When Ben Gardier, CFO of National Laser Institute, a Scottsdale, Ariz.-based company offering medical aesthetics training, thinks of 2014’s challenges, he says one new tax has been hurting his business: the medical-device tax. That’s because the tax, which went into effect in January, is not only applied to pacemakers and defibrillators, it’s also added to obscure items such as wrinkle-cream applicators.
A component of the Affordable Care Act, the medical-device tax calls for a 2.3% excise tax on devices that are listed with the Food and Drug Administration and used in the direct treatment, diagnosis or monitoring of a patient. One consequence of the tax is that it also affects products not traditionally thought of as medical devices due to the way they are classified.
Botox, for example, is delivered to suppliers in a vial, so the muscle relaxer is exempt from the tax. But tissue filler Juvederm is prepackaged with a syringe, so it is considered a medical device.
As one of the largest purchasers of Botox and Juvederm, National Laser Institute gets smacked broadside by the tax. “We are getting the medical-device tax on every box of Juvederm that we sell,” says Gardier, who notes that the lasers his firm also purchases can cost more than $1,000 each. “You’re faced with the dilemma about whether to pass this on to your clients.”
Just operating in some states as opposed to others can add to those problems. Arizona, for one, has a separate tax, called a privilege tax, on these products, which has caused Gardier’s firm to move some distribution operations to Texas, which does not have the tax. National Laser Institute’s vendor decided that it would no longer absorb the tax for the firm, though it had done so previously.
As with a lot of other newly installed or pending legislation, larger firms may be able to swallow such taxes more easily. Smaller firms, for example, that sell products over the Internet are also expecting to get walloped if the Marketplace Fairness Act, which is pending review by the House Judiciary Committee, gets passed. The law calls for retailers with annual online revenues over $1 million to collect state tax on remote sales.
“If the Internet sales tax goes through, we hear from clients telling us all the time that it could potentially threaten their entire business. These are online sellers. This is not a super-high-margin business,” says Mark Faggiano, CEO and founder of TaxJar, an automated tax solution provider for small businesses. “We have heard multiple people say they would probably consider going out of business.”
Compliance is a big reason for those pessimistic comments. “Whether you have nexus [commonly referred to as physical presence in a state] or not, or inventory there or not, all that stuff goes completely out the window. Now you are burdened essentially with 45 states and [Washington,] D.C. [the areas with sales tax],” says Faggiano.