Medical device tax repeal efforts - Medical Devices Group

Media Relations

November 2015

2 min reading time

This year, 280 members of Congress have voted to repeal the medical device tax. In a non-binding vote, 79 Senators have indicated that they want this tax to be repealed.

Congressional action on the repeal of the medical device tax legislation is vital. The U.S. leads the world in the manufacturing of medical technologies. Without the repeal of this tax, we could lose this position. As you know, the tax is based upon the gross sales of a manufacturer, rather than its profits. This has a significant impact on small innovators, and limits R&D and job creation for mature companies.

For this repeal to become law, the House and Senate must agree to find a solution to the device tax and send it to the President’s desk. Next year’s political environment will make change more challenging. Now is a good time to act and let your senator know about the harm.

Ask your Senator to address the harm from the device tax when the “end-of-year legislative package” comes together. Detail how the tax means projects delayed and innovation stalled. Detail job lay-offs in your division. Simply share your experience in simple terms and ask for repeal. Cut and paste this into your browser for an easy one-click trip to your Senator’s comment box.

http://no2point3.com/thank-you

You can also help by forwarding this link to family, peers, colleagues, customers, and employees who care about this industry. Ask them to urge Congress to take steps to repeal the medical device tax this year.

>> This is our best chance to be heard <<

And, if you want to do more, send an extra message to the leaders of these key swing states to thank them for their work to repeal the tax and to urge them to close the deal; Colorado, New York, Illinois, Pennsylvania, Minnesota, Maryland, New Hampshire, and Connecticut.

