Medical system setup is not further manufacture for excise tax purposes

Plain-English summary

A healthcare-products reseller sold and set up a system under an agreement that licensed it to install the developer’s software. The reseller did not list either the system or the software as a device with the FDA. The IRS ruled that the setup did not constitute further manufacture under IRC § 4221 because the reseller did not produce another article taxable under chapter 32. The ruling did not decide whether installing the software could otherwise make someone a manufacturer or determine any other person’s medical-device excise tax liability.

Ruling snapshot

• Question: Does the reseller’s setup of the system constitute further manufacture under IRC § 4221?
• Outcome: Approved
• Key authorities: IRC §§ 4191, 4221(a)(1), 4221(d)(6)(A); Treas. Reg. §§ 48.4191-2(a), 48.4221-2(b)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201601008 Third Party Communication: None
Release Date: 12/31/2015 Date of Communication: Not Applicable
Index Number: 4191.00-00, 4221.01-00
Person To Contact:
----------- -----------------------, ID No. -------------------
-------------------------------- ---------------------------------------------------
--------------------------- Telephone Number:
---------------------
----------------------------- Refer Reply To:
CC:PSI:B7
In Re: --------------------------- PLR-115614-14
Date:
August 18, 2015

LEGEND

X = ------------

A = --------------------------------

System = ------------------------------------------------------------------------------------------

Software = ------------------------------------------------

Dear ---------------:

This is in response to your authorized representative’s request for a private letter ruling
regarding the applicability of the medical device excise tax to certain transactions.

According to the facts submitted, X sells System and X develops Software for use with
System.

A is in the business of marketing, distributing, and selling healthcare-related products.
A sells and sets up System pursuant to a reseller agreement (Agreement) with X.
Under the terms of Agreement, X grants A a license to install and use Software to set
up System.

A does not list System or Software as a device with the FDA.
PLR-115614-14 2

RULING REQUESTED

A’s set up of System, pursuant to the terms of Agreement, does not constitute further
manufacture within the meaning of § 4221.

LAW

Section 4191(a) imposes a tax on the sale of any taxable medical device by the
manufacturer, producer, or importer of 2.3 percent of the price for which the device was
sold.

Section 4191(b)(1) provides that, in general, a “taxable medical device” means any
device (as defined in § 201(h) of the Federal Food Drug and Cosmetic Act (FFDCA))
that is intended for humans.

Section 4221(a)(1) provides that no tax shall be imposed under chapter 32 on the sale
by the manufacturer of an article for use by the purchaser for further manufacture, or for
resale by the purchaser to a second purchaser for use by such second purchaser in
further manufacture.

Section 4221(d)(6)(A) provides that an article shall be treated as sold for use in further
manufacture if such article is sold for use by the purchaser as material in the
manufacture or production of, or as a component part of, another article taxable under
chapter 32 to be manufactured or produced by him.

Under § 48.4191-2(a) of the Regulations, a device defined in § 201(h) of the FFDCA
that is intended for humans is a device that is listed as a device with the FDA under
§ 510(j) of the FFDCA and 21 CFR part 807, pursuant to FDA requirements.

Under § 48.4221-2(b), an article shall be treated as sold for use in further manufacture if
the article is sold for use by the buyer as material in the manufacture or production of, or
as a component part of, another article taxable under chapter 32 of the Code. An article
is used as material in the manufacture or production of, or as a component of, another
article if it is incorporated in, or is a part or accessory of, the other article when the other
article is sold by the manufacturer.

ANALYSIS AND CONCLUSION

Section 4221(d)(6)(A) provides, in part, that an article is treated as sold for use in further
manufacture if the article is sold for use by the purchaser as material in the manufacture
or production of, or as a component part of, another article taxable under chapter 32. In
this case, A does not produce another article that is taxable under chapter 32 because
A does not list System as a device with the FDA. Therefore, we conclude that A’s set
PLR-115614-14 3

up of System pursuant to Agreement does not constitute further manufacture within the
meaning of § 4221.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) provides
that it may not be used or cited as precedent.

Except as expressly ruled herein, no opinion is expressed or implied concerning the tax
consequences of any aspect of any transaction or article discussed or referenced in this
letter. Specifically, we express no opinion on whether a person that installs Software on
one or more computers to create a System is a manufacturer. Further, we express no
opinion regarding the § 4191 tax liability of anyone other than A with respect to System
and Software.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.

This private letter ruling is based upon information and representations submitted by
Taxpayer and accompanied by a penalty of perjury statement executed by an
appropriate party. While this office has not verified any of the material submitted in
support of the request for a ruling, the supporting material is subject to verification or
examination.

                                               Sincerely,




                                               Stephanie Bland
                                               Branch Chief, Branch 7
                                               Office of Associate Chief Counsel
                                               (Passthroughs & Special Industries)