-3(a)(1) would provide that section 5000D 
imposes a tax on an applicable sale made by a manufacturer, producer, 
or importer during a day described in section 5000D(b). As described in 
part I.B of this Explanation of Provisions, the term ``applicable 
sale'' refers to the subset of a sale in units of a designated drug 
that will be dispensed, furnished, or administered to MFP-eligible 
individuals, as defined in section 1191(c)(2) of the SSA and any 
regulations or guidance issued thereunder by the Secretary of HHS.
    The scope of sales potentially subject to the section 5000D tax, as 
expressed in this proposed rule, reflects the broader statutory context 
of the Program, which defines both the substance and operation of the 
tax. Among other things, the objects of the tax, ``designated 
drug[s],'' are defined by section 5000D(e)(1), in part, by reference to 
the ``negotiation-eligible drugs,'' as defined in section 1192(d) of 
the SSA, included on the list published under section 1192(a) of the 
SSA. Such negotiation-eligible drugs are identified, under the Program, 
on the basis of

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historical Medicare expenditures (see section 1192(b) and (c) of the 
SSA) and for the sole purpose of affecting prices paid by Medicare 
beneficiaries (see section 1192(a)(3) of the SSA). Similarly, the 
statutory periods during which the section 5000D tax may arise are 
defined by reference to milestones of the Program. See section 
5000D(b). And, more generally, the applicability of the section 5000D 
tax is expressly linked to whether the manufacturer of a designated 
drug has a statutorily defined agreement with Medicare in place. See 
section 5000D(c). Because the section 5000D tax depends substantively 
on, and operates only in relation to, the Program, the scope of the 
Program--which provides access to selected drugs at the negotiated 
prices only to Medicare beneficiaries and their pharmacies, mail order 
services, and other dispensers, as well as hospitals, physicians, and 
other providers of services and suppliers--is reflected in the scope of 
the tax.
B. Attachment of and Person Liable for the Tax
    Proposed Sec.  47.5000D-3(a)(2) would clarify that the section 
5000D tax attaches when a manufacturer, producer, or importer of a 
designated drug makes an applicable sale of such designated drug during 
a statutory period. Under proposed Sec.  47.5000D-3(a)(3), the 
manufacturer, producer, or importer of a designated drug that sells 
units of such designated drug during a statutory period would be liable 
for any section 5000D tax arising from that sale.
C. Identification of Applicable Sales
    Consistent with Notice 2023-52, proposed Sec.  47.5000D-3(a)(4) 
would require a manufacturer, producer, or importer to employ a 
reasonable method to identify any applicable sales it made during a 
statutory period. The proposed rule would require a manufacturer, 
producer, or importer's method of identifying such applicable sales to 
be based on recent transactions reflected in books, records, or other 
information pertaining to the drug or biological product selected under 
the Program. For this purpose, recent transactions would include those 
occurring no more than 24 months before the first day of the calendar 
quarter in which the applicable sales occurred.
    For statutory periods that begin prior to March 1, 2026, proposed 
Sec.  47.5000D-3(a)(4)(iii) would allow a manufacturer, producer, or 
importer to disregard sales of drugs or biological products furnished 
or administered by a hospital, physician, or other provider of services 
or supplier, where the recipient is an individual enrolled under 
Medicare part B of title XVIII of the SSA, including an individual 
enrolled in a Medicare Advantage plan under part C of title XVIII of 
the SSA, if payment may be made under part B for such units, consistent 
with section 1192(b)(2) of the SSA, which provides for the temporary 
exclusion of expenditures under part B of title XVIII of the SSA for 
purposes of ranking negotiation-eligible drugs.
    The Treasury Department and the IRS are aware that identifying 
applicable sales made during a statutory period may be difficult or 
burdensome. To help a manufacturer, producer, or importer comply with 
this requirement, the Treasury Department and the IRS are proposing a 
safe harbor for identifying such applicable sales. Specifically, 
proposed Sec.  47.5000D-3(a)(4)(iv) would provide that a manufacturer, 
producer, or importer may satisfy the requirement to identify 
applicable sales by using the safe harbor percentage provided in 
guidance published in the Internal Revenue Bulletin. A manufacturer, 
producer, or importer that uses the safe harbor provided in proposed 
Sec.  47.5000D-3(a)(4)(iv) to identify the applicable sales made during 
a statutory period would be deemed to have complied with the 
requirements of proposed Sec.  47.5000D-3(a)(4)(i) through (iii), as 
applicable.
    To ensure consistent reporting and reduce the potential for abuse, 
proposed Sec.  47.5000D-3(a)(4)(iv)(C) and (D) would require the safe 
harbor to be applied uniformly to all sales of a designated drug by a 
manufacturer, producer, or importer subject to the section 5000D tax 
during a calendar quarter and, unless the safe harbor percentage is 
changed by subsequent guidance, for a period of three consecutive 
calendar quarters thereafter.
    Under proposed Sec.  47.5000D-3(a)(4)(iv)(E), any update of to the 
safe harbor percentage described in proposed Sec.  47.5000D-
3(a)(4)(iv)(A) would use a calculation methodology similar to that 
described in proposed Sec.  47.5000D-3(a)(4)(iv)(A), use the most 
recent analysis that the IRS has received from CMS of data available to 
CMS, and relieve a manufacturer, producer, or importer from an existing 
obligation under proposed Sec.  47.5000D-3(a)(4)(iv)(C) to use the safe 
harbor described in proposed Sec.  47.5000D-3(a)(4)(iv) as of the 
effective date of such updated safe harbor percentage. If a 
manufacturer, producer, or importer continues to use the safe harbor 
described in proposed Sec.  47.5000D-3(a)(4)(iv) after the safe harbor 
percentage is updated, such manufacturer, producer, or importer would 
be required to use the updated safe harbor percentage on and after the 
effective date of such updated safe harbor percentage and for the 
remainder of any period required by proposed Sec.  47.5000D-
3(a)(4)(iv)(C).
    Finally, proposed Sec.  47.5000D-3(a)(4)(v) would provide that once 
a section 5000D tax liability is reported to the IRS for a particular 
calendar quarter, the manufacturer, producer, or importer liable for 
the section 5000D tax may not later recalculate its section 5000D tax 
liability for that quarter using a different method to identify its 
applicable sales. However, the correction of a mathematical or clerical 
error or the use of corrected data from the same historical period used 
to identify the applicable sales originally would not alone constitute 
the recalculation of a section 5000D tax liability using a different 
method.
D. Calculation of Tax
    Proposed Sec.  47.5000D-3(b)(1) would provide the tax rate by 
restating the statutory formula for calculating the section 5000D tax. 
As described in the Background section of this preamble, section 
5000D(a) provides a formula for calculating the section 5000D tax by 
which an applicable percentage, ranging from 65 to 95 percent, equals 
the tax divided by the sum of the tax and the price. The applicable 
percentage varies depending on the number of days that have passed 
since a statutory period began.
E. Effect of Invoicing Tax on Tax Calculation
    Consistent with Notice 2023-52, proposed Sec.  47.5000D-3(b)(2)(i) 
would provide that if a manufacturer, producer, or importer makes no 
separate charge on its invoice or similar document with respect to a 
sale, the amount charged is presumed to include the proper amount of 
the section 5000D tax. The price would, under those circumstances, 
exclude the portion of the amount charged that is allocable to the 
section 5000D tax; no section 5000D tax would be calculated on the 
amount allocated to the section 5000D tax. see the example provided in 
proposed Sec.  47.5000D-3(b)(3).
    If a manufacturer, producer, or importer includes the section 5000D 
tax as a separate line item on an invoice or similar document, proposed 
Sec.  47.5000D-3(b)(2)(ii) would provide that the amount of section 
5000D tax so charged is not included in the price; thus, no section 
5000D tax would be due on the amount of section 5000D tax so charged.

