Thousands fewer companies than expected pay medical device tax

WASHINGTON – The Internal Revenue Service expected medical device companies to file 9,000 to 15,000 tax returns when it set out to collect a controversial tax on the industry in the first half of 2013.

Only 5,107 returns were filed.

The apparent shortfall in participation could become a problem for the government, which is counting on revenue from the tax to help pay for the Affordable Care Act. The tax brought in $913 million instead of the projected $1.2 billion during the first six months of last year, according to the Treasury Department's inspector general.

Now the government is searching for ways to find devicemakers who should have paid but did not.

The IRS, which declined a Star Tribune request for an interview, has said it "may issue notices to potential nonfilers if there appears to be a benefit to future tax administration."

The tax on sales of certain medical devices is projected to supply $20 billion to $30 billion in funding for the new law over the next decade. It was created with the idea that devicemakers will benefit from the law, because millions of newly insured Americans will seek health care.

There is no clear explanation why receipts are running below ­projections. One health business website suggested that a tax revolt might be underway in an industry that remains bent on killing the tax.

The industry argues that the tax is confusing and out of sync with the realities of the business, partly because a tax on revenue hits even new and growing companies that might not yet be profitable.

The Republican-run House of Representatives last week approved a jobs package that repeals the device tax, but the Democratic-run Senate likely won't follow suit without finding an alternate revenue source.

Even if the House jobs bill makes it through the Senate, the Office of Management and Budget says it will recommend that President Obama veto the legislation rather than sign it into law.

Meanwhile, industry trade groups played down any suggestion of a tax revolt.

"It's a bad idea; it's silly, frankly," said Shaye Mandle, CEO of LifeScience Alley, a trade group that represents hundreds of companies employing 90 percent of the Minnesota's med-tech workers. "I'd be surprised to find many — if any — in our community who haven't paid the tax. We focused our [device tax education] program on smaller and midsize companies and made sure they had access to expertise."

AdvaMed, the devicemakers' principal national trade group, has "no knowledge of a tax revolt," general counsel Chris White said. In an interview, White added that it is not fair to conclude — as the business website Healthcare Dive did — that the shortfall in participation represented a conscious effort to avoid paying.

But AdvaMed officials said they do not have enough data to say whether fewer device companies paid the tax than should have. White said AdvaMed "has had discussions with members" since the Treasury inspector general's report became public in August and is "pressing for guidance" from the IRS about who is supposed to pay.

Among other things, the Treasury inspector general found that because of differences in commercial and government business registration processes, the IRS "still cannot identify the population of medical device manufacturers … required to … pay the medical device tax."

The agency has told Treasury that it now "is considering alternative strategies for identifying noncompliant medical device manufacturers."

Washington and Lee University law Prof. Timothy Jost, an expert on the Affordable Care Act, said the medical device tax, a 2.3 percent tax on some domestic device sales, is "fairly complicated."

Minnesota's Democratic Sens. Amy Klobuchar and Al Franken and Republican Rep. Erik Paulsen all said the confusion points to a need to repeal the tax, not to find companies that are legally obliged to pay it, but are not doing so.

"The inspector general report just confirms that what started off as a bad idea to begin with, has gotten even worse," Paulsen said in a statement to the Star Tribune. That's why the House included repeal of the tax in a jobs bill it approved Thursday, Paulsen added.

Franken and Klobuchar voted for the tax as part of the Affordable Care Act in 2010. Both have said the need for health care reform was too important to vote against because it included the device tax. The senators have since worked to find ways to reduce or repeal the device tax.

"The tax isn't just bad for business — it's being implemented incorrectly by the IRS," Franken said in a statement to the Star Tribune. "I'll keep fighting to repeal the tax to provide needed relief for manufacturers in Minnesota and around the country."

Klobuchar said in a statement that she will "continue to lead and push bipartisan legislation to repeal [the tax] so that our medical device manufacturers can keep innovating and creating jobs in Minnesota."

Van de Water, a former manager in the Congressional Budget Office, also discounts the notion of a tax revolt by the device industry.

"I don't think there is anything scandalous going on," he said.

The report is from the first two quarters of collections. New policies, he explained, are "never complete and perfect in the first six months."