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Compliance In Focus
Posted by John Lehmann on Fri, Feb 3, 2012

Will 2.3% Sales Tax Push Med-tech Companies Overseas?

There has been much talk recently about the proposed changes to the regulatory and healthcare systems in the U.S. for the medical device industry. A recent MD+DI article by Nick Woods, director of Woods Medical Media, describes these proposed changes and how they might impact our industry. Woods points out that while President Obama’s PPACA document contains 2074 pages filled with words, for most, one number holds the most weight. The 2.3% sales tax on medical devices expected to come into effect a year from now. The industry seems to be united against this new tax. Our blog last October highlighted Senator Scott Brown’s plight for a repeal, and there have been numerous other calls to have it eliminated.

Woods discusses this 2.3% levy and deals with the telling question – will this tax push U.S. companies overseas? In the article, Woods declares his admiration for the U.S. medical device industry. He believes the market size and willingness to embrace the latest in technology allows ideas to “turn to reality with breathtaking frequency compared with the rest of the world.”

Many believe that these new regulations, and the 2.3% tax, could result in a 43,000 industry job loss, less innovation, and higher priced goods. So, will this leave some medical device companies choosing to migrate overseas? Perhaps the tax has already made an impact. An article in Bloomberg claims that both Covidien and Stryker have laid-off workers, with the former moving production to Costa Rica and Mexico. Both companies directly mentioned the new tax as reason for the changes.

However, Woods believes that companies shouldn’t move production because of a 2.3% tax increase. After all, company location makes no difference for the sales tax. Woods lightheartedly points out that, “If the medical device is sold in U.S. the device will be taxed whether the product is made in Birmingham, Alabama or Birmingham, UK.”

Woods sees other reasons as to why companies may want to move overseas, including:

  • U.S. sales growth is slower than elsewhere and downward price pressure is exacerbating the effect
  • Woods describes the FDA process as ‘burdensome, expensive, and slow’. Generating revenue from your new device is much quicker overseas than it is in the U.S.

While these reasons don’t directly relate to the 2.3% tax increase, the proposed tax has to play a part in why companies may leave the U.S. Woods argues that the tax hurts an already weak investor sentiment, extending the time to gain a return on investment, and it certainly doesn’t encourage innovation within the sector.

So what are the implications of the 2.3% tax? Do you think Medical Device companies will choose to move overseas? Please share your thoughts.

Topics: Medical Devices, technology solutions, nick woods, MD+DI


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