[[Page 35]]

    Although this rule is modeled on a similar rule found in Sec.  
48.4216(a)-2(a) of the Manufacturers and Retailers Excise Tax 
Regulations, neither that rule nor any other found in 26 CFR part 48 
would apply or provide any interpretive guidance with respect to any 
rule proposed or issued under section 5000D because the part 48 
regulations apply to taxes imposed by chapters 31 and 32 of the Code, 
and section 5000D is in chapter 50A.
F. Anti-Abuse Rule
    Pursuant to the authority provided in section 5000D(h), proposed 
Sec.  47.5000D-3(c) would provide an anti-abuse rule under which a 
transaction or series of transactions, including transactions made 
other than at arm's length, may be adjusted, recharacterized, or 
otherwise recast by the IRS in circumstances in which the parties 
engaged in such transaction or series of transactions with a principal 
purpose of avoiding the section 5000D tax or substantially reducing the 
purported price on which the section 5000D tax is calculated.

Proposed Applicability Date

    These regulations are proposed to apply to sales of designated 
drugs on and after the date the Treasury decision adopting these rules 
as final regulations is published in the Federal Register.

Effect on Other Documents

    Taxpayers may continue to rely on sections 3.01 and 3.02 of Notice 
2023-52 until these proposed regulations are finalized.

Special Analyses

I. Regulatory Planning and Review--Economic Analysis

    Pursuant to the Memorandum of Agreement, Review of Treasury 
Regulations under Executive Order 12866 (June 9, 2023), tax regulatory 
actions issued by the IRS are not subject to the requirements of 
section 6 of Executive Order 12866, as amended. Therefore, a regulatory 
impact assessment is not required.

II. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) generally 
requires that a Federal agency obtain the approval of the Office of 
Management and Budget (OMB) before collecting information from the 
public, whether such collection of information is mandatory, voluntary, 
or required to obtain or retain a benefit. An agency may not conduct or 
sponsor, and a person is not required to respond to, a collection of 
information unless the collection of information displays a valid 
control number.
    Any collection burden associated with rules described in these 
proposed regulations is previously accounted for in OMB Control Number 
1545-0023, which covers Form 720, Quarterly Federal Excise Tax Return. 
The recordkeeping requirements associated with Form 720 have already 
been approved by OMB. Moreover, a taxpayer may avail itself of the safe 
harbor proposed in these proposed regulations without filing any formal 
election or statement or performing any other affirmative act. These 
proposed regulations do not, therefore, alter previously accounted for 
information collection requirements or create new collection 
requirements. For PRA burden estimated for procedural rules related to 
the section 5000D tax, see the preamble to TD 10003.

III. Regulatory Flexibility Act

    Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6) 
(RFA), the Secretary of the Treasury hereby certifies that these 
proposed regulations will not have a significant economic impact on a 
substantial number of small entities. This certification is based on 
the fact that the section 5000D tax is imposed only when certain drug 
manufacturers, producers, or importers sell certain designated drugs 
during periods described in section 5000D(b). The periods described in 
section 5000D(b) relate to milestones in the Program, the scope of 
which is limited to a subset of drugs with high Medicare expenditures. 
To the extent any section 5000D tax liability arises, taxpayers will be 
few and unlikely to meet the relevant definitions of small entities 
under the RFA and regulations thereunder. These proposed regulations 
will not, therefore, create additional obligations for, or have a 
significant economic impact on, a substantial number of small entities, 
and analysis under the RFA is not required. Notwithstanding this 
certification, the Treasury Department and the IRS welcome comments on 
the impact of these proposed regulations on small entities.

IV. Section 7805(f)

    Pursuant to section 7805(f) of the Code, this notice of proposed 
rulemaking has been submitted to the Chief Counsel for the Office of 
Advocacy of the Small Business Administration for comment on its impact 
on small business.

V. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 requires 
that agencies assess anticipated costs and benefits and take certain 
other actions before issuing a final rule that includes any Federal 
mandate that may result in expenditures in any one year by a State, 
local, or Tribal government, in the aggregate, or by the private 
sector, of $100 million in 1995 dollars, updated annually for 
inflation. These proposed regulations do not include any Federal 
mandate that may result in expenditures by State, local, or Tribal 
governments, or by the private sector, in excess of that threshold.

VI. Executive Order 13132: Federalism

    Executive Order 13132 (Federalism) prohibits an agency from 
publishing any rule that has federalism implications if the rule either 
imposes substantial, direct compliance costs on State and local 
governments, and is not required by statute, or preempts State law, 
unless the agency meets the consultation and funding requirements of 
section 6 of the Executive order. These proposed regulations do not 
have federalism implications, do not impose substantial direct 
compliance costs on State and local governments, and do not preempt 
State law within the meaning of the Executive order.

Comments and Requests for a Public Hearing

    Before these proposed amendments to the regulations are adopted as 
final regulations, consideration will be given to comments that are 
submitted timely to the IRS as prescribed in the preamble under the 
ADDRESSES section. The Treasury Department and the IRS request comments 
on all aspects of the proposed regulations. All commenters are strongly 
encouraged to submit comments electronically. The Treasury Department 
and the IRS will publish for public availability any comment submitted 
electronically or on paper to its public docket on https://www.regulations.gov.
    A public hearing will be scheduled if requested in writing by any 
person who timely submits electronic or written comments. Requests for 
a public hearing are also encouraged to be made electronically. If a 
public hearing is scheduled, notice of the date and time for the public 
hearing will be published in the Federal Register.

Statement of Availability of IRS Documents

    The IRS notice cited in this preamble is published in the Internal 
Revenue Bulletin and is available from the Superintendent of Documents, 
U.S. Government Publishing Office,

[[Page 36]]

Washington, DC 20402, or by visiting the IRS website at https://www.irs.gov.

Drafting Information

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

List of Subjects in 26 CFR Part 47

    Excise taxes.

Proposed Amendments to the Regulations

    Accordingly, the Treasury Department and the IRS propose to amend 
26 CFR part 47 as follows:

PART 47--DESIGNATED DRUGS EXCISE TAX REGULATIONS

0
Paragraph 1. The authority citation for part 47 is amended by adding 
entries in numerical order for Sec. Sec.  47.5000D-2 and 47.5000D-3 to 
read in part as follows:

    Authority:  26 U.S.C. 7805.
* * * * *
    Section 47.5000D-2 also issued under 26 U.S.C. 5000D(h). Section 
47.5000D-3 also issued under 26 U.S.C. 5000D(h).
0
Par. 2. Section 47.5000D-0 is amended by:
0
a. Removing the entry ``Sec. Sec.  47.5000D-2--47.5000D-4 [Reserved]''.
0
b. Adding entries for Sec. Sec.  47.5000D-2 and 47.5000D-3 and the 
entry ``Sec.  47.5000D-4 [Reserved]'' in numerical order.
    The additions read as follows:


Sec.  47.5000D-0  Table of contents.

* * * * *
Sec.  47.5000D-2 Definitions.

    (a) Overview.
    (b) Definitions.
    (1) Applicable percentage.
    (2) Applicable sale.
    (3) Manufacturer, producer, or importer.
    (i) In general.
    (ii) Sale made other than on a day described in section 
5000D(b).
    (iii) Sale made prior to publication of the list of selected 
drugs under section 1192(a) of the Social Security Act.
    (4) Price.
    (i) In general.
    (ii) Adjustment to amount charged.
    (iii) Amount of adjustment.
    (iv) Allocation between price and tax.
    (5) Sale.
    (c) Examples.
    (1) Example 1: First sale of units of a designated drug.
    (i) Facts.
    (ii) Analysis.
    (2) Example 2: Manufacturer sale prior to day described in 
section 5000D(b).
    (i) Facts.
    (ii) Analysis.
    (3) Example 3: Sale made prior to publication of the list of 
selected drugs.
    (i) Facts.
    (ii) Analysis.
    (4) Example 4: Subsequent sale to relabeler.
    (i) Facts.
    (ii) Analysis.
    (5) Example 5: Importation.
    (i) Facts.
    (ii) Analysis.
    (6) Example 6: Chargeback reimbursement and allocation.
    (i) Facts.
    (A) Manufacturer sale.
    (B) Wholesaler sale and chargeback.
    (ii) Analysis.
    (A) Bona fide discount, rebate, or allowance.
    (B) Allocation of chargeback reimbursement between tax and 
price.
    (d) Severability.
    (e) Applicability date.

    Sec.  47.5000D-3 Imposition of section 5000D tax.

    (a) Imposition of tax.
    (1) In general.
    (2) Attachment of tax.
    (3) Person liable for tax.
    (4) Identification of applicable sales.
    (i) In general.
    (ii) Books, records, and other information.
    (iii) Disregard of Medicare part B sales permissible prior to 
March 1, 2026.
    (iv) Safe harbor.
    (A) In general.
    (B) No election required.
    (C) Must use safe harbor for four consecutive calendar quarters.
    (D) Uniform application required.
    (E) Updates to safe harbor percentage.
    (v) Recalculation of liability not permitted.
    (b) Calculation of tax.
    (1) In general.
    (2) Charging tax as line item; effect on price.
    (i) Presumption if no separate charge for tax is made.
    (ii) Separately charged tax not part of price.
    (3) Example.
    (i) Facts.
    (ii) Analysis.
    (A) In general.
    (B) Step 1.
    (C) Step 2.
    (D) Step 3.
    (E) Step 4.
    (c) Anti-abuse rule.
    (d) Severability.
    (e) Applicability date.
Sec.  47.5000D-4 [Reserved]

0
Par. 3. Sections 47.5000D-2 and 47.5000D-3 are added to read as 
follows:


Sec.  47.5000D-2  Definitions.

