Don't allow medical device taxation on smartphones, tablets and apps

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ObamaCare imposes a 2.3 percent tax on the gross sales of American medical device manufacturers, even if the manufacturer doesn’t make a profit in a given year. Most device companies are small businesses with fewer than 50 employees and operate at very thin margins. The companies are forced with a decision to either lay off workers, cut research and development budgets, or pass the cost on to the customer. This will only make health care more expensive – not less expensive. However, from the innovator’s perspective a new problem arises – will app developers, or smartphone and tablet manufactures be subject to FDA oversight?
 
The start-up tech sector opens up new small business development opportunities and is vital to the American economy. Most apps are developed by one or two people. It seems strange that the FDA would have oversight where apps are concerned. Do we really want their next required hire to be an FDA specialist attorney or DC lobbyist?
 
The Internal Revenue Service deferred their taxing authority to however the FDA defines medical devices:
 
Generally, under the final regulations, a “taxable medical device” is a device that is listed as a device with the FDA under section 510(j) of the Federal Food, Drug and Cosmetic Act, and 21 CFR part 807, pursuant to FDA requirements. 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.

The new tax does not apply to sales of eyeglasses, contact lenses, and hearing aids. The new tax also does not apply to the sale of any other devices that are of a type generally purchased by the general public at retail for individual use (the retail exemption).  
 
By the IRS deferring authority in this matter to the FDA, the FDA inadvertently becomes a tax-collecting arm of the government rather than an agency focused on science and consumer welfare.
 
As the Energy & Commerce Committee letter notes, the FDA’s July 2011 mobile medical applications announcement calls for oversight on apps used as accessories to medical devices already under FDA regulation, or that transform mobile communications technology via attachments, sensors, or other devices. The FDA claims that a smartphone or tablet manufacturer would not be taxed simply because a medical app could run on the device. However, if manufactures advertise their platform as capable of running medical applications they could be subject to medical device taxation.
 
Intellectually one would think that since the IRS says “The new tax also does not apply to the sale of any other devices that are of a type generally purchased by the general public at retail for individual use (the retail exemption)” then apps would not be taxed. However, the FDA made it clear that they need to make a determination, so developers beware.
 
The FDA is typically concerned with science and consumer welfare, as it should be. If a smartphone app were to link to a pacemaker via a Bluetooth connection, it is entirely feasible that the FDA would want to regulate this device for safety. An app such as this could at the very least be considered a medical device accessory and at the most a medical device in and of itself.
 
If the FDA determines it is a medical device, how does the retail exemption apply? Would it be exempt from the tax, or will it be considered an integral part of the pacemaker and therefore taxed?
 
Among a number of other questions, the Energy & Commerce Committee rightfully asks the FCC: How many apps have sought approval as medical devices? What was the processing time? How many apps have been subject to FDA oversight after market introduction?  Were apps changed or discontinued after oversight?
 
There are many innovations in the tech sector allowing individuals to take more control their health. Traditional methods of heart rate monitoring, blood sugar/glucose measurements, temperature assessments, and weight control are changing. Making these burgeoning industries not only subject to new tax authority, but also subject to FDA oversight will stifle innovation.
 
It is commendable that Congress sent a letter asking about the FDA’s intentions, but Congress should take this a step further and preempt the discussion by passing a law forbidding the taxing of apps, smartphones, or tablets. The fact that this is an open question is why bills should be read before passage.

McAuliffe is executive director of Digital Liberty, a sister organization of Americans for Tax Reform.