Treasury, IRS Set to Propose New Rules on Section 5000D Drug Excise Tax

Section 5000D, enacted as part of last year’s Inflation Reduction Act, imposes the excise tax on sales of “designated drugs,” which is defined by the IRS as “any negotiation-eligible drug (as defined in Section 1192(d) of the Social Security Act) included on the list published under Section 1192(a) of the SSA that is manufactured or produced in the United States or entered into the United States for consumption, use, or warehousing.”

The Inflation Reduction Act requires the secretary of health and human services to establish a Medicare prescription drug price negotiation program to negotiate maximum fair prices (MFPs) for certain high-expenditure, single-source drugs covered under Medicare.

The IRS said:

Under the program, Secretary of Health and Human Services must, among other things: (1) publish a list of selected drugs in accordance with § 1192 of the SSA; (2) enter into agreements with willing manufacturers of selected drugs in accordance with § 1193 of the SSA; and (3) negotiate MFPs for such selected drugs in accordance with § 1194 of the SSA. Under § 1193(a)(3) of the SSA, manufacturers of selected drugs that choose to enter into agreements with the Secretary of Health and Human Services and that agree to an MFP commit to provide access to selected drugs at the negotiated prices to MFP-eligible individuals (as defined in § 1191(c)(2) of the SSA), as well as to pharmacies and other dispensers, hospitals, physicians, other providers of services, and suppliers with respect to such individuals.

The Section 5000D tax is imposed on the sale by the manufacturer, producer, or importer of any designated drug during a day that falls within the statutory period.

The IRS said:

The amount of § 5000D tax imposed on such a manufacturer equals the amount that causes the ratio of (1) the § 5000D tax, divided by (2) the sum of the § 5000D tax and the price for which the designated drug was sold, when such ratio is expressed as a percentage, to equal the “applicable percentage.”

Section 5000D(d) defines the term “applicable percentage” as follows: (1) in the case of sales of a designated drug during the first 90 days in a statutory period with respect to such drug, 65 percent; (2) in the case of sales of such drug during the 91st day through the 180th day in a statutory period with respect to such drug, 75 percent; (3) in the case of sales of such drug during the 181st day through the 270th day in a statutory period with respect to such drug, 85 percent; and (4) in the case of sales of such drug during any subsequent day in a statutory period, 95 percent.

If companies are found to be noncompliant with the rules, the excise tax rate would range from 185.71% to 1,900% of the selected drug’s price depending on the duration of noncompliance.

Until the Treasury Department and IRS issue further guidance, taxpayers may rely on the guidance set out in Notice 2023-52, the IRS said.