    (a) Overview. This section provides definitions for purposes of 
section 5000D of the Internal Revenue Code (Code) and the Designated 
Drugs Excise Tax Regulations in this part.
    (b) Definitions--(1) Applicable percentage. The term applicable 
percentage has the meaning provided in section 5000D(d). To determine 
the applicable percentage with respect to a specific applicable sale, 
days described in section 5000D(b) are cumulative regardless of whether 
such days are consecutive.
    (2) Applicable sale. The term applicable sale means the sale 
transaction that is the subset of each sale in units of a designated 
drug, as defined in section 5000D(e)(1), made by the manufacturer, 
producer, or importer that will be dispensed, furnished, or 
administered to maximum fair price-eligible individuals, as defined in 
section 1191(c)(2) of the Social Security Act (42 U.S.C. 1320f(c)(2)) 
and any regulations (in title 42 of the Code of Federal Regulations) or 
guidance issued thereunder by the Secretary of Health and Human 
Services. See Sec.  47.5000D-3(a)(4) for methods of identifying 
applicable sales.
    (3) Manufacturer, producer, or importer--(i) In general. With 
respect to any units of a designated drug, the term manufacturer, 
producer, or importer means the person that makes the first sale of 
such units or, in the case of imports, the person that makes the first 
sale of such units after such units are entered into the United States 
for consumption, use, or warehousing. A sale is the first sale if it 
precedes in time any other sale of the same units. Each unit of a 
designated drug, therefore, has only one manufacturer, producer, or 
importer.
    (ii) Sale made other than on a day described in section 5000D(b). A 
person that meets the criteria of paragraph (b)(3)(i) of this section 
is a manufacturer, producer, or importer regardless of whether the sale 
described in paragraph (b)(3)(i) is made during a day described in 
section 5000D(b). See Example 2 provided in paragraph (c)(2) of this 
section.
    (iii) Sale made prior to publication of the list of selected drugs 
under section 1192(a) of the Social Security Act. With respect to 
particular units of a drug or biological product, if a person would be 
described in paragraph (b)(3)(i) of this section but for the timing of 
the publication of the list of selected drugs under section 1192(a) of 
the Social Security Act, such person will nevertheless be considered 
the manufacturer, producer, or importer of such units. Subsequent 
sellers of such units would not, therefore, be the manufacturer, 
producer, or importer of such units. See Example 3 provided in 
paragraph (c)(3) of this section.
    (4) Price--(i) In general. Except as provided in Sec.  47.5000D-
3(b)(2)(i) and (ii), the term price means, with respect to an 
applicable sale of units of a designated drug sold during a day

[[Page 37]]