source: https://www.linkedin.com/groups/78665/78665-6073518647182188545

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Posted by John Eckberg

Asked on November 20, 2015 12:00 am

70 views

	Private answer Gary Baker, Esq., MT If you want less of something, tax it. Medical Devices? Marked as spam Report spam
	Private answer Tom Nonnemaker Sorry, John, but I have to chime in here. While I'm all for lower taxes, in general, I come from auto industry (and now 7 years in med devices). And I was amazed at the profit margins on med devices, it's utterly insane (i.e. high). And I've seen numbers across several companies, and know what the market is paying, on various product lines. Of course those in the med device industry, particularly sales and marketing, justify and rationalize it, since these are life changing, life sustaining products, but still, 50, 60, 70 and even 80% gross margins ?! C'mon. I worked in airbags and seat belts in automotive, we were lucky if we got 10-15%. So on this particular one, I'm not sure a 2.5% med device tax is breaking the bank of the industry. I could go on, about salaries, bonuses, etc, relatively speaking. Not to mention this is one reason healthcare is so expensive, or why we don't drop margins to just slightly lower levels, and open up devices to a larger audience that can afford them. Marked as spam Report spam
	Private answer John Eckberg Hello Gary Baker, Esq., MT What is particularly galling about this tax is that it's a top line tax. So, diversified companies pay a tax on only a percentage of their revenues (medical device sales in the U.S.) while smaller domestic companies with a domestic market are paying it on ALL of their revenues. The major players, too, no longer have much pure R&D because they wait for smaller companies to gain FDA approval and market share and then write a check to buy the company. When a tax like this leads to an erosion of profits that is on average a decline of 30 percent, that means companies that are takeover targets by the big diversified firms (companies that may even have a Big Pharma arm and will get Pharma sales from the ACA), are going to be priced at a 30 percent discount. What's not to like? A tax that devalues takeover targets by 30 percent and is a tax that is applied to just a fraction of your revenues? It's a myth that major companies were lobbying hard to get this repeal. Marked as spam Report spam
	Private answer John Eckberg Hello Tom - No need to apologize as your point is a fair one. Fact is, those devices usually burn through 10s of millions of $ in clinical trials and other development costs before they are brought to market. Keep in mind that The average profit margin for the average medical device company is about six to eight percent. You can't leave SG&A out of the equation. Nor can you leave out the sole truth that this is a global market with manufacturing routinely happening in no-tax zones in Costa Rica and Asia. How can US companies compete? Medical devices as a percentage of the total cost of health care has been about six percent each year for the past two decades. And, finally, the amount of a 2.3 percent tax on sales when dropped down the balance sheet is a 30 percent hit to earnings. That's why four of five Senators and a veto-proof majority in the House want to see this tax repealed. Marked as spam Report spam
	Private answer Michael Lehmicke Tom - I also came from the auto/airbag industry (although it was a lot longer than seven years ago!) I had the same reaction as you did when I started. I think that there is still a lot that the device industry could learn from automotive, but it's really a completely different market. Automotive is highly regulated, but device regulation is off the charts and at the end of the day this costs $$. Added costs like the device tax are killers for smaller companies who are trying to become profitable. The industry is reacting by consolidating. Is this a good thing? Marked as spam Report spam
	Private answer Tom Nonnemaker You guys are spouting numbers that I don't have the energy to research. As far as clinical trial costs, I thought most devices are cleared to market via 510(k)'s, but I do not know the statistics on it. Actually, I just found an article on meddeviceonline that says 10% of devices are approved through PMA, so thus 90% cleared through 510k (or exempt altogether) with no clinical trials required. All I know is I have worked from the biggest med device company there is, to now a company of less than 10 employees, as well as companies in between, and I see strong, strong earnings (after SG&A), high salaries, and ridiculous bonuses and stock options. I realize med devices is a varied market, and I am only seeing a very small slice, so perhaps I have a myopic view, but it's still one person's view nonetheless. Don't get me wrong, I am glad I am here.....getting my little pieces of bread crumbs.....heck, I wish I discovered it 30 years ago !! :-) Marked as spam Report spam
	Private answer Joe McMenamin The tax is indefensible. But then so are the deficits that it was designed to mitigate. And the law giving rise to both. That a business is profitable is no reason to penalize it. Marked as spam Report spam
	Private answer Michael Cambron John, The device tax is projected to contribute $24B over ten years. Does Cook have a proposal for offsetting these revenues if this tax is repealed? Wouldn't a tax on earnings penalize domestic device makers even more because foreign companies could use transfer pricing schemes to recognize and shelter income outside the US? Marked as spam Report spam
	Private answer John Eckberg Hello Michael -Good question and good point. But $24 billion against $1 trillion is a rounding error. Raise tobacco tax by 15 percent and you get to $24 billioN after a decade. Repatriate $200 million in profits now sitting offshore and tax it at 2% each year and you get a meaningful amount. A tax on revenues is dumbest public policy since Diocletes thought capital punishment was smart for violators of his eage and price controls Use savings from no troops in Afghanistan. I could go on but im not tax expert. I do know this tax was a terrible idea and drains the equivalent of a $60,000 a year job from the balance sheets of US companies every 40 minutes sincre Jan. 2013. Thats why veto proof Congress and 46 Dema want it repealed. VC is just about dead im this sector thanks to this tax. Marked as spam Report spam
	Private answer John Eckberg Did I say $200 million? Oops, $200 billion repatriated...or a penny an ounce sugar tax would be helpful Marked as spam Report spam
	Private answer Michael Cambron John, Wouldn't a 2.5% federal sales tax on medical devices achieve the same tax revenue? How would this sort of shift from tax on revenue to tax on sales be perceived? Marked as spam Report spam
	Private answer John Eckberg Hi Michael - It's the same thing. 2.3 percent of revenues = 2.3 percent of sales. That amount when applied to balance sheet equals a 30 percent tax surcharge for average company in this space. Marked as spam Report spam
	Private answer Matthew Martin This tax can be unbearable for small companies. Marked as spam Report spam
	Private answer Michael Cambron John, The reason for my question was because consumers typically pay over 5% state sales tax on goods and services and very few of us see this as a 30+% tax surcharge against the producers. If medical devices faced a 2.3% federal sales tax rather than a 2.3% tax on producers revenue I suspect the tax would be perceived differently. FWIW, most European countries charge 7 - 20% VAT on medical devices and there is not a similar call to repeal. Marked as spam Report spam
	Private answer John Eckberg Michael Cambron I'm no tax expert but it strikes me you are comparing apples to zebras. It's a 30 percent surcharge or worse. Most US companies pay 30 percent corp rate. Assume for sake of argument that it's 28 percent. So the amount of a 2.3 percent tax when compared to previous year's tax will mean an additional 8 percent of taxation. Eight percent more paid is a 30 percent increase. Consumers pay a sales tax. Manufacturers pay the device tax. Ireland has a tax rate of what? 12.5 percent? Costa Rica is zip. In the US, every two weeks, companies must pay this tax. Into Treasury. Not the ACA. To Treasury. Doesn't even fund the ACA. They reason those "very few" us's don't see the 30 percent is because, like former Sen. Baucaus who dreamed this tax up, they probably have never looked at a P&L or had to make a Hobson's choice: where will the money come from to pay this unfair, excessive and harmful tax. Payroll? R&D? Both? Marked as spam Report spam
	Private answer Michael Cambron John, I think you misunderstood my point(s). I understand many elements of the device tax - certainly not all. I'm forced to make make similar funding decisions because it is now a line in our businesses P&L's and we're accountable to achieve our earning targets. These were never lowered due to the device tax. You seem to be advocating to simply repeal the tax on the grounds that it's unfair, excessive and harmful. Not the first tax to fall into these categories and won't be the last... My first post asked about replacing the tax revenue if the device tax is repealed. My second post simply asked if the device tax would be perceived differently - more fair, less harmful - if we enacted a 2.3% federal sales/VAT tax on medical devices in lieu of the current tax on revenues. I asked because in Europe they do something similar by applying a VAT tax to medical devices. Most are taxed at 18-20% but a few are at a lower rate of 7-9%. Marked as spam Report spam
	Private answer Paul M. Stein We've been, what, just about a year into the deep Republican majority Congress, and this is all they have come up with? It looks veto-proof. I hate these non-binding votes. Such a waste of time. If one has the gonads, one should vote for real, and not give everyone false hope with worthless platitudes. Marked as spam Report spam
	Private answer John Eckberg You can have a Value Added Tax of 7 percent in the U.S. On medical device companies. But since the average profit margin for the average medical device company is maybe eight percent (but actually closer to six percent, according the MDMA and other surveys) of revenues that means all the profits of every average company will be lost to a tax. When lawmakers realized that the first incarnation of this tax at 5 percent was going to do just that, they quickly got on their unicycles and back pedaled to 2.3 percent, which alone and by itself, not including existing federal, state and local taxes, it's a 30 percent hit to existing earnings. Marked as spam Report spam
	Private answer John Eckberg Hello Paul - True that but fact is the only thing they could vote on was a non-binder thanks to their leadership's refusal to offer a repeal for floor vote...but honestly I know about as much about DC as any guy you might find walking down the sidewalk. What I do know tho is that for every $60,000 job that has not been created because this tax was a bill that needed to be paid - for every one of those jobs, three other indirect jobs were not created. Innovation that does not happen leaves no footprint. Marked as spam Report spam

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