described in section 5000D(b), any amount (whether in cash or in kind) 
that is required by a manufacturer, producer, or importer to be paid as 
a condition of such applicable sale. It is immaterial, for purposes of 
this paragraph (b)(4), that such amount may be paid to a person other 
than the manufacturer, producer, or importer, or that it may be 
separately billed to the buyer as an amount earmarked for expenses 
incurred or to be incurred on such buyer's behalf.
    (ii) Adjustment to amount charged. A manufacturer, producer, or 
importer may adjust the amount charged in an applicable sale to reflect 
a bona fide discount, rebate, or allowance that is connected to such 
applicable sale and paid or credited by such manufacturer, producer, or 
importer against such amount. The basic consideration in determining, 
for purposes of this section, whether a bona fide discount, rebate, or 
allowance has been made is whether the amount actually paid by, or 
charged against the account of, the buyer in the applicable sale has 
been reduced. Such amount will be considered reduced by reason of a 
bona fide discount, rebate, or allowance only if the manufacturer, 
producer, or importer repays part or all of the amount charged to the 
buyer, credits the buyer's account, or reimburses a third party for 
part or all of the amount charged for the benefit of the buyer.
    (iii) Amount of adjustment. The amount of any bona fide discount, 
rebate, or allowance described in paragraph (b)(4)(ii) of this section 
that may be used to reduce the amount charged for an applicable sale is 
limited by the percentage of a sale that constitutes such applicable 
sale.
    (iv) Allocation between price and tax. The amount described in 
paragraph (b)(4)(iii) of this section must be allocated between price 
and the tax imposed by section 5000D(a) (section 5000D tax) in the same 
manner as the amount charged for the applicable sale absent such 
adjustment. See Example 6 provided in paragraph (c)(6) of this section.
    (5) Sale. The term sale means any agreement by which substantial 
incidents of ownership in units of a designated drug serve as 
consideration.
    (c) Examples. The following examples illustrate the application of 
the definitions provided in this section and the rules provided in 
Sec.  47.5000D-3. For purposes of this paragraph (c), all sales are 
applicable sales (see paragraph (b)(2) of this section and Sec.  
47.5000D-3(a)(4)) and, unless otherwise provided, all designated drugs 
are manufactured or produced in the United States.
    (1) Example 1: First sale of units of a designated drug--(i) Facts. 
Manufacturer D is a manufacturer of Designated Drug Y. During the 
fourth quarter of 2024, Manufacturer D sells 1,000,000 units of 
Designated Drug Y to Wholesaler E, a drug wholesaler. With respect to 
Designated Drug Y, every day of the fourth quarter of 2024 is a day 
described in section 5000D(b).
    (ii) Analysis. Manufacturer D incurs liability under section 
5000D(a) and Sec.  47.5000D-3(a) for its sale of the 1,000,000 units of 
Designated Drug Y to Wholesaler E. No other person incurs liability 
under section 5000D(a) and Sec.  47.5000D-3(a) with respect to those 
units. Under paragraph (b)(3)(i) of this section, Manufacturer D's sale 
of the 1,000,000 units of Designated Drug Y to Wholesaler E is the 
first sale of such units of the designated drug. As a result, 
Manufacturer D is the manufacturer, producer, or importer with respect 
to such units of Designated Drug Y. Because Manufacturer D's sale of 
the 1,000,000 units of Designated Drug Y is made during a day described 
in section 5000D(b), that sale is subject to taxation under section 
5000D(a) and Sec.  47.5000D-3(a). No tax liability under section 5000D 
arises with respect to any subsequent sale of the 1,000,000 units of 
Designated Drug Y because no subsequent sale would qualify as the first 
sale of such units; therefore, no other person is the manufacturer, 
producer, or importer with respect to such units.
    (2) Example 2: Manufacturer sale prior to day described in section 
5000D(b)--(i) Facts. The facts are the same as those described in 
paragraph (c)(1)(i) of this section (Example 1), except that 
Manufacturer D's sale of the 1,000,000 units of Designated Drug Y is 
made after it is included on the list published under section 1192(a) 
of the Social Security Act, but before a day described in section 
5000D(b).
    (ii) Analysis. Manufacturer D incurs no liability under section 
5000D(a) and Sec.  47.5000D-3(a) for its sale of the 1,000,000 units of 
Designated Drug Y to Wholesaler E. In addition, no other person incurs 
liability under section 5000D(a) and Sec.  47.5000D-3(a) with respect 
to those units. Under paragraph (b)(3)(i) of this section, Manufacturer 
D's sale of the 1,000,000 units of Designated Drug Y to Wholesaler E is 
the first sale of such units of the designated drug. As a result, 
Manufacturer D is the manufacturer, producer, or importer with respect 
to such units of Designated Drug Y. No tax liability under section 
5000D, however, arises in relation to that sale because it was not made 
during a day described in section 5000D(b). Moreover, no tax liability 
under section 5000D arises with respect to any subsequent sale of the 
1,000,000 units of Designated Drug Y because no subsequent sale would 
qualify as the first sale of such units, and therefore no other person 
is the manufacturer, producer, or importer with respect to such units.
    (3) Example 3: Sale made prior to publication of the list of 
selected drugs--(i) Facts. Manufacturer B, a drug manufacturer, sells 
1,000,000 units of Drug J to Wholesaler V, a drug wholesaler. After 
such sale and before Wholesaler V resells those 1,000,000 units, Drug J 
is identified as a selected drug on the list published under section 
1192(a) of the Social Security Act, making it a designated drug 
(Designated Drug J), as defined in section 5000D(e)(1). Wholesaler V 
subsequently sells the 1,000,000 units of Designated Drug J to 
pharmacies; these sales occur on a day described in section 5000D(b).
    (ii) Analysis. Manufacturer B incurs no liability under section 
5000D(a) and Sec.  47.5000D-3(a) for its sale of the 1,000,000 units of 
Designated Drug J to Wholesaler V. In addition, no other person incurs 
liability under section 5000D(a) and Sec.  47.5000D-3(a) with respect 
to those units. At the time of Manufacturer B's sale to Wholesaler V, 
Drug J had not been included on the list of selected drugs published 
under section 1192(a) of the Social Security Act and, therefore, was 
not a designated drug as defined in section 5000D(e)(1). Under 
paragraph (b)(3)(iii) of this section, Manufacturer B would 
nevertheless be considered the manufacturer, producer, or importer with 
respect to the sale to Wholesaler V. No tax liability under section 
5000D(a) and Sec.  47.5000D-3(a) would arise with respect to 
Manufacturer B's sale because that sale did not occur (and could not 
have occurred) during a day described in section 5000D(b). Moreover, no 
tax liability under section 5000D would arise with respect to 
Wholesaler V's sale of the 1,000,000 units of Designated Drug J, even 
though such sale occurred during a day described in section 5000D(b), 
because, as a function of the rule provided in paragraph (b)(3)(iii) of 
this section, Wholesaler V did not make the first sale of such units. 
Wholesaler V is not, therefore, the manufacturer, producer, or importer 
under paragraph (b)(3)(i) of this section with respect to such units of 
Designated Drug J, and is not subject to tax under section 5000D and 
Sec.  47.5000D-3(a).
    (4) Example 4: Subsequent sale to relabeler--(i) Facts. The facts 
are the same as those described in paragraph (c)(1)(i) of this section 
(Example 1),

[[Page 38]]

except that during the fourth quarter of 2024, Wholesaler E sells the 
same 1,000,000 units to Relabeler F, a drug relabeler. Relabeler F then 
relabels the 1,000,000 units of Designated Drug Y and, before the end 
of the fourth quarter of 2024, sells all 1,000,000 units to pharmacies.
    (ii) Analysis. Manufacturer D incurs liability under section 
5000D(a) and Sec.  47.5000D-3(a) for its sale of the 1,000,000 units of 
Designated Drug Y to Wholesaler E. No other person incurs liability 
under section 5000D(a) and Sec.  47.5000D-3(a) with respect to those 
units. Relabeler F's relabeling of the 1,000,000 units of Designated 
Drug Y does not affect this outcome, regardless of whether such 
relabeling involves affixing a new National Drug Code or Codes to the 
units of Designated Drug Y prior to those units of Designated Drug Y 
being furnished to a maximum fair price-eligible individual. Relabeler 
F's sales of the 1,000,000 units of Designated Drug Y to pharmacies are 
the third sales of such units, not the first. As a result, Manufacturer 
D is the manufacturer, producer, or importer with respect to such units 
under paragraph (b)(3)(i) of this section, not Relabeler F. Thus, 
Relabeler F's sale of such units is not subject to taxation under 
section 5000D(a) and Sec.  47.5000D-3(a), but Manufacturer D's sale of 
such units to Wholesaler E is subject to the tax.
    (5) Example 5: Importation--(i) Facts. With respect to Designated 
Drug Y, every day of the fourth quarter of 2024 is a day described in 
section 5000D(b). Manufacturer R is a manufacturer of Drug Y. During 
the fourth quarter of 2024, Manufacturer R sells 1,000,000 units of 
Drug Y to Wholesaler Q, a drug wholesaler, before such units are 
entered into the United States for consumption, use, or warehousing. 
Before the end of the fourth quarter of 2024, Wholesaler Q enters the 
1,000,000 units of Drug Y into the United States for consumption, use 
or warehousing, rendering them units of a designated drug (Designated 
Drug Y), as defined in section 5000D(e)(1), and sells all 1,000,000 
units to pharmacies.
    (ii) Analysis. Wholesaler Q incurs liability under section 5000D(a) 
and Sec.  47.5000D-3(a) for its sale of the 1,000,000 units of 
Designated Drug Y to the pharmacies. No other person incurs liability 
under section 5000D(a) and Sec.  47.5000D-3(a) with respect to those 
units. Under paragraph (b)(3)(i) of this section, Manufacturer R is not 
the manufacturer, producer, or importer with respect to the 1,000,000 
units of Drug Y that Manufacturer R sold to Wholesaler Q during the 
fourth quarter of 2024 because Manufacturer R's sale occurred before 
such units were entered into the United States for consumption, use, or 
warehousing. As a result, Manufacturer R's sale to Wholesaler Q is not 
subject to taxation under section 5000D(a) and Sec.  47.5000D-3(a). 
Wholesaler Q's sales of the same 1,000,000 units of Designated Drug Y 
to pharmacies in the fourth quarter of 2024, however, are subject to 
taxation under section 5000D(a) and Sec.  47.5000D-3(a). Wholesaler Q's 
sales to such pharmacies are the first sales of those units after they 
were entered into the United States for consumption, use, or 
warehousing. As a result, Wholesaler Q is the manufacturer, producer, 
or importer under paragraph (b)(3)(i) of this section with respect to 
such units of Designated Drug Y, and its sales thereof are subject to 
taxation under section 5000D(a) and Sec.  47.5000D-3(a).
    (6) Example 6: Chargeback reimbursement and allocation--(i) Facts--
(A) Manufacturer sale. Manufacturer P is the manufacturer, producer, or 
importer of 100,000 units of Designated Drug Q. During a day described 
in section 5000D(b), and no more than 90 days since the first such day, 
Manufacturer P sells 100,000 units of Designated Drug Q to Wholesaler V 
at $1.00 per unit ($100,000). Manufacturer P reasonably determines that 
40 percent of the sale is the applicable sale. See paragraph (b)(2) of 
this section and Sec.  47.5000D-3(a)(4). Manufacturer P does not 
separately invoice any section 5000D tax to Wholesaler V. See Sec.  
47.5000D-3(b)(2)(i). Manufacturer P's sale to Wholesaler V would, 
therefore, have resulted in a section 5000D tax liability of $26,000 
($26,000 / $40,000 = 65 percent).
    (B) Wholesaler sale and chargeback. Pharmacy G purchases the 
100,000 units of Designated Drug Q from Wholesaler V at a discount. 
Wholesaler V issues a $30,000 chargeback invoice to Manufacturer P 
related to the amount of the discount. Manufacturer P pays Wholesaler V 
the full amount of the chargeback.
    (ii) Analysis--(A) Bona fide discount, rebate, or allowance. 
Manufacturer P's reimbursement for Wholesaler V's chargeback is a bona 
fide discount, rebate, or allowance against the price of the applicable 
sale because it is for the sale of the 100,000 units (and no other 
sale, goods, or services). Of the 100,000 units sold, 40 percent, or 
40,000, constitute the applicable sale and are therefore subject to the 
section 5000D tax. Manufacturer P's reimbursement to Wholesaler V 
reduces the amount charged in that applicable sale, such that the 
amount charged per unit is $0.70 and the total amount charged in the 
applicable sale is $28,000 ($0.70 per unit x 40,000 units). The 
reimbursement proportionally attributable to the applicable sale is, 
therefore, $12,000 ($0.30 per unit x 40,000 units).
    (B) Allocation of chargeback reimbursement between tax and price. 
(1) The amount by which the chargeback reimbursement reduces the price 
and tax, for purposes of section 5000D, is determined by allocating the 
reimbursement according to the same price-tax ratio that initially 
applied to the applicable sale:
Equation 1 to Paragraph (c)(6)(ii)(B)(1)
[GRAPHIC] [TIFF OMITTED] TP02JA25.000

    (2) The quotient of the tax-inclusive price adjustment ($12,000) 
and the tax-inclusive sale price (the $40,000 amount charged) 
multiplied by the initial tax-exclusive sale price of the applicable 
sale (($1.00-$0.65) x $40,000, or $14,000) results in a price 
adjustment of $4,200, meaning that, of the $12,000 reimbursement, 
$7,800 is allocated to tax and $4,200 is allocated to price. Thus, 
Manufacturer P's liability under section 5000D for the applicable sale 
is $18,200 (the $26,000 tax liability arising from the sale as 
originally made less the $7,800 of the reimbursement allocated to the 
tax). In other words, Manufacturer P's liability under section 5000D 
after the price adjustment is identical to the liability that 
Manufacturer P would have incurred under section 5000D had Manufacturer 
P originally sold the 100,000 units of Designated Drug Q to Wholesaler 
V at the adjusted amount ($18,200 / $28,000 = 65 percent).
    (d) Severability. The provisions of this section are separate and 
severable from one another and any other section in this part. If any 
provision of this section is stayed or determined to be invalid, it is 
the intention of the Department of the Treasury and the Internal 
Revenue Service that the remaining provisions

[[Page 39]]

and sections of this part shall continue in effect.
    (e) Applicability date. This section applies to sales of designated 
drugs on or after [date of publication of final regulations in the 
Federal Register].


Sec.  47.5000D-3  Imposition of section 5000D tax.

    (a) Imposition of tax--(1) In general. Section 5000D(a) of the 
Internal Revenue Code (Code) imposes a tax (section 5000D tax) on 
applicable sales made by a manufacturer, producer, or importer during a 
day described in section 5000D(b).
    (2) Attachment of tax. The section 5000D tax attaches when a 
manufacturer, producer, or importer of units of a designated drug makes 
an applicable sale of such units during a day described in section 
5000D(b).
    (3) Person liable for tax. A manufacturer, producer, or importer of 
units of a designated drug that makes an applicable sale of such units 
during a day described in section 5000D(b) is liable for the section 
5000D tax imposed on such sale.
    (4) Identification of applicable sales--(i) In general. A 
manufacturer, producer, or importer of units of a designated drug must 
employ a reasonable method to identify the applicable sales of such 
units, if any, that it makes during a day described in section 
5000D(b). A manufacturer, producer, or importer's method of identifying 
such applicable sales must be based on its books, records, or other 
information. For example, a subsidiary may rely on historical sales 
data collected and analyzed by its parent, provided that such data and 
analysis meet the requirements of paragraph (a)(4)(ii) of this section 
and are otherwise reasonable.
    (ii) Books, records, and other information. Books, records, and 
other information used to identify applicable sales must reflect 
transactions pertaining to the drug or biological product selected for 
inclusion on the list of selected drugs published under section 1192(a) 
of the Social Security Act that predate the first day of the calendar 
quarter in which the applicable sales occurred by no more than 24 
months.
    (iii) Disregard of Medicare part B sales permissible prior to March 
1, 2026. For periods described in section 5000D(b) that begin prior to 
March 1, 2026, a manufacturer, producer, or importer's method may 
disregard sales of drugs or biological products furnished or 
administered by a hospital, physician, or other provider of services or 
supplier, the recipient of which is an individual enrolled under 
Medicare part B of title XVIII of the Social Security Act, including an 
individual enrolled in a Medicare Advantage plan under part C of such 
title, if payment may be made under part B for such units. See section 
1192(b)(2) of the Social Security Act.
    (iv) Safe harbor--(A) In general. A manufacturer, producer, or 
importer may satisfy the requirements of this paragraph (a)(4) by using 
the safe harbor percentage provided in guidance published in the 
Internal Revenue Bulletin (see Sec.  601.601 of this chapter), as 
applicable to the relevant calendar quarter, to identify its applicable 
sales. Such safe harbor percentage is a rounded average of the 
percentage of all sales that are applicable sales of a sample of 
qualifying single-source drugs (as defined in section 1192(e) of the 
Social Security Act) that is large enough to yield meaningful results, 
as determined by the analysis of certain manufacturer- and patient-
level data conducted by the Centers for Medicare and Medicaid Services 
(CMS).
    (B) No election required. No election is required for a 
manufacturer, producer, or importer to use the safe harbor described in 
paragraph (a)(4)(iv)(A) of this section.
    (C) Must use safe harbor for four consecutive calendar quarters. 
Except as provided in paragraph (a)(4)(iv)(E) of this section, a 
manufacturer, producer, or importer that uses the safe harbor described 
in paragraph (a)(4)(iv)(A) of this section must continue to use the 
safe harbor for a period of four consecutive calendar quarters, 
including the calendar quarter in which the safe harbor is first used.
    (D) Uniform application required. A manufacturer, producer, or 
importer that uses the safe harbor described in paragraph (a)(4)(iv)(A) 
of this section for sales made during any day described in section 
5000D(b) falling within a calendar quarter must apply the safe harbor 
to all sales by such manufacturer, producer, or importer during all 
days described in section 5000D(b) falling within that calendar 
quarter. Thus, if a manufacturer, producer, or importer uses the safe 
harbor described in paragraph (a)(4)(iii)(A) of this section with 
respect to one sale of a designated drug during a day described in 
section 5000D(b), it must use the safe harbor for all sales of that 
designated drug and all sales of any other designated drug that occur 
in that calendar quarter during a day described in section 5000D(b).
    (E) Updates to safe harbor percentage. Any update to the safe 
harbor percentage described in paragraph (a)(4)(iv)(A) of this section 
will use a calculation methodology similar to that described in 
paragraph (a)(4)(iv)(A) of this section, use the most recent analysis 
that the Internal Revenue Service (IRS) has received from CMS of data 
available to CMS, and relieve a manufacturer, producer, or importer 
from an existing obligation under paragraph (a)(4)(iv)(C) of this 
section to use the safe harbor described in this paragraph (a)(4)(iv) 
as of the effective date of such updated safe harbor percentage. If a 
manufacturer, producer, or importer continues to use the safe harbor 
described in this paragraph (a)(4)(iv) after the safe harbor percentage 
is updated, such manufacturer, producer, or importer must use the 
updated safe harbor percentage on and after the effective date of such 
updated safe harbor percentage and for the remainder of any period 
required by paragraph (a)(4)(iv)(C) of this section.
    (v) Recalculation of liability not permitted. Once a section 5000D 
tax liability is reported to the IRS for a particular calendar quarter, 
the manufacturer, producer, or importer liable for the section 5000D 
tax may not later recalculate its section 5000D tax liability for that 
quarter using a different method to identify its applicable sales. The 
correction of a mathematical or clerical error, or the use of corrected 
data from the same historical period used to originally identify the 
applicable sales, does not alone constitute the recalculation of a 
section 5000D tax liability using a different method.
    (b) Calculation of tax--(1) In general. (i) For any applicable sale 
of units of a designated drug during a day described in section 
5000D(b), the amount of the section 5000D tax is the amount such that 
the applicable percentage is equal to the ratio of such tax divided by 
the sum of such tax and the price of such applicable sale expressed as 
a percentage. This ratio may be expressed as follows:
Equation 1 to Paragraph (b)(1)(i)
Applicable Percentage = Tax/(Tax + Price)

    (ii) See paragraph (b)(2) of this section for rules relating to the 
effect of certain invoicing methods on the determination of price.
    (2) Charging tax as line item; effect on price--(i) Presumption if 
no separate charge for tax is made. If no separate charge is made for 
the section 5000D tax on the invoice or similar document pertaining to 
an applicable sale, the amount charged for units of the designated drug 
is presumed to include both the proper amount of section 5000D tax and 
the price. In such cases, the price excludes the portion of the

[[Page 40]]

amount charged allocable to the section 5000D tax so charged, and no 
section 5000D tax is due on the amount of section 5000D tax so charged.
    (ii) Separately charged tax not part of price. If the section 5000D 
tax is separately charged on the invoice or similar document pertaining 
to an applicable sale, the section 5000D tax so charged is not included 
in the price. Thus, if a manufacturer, producer, or importer calculates 
the section 5000D tax and charges it as a separate item on the invoice 
or similar document pertaining to an applicable sale, the amount of 
section 5000D tax so charged is not included in the price for purposes 
of calculating the section 5000D tax under paragraph (b)(1) of this 
section, and no section 5000D tax is due on the amount of section 5000D 
tax so charged.
    (3) Example--(i) Facts. Manufacturer X is the manufacturer, 
producer, or importer of 409,000 units of Designated Drug H (that is, 
it makes the first sale of those units). During a day described in 
section 5000D(b), and no more than 90 days since the first such day, 
Manufacturer X sells 100,000 units of Designated Drug H to Wholesaler A 
at $1.00 per unit, 300,000 units of Designated Drug H to Wholesaler B 
at $0.90 per unit, and 9,000 units of Designated Drug H to Wholesaler C 
at $1.12 per unit. Manufacturer X has reasonably determined that the 
applicable sale consists of 35 percent of the units of Designated Drug 
H in each such sale. Manufacturer X has not separately invoiced any 
section 5000D tax to Wholesalers A, B, or C.
    (ii) Analysis--(A) In general. To calculate its section 5000D tax 
liability with respect to its sales of Designated Drug H to Wholesalers 
A, B, and C, Manufacturer X must aggregate its section 5000D tax 
liability for the applicable sales by applying the presumption 
described in paragraph (b)(2)(i) of this section.
    (B) Step 1. Manufacturer X begins by determining the applicable 
sales within each of the sales described in paragraph (b)(3)(i) of this 
section. The applicable sale within the sale to Wholesaler A is 35,000 
units (100,000 units x 0.35). The applicable sale within the sale to 
Wholesaler B is 105,000 units (300,000 units x 0.35). And the 
applicable sale within the sale to Wholesaler C is 3,150 units (9,000 
units x 0.35).
    (C) Step 2. Next, Manufacturer X determines the amount charged for 
the applicable sales. The amount charged for the applicable sale to 
Wholesaler A is $35,000.00 (35,000 units x $1.00 per unit). The amount 
charged for the applicable sale to Wholesaler B is $94,500.00 (105,000 
units x $0.90 per unit). And the amount charged for the applicable sale 
to Wholesaler C is $3,528.00 (3,150 units x $1.12 per unit).
    (D) Step 3. Manufacturer X then determines the correct tax and 
price with respect to each amount charged for the applicable sales 
under the presumption provided in paragraph (b)(3)(i) of this section. 
Of the $35,000.00 Manufacturer X charged for the applicable sale to 
Wholesaler A (35,000 of 100,000 units), Manufacturer X allocates 
$22,750.00 to the section 5000D tax and $12,250.00 to the price 
($22,750.00/($22,750.00 + $12,250.00) = 0.65). Of the $94,500.00 
Manufacturer X charged for the applicable sale to Wholesaler B (105,000 
of 300,000 units), Manufacturer X allocates $61,425.00 to the section 
5000D tax and $33,075.00 to the price ($61,425.00/($61,425.00 + 
$33,075.00) = 0.65). And of the $3,528.00 Manufacturer X charged for 
the applicable sale to Wholesaler C (3,150 of 9,000 units), 
Manufacturer X allocates $2,293.20 to the section 5000D tax and 
$1,234.80 to the price ($2,293.20/($2,293.20 + $1,234.80) = 0.65).
    (E) Step 4. Manufacturer X's section 5000D tax liability for the 
applicable sales is $86,468.20 ($22,750.00 + $61,425.00 + $2,293.20 = 
$86,468.20). This amount, when divided by the sum of the tax and the 
price of the applicable sales, equals 65 percent ($86,468.20/
($86,468.20 + $46,559.80) = 0.65).
    (c) Anti-abuse rule. If a manufacturer, producer, or importer 
engages in any transaction (or series of transactions) with a principal 
purpose of avoiding the section 5000D tax or substantially reducing the 
purported price at which a sale is made, including transactions made 
other than at arm's length, such transaction (or series of 
transactions) may be adjusted, recharacterized, or otherwise recast by 
the Secretary for purposes of determining the correct section 5000D tax 
liability. Whether a transaction (or series of transactions) has a 
principal purpose of avoiding the section 5000D tax or substantially 
reducing the purported price of an applicable sale is determined based 
on all of the facts and circumstances, including, but not limited to, a 
comparison of the purported business purpose for, and the section 5000D 
tax consequences of, the transaction (or series of transactions).
    (d) Severability. The provisions of this section are separate and 
severable from one another and any other section of this part. If any 
provision of this section is stayed or determined to be invalid, it is 
the intention of the Department of the Treasury and Internal Revenue 
Service that the remaining provisions and sections of this part shall 
continue in effect.
    (e) Applicability date. This section applies to sales of designated 
drugs on or after [date of publication of final regulations in the 
Federal Register].

Douglas W. O'Donnell,
Deputy Commissioner.
[FR Doc. 2024-31462 Filed 12-31-24; 8:45 am]
BILLING CODE 4830-01-P