Excise Tax on Designated Drugs; Procedural Requirements

<RULE> DEPARTMENT OF THE TREASURY <SUBAGY>Internal Revenue Service</SUBAGY> <CFR>26 CFR Parts 40 and 47</CFR> <DEPDOC>[TD 10003]</DEPDOC> <RIN>RIN 1545-BQ93</RIN> <SUBJECT>Excise Tax on Designated Drugs; Procedural Requirements</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> Internal Revenue Service (IRS), Treasury. <HD SOURCE="HED">ACTION:</HD> Final rule. <SUM> <HD SOURCE="HED">SUMMARY:</HD> This document contains final regulations relating to the excise tax imposed on certain sales by manufacturers, producers, or importers of designated drugs. Specifically, the final regulations set forth procedural provisions relating to how taxpayers must report liability for such tax. The final regulations also except such tax from semimonthly deposit requirements. The final regulations affect manufacturers, producers, or importers of designated drugs dispensed, furnished, or administered to individuals under the terms of Medicare during certain statutory periods. </SUM> <EFFDATE> <HD SOURCE="HED">DATES:</HD> <E T="03">Effective date:</E> These regulations are effective on August 5, 2024. <E T="03">Applicability dates:</E> For dates of applicability, see §§ 40.0-1(e), 40.6011(a)-1(e), 40.6302(c)-1(f), and 47.5000D-1(b). </EFFDATE> <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> Jacob W. Peeples or James S. Williford at (202) 317-6855 (not a toll-free number). </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> <HD SOURCE="HD1">Background</HD> This document amends the Excise Tax Procedural Regulations (26 CFR part 40) and adds new part 47 to 26 CFR chapter I to contain the “Designated Drugs Excise Tax Regulations” related to the excise tax imposed by section 5000D of the Internal Revenue Code (Code) on certain sales by manufacturers, producers, or importers of designated drugs (section 5000D tax). Sections 1191 through 1198 of the Social Security Act (SSA), added by sections 11001 and 11002 of Public Law 117-169, 136 Stat. 1818 (August 16, 2022), commonly referred to as the Inflation Reduction Act of 2022 (IRA), require the Secretary of Health and Human Services to establish a Medicare prescription drug price negotiation program (Medicare Drug Price Negotiation Program) to negotiate maximum fair prices for certain high expenditure, single-source drugs covered under Medicare. Section 5000D, added to new chapter 50A of the Code by section 11003 of the IRA, imposes an excise tax on certain sales by manufacturers, producers, or importers of designated drugs dispensed, furnished, or administered to individuals under the terms of Medicare during a day that falls within a period described in section 5000D(b). The periods described in section 5000D(b) relate to certain statutorily prescribed milestones in the Medicare Drug Price Negotiation Program. Because chapter 50A is a new chapter of the Code, the existing regulations that prescribe procedural rules applicable to most Federal excise taxes do not apply to chapter 50A. Notice 2023-52 (2023-35 I.R.B. 650; August 28, 2023) announced that the Department of the Treasury (Treasury Department) and the IRS intended to propose regulations addressing substantive and procedural issues related to the section 5000D tax. On October 2, 2023, a notice of proposed rulemaking (REG-115559-23) was published in the <E T="04">Federal Register</E> (88 FR 67690) (proposed regulations). No public hearing was requested or held. The Treasury Department and the IRS received several comments in response to the proposed regulations. The comments addressing the proposed regulations are summarized in the Summary of Comments and Explanation of Revisions section of this preamble. <HD SOURCE="HD1">Summary of Comments and Explanation of Revisions</HD> <HD SOURCE="HD1">I. Overview</HD> As noted in the Background section of this preamble, the Treasury Department and the IRS received several public comment submissions in response to the proposed regulations. The public comments fall into six general categories: timing of the publication of the proposed regulations; the quarterly filing requirement in the proposed regulations; the proposed regulations' retroactive applicability dates; the constitutionality of the section 5000D tax; technical issues and questions relating to the implementation of the section 5000D tax itself; and comments on the Special Analyses provided in the proposed regulations. Each of these categories of comments is addressed in turn in parts II through VII of this Summary of Comments and Explanation of Revisions. All public comments were considered and are available at <E T="03">https://www.regulations.gov</E> or upon request. After full consideration of the public comments received in response to the proposed regulations, this Treasury decision adopts the proposed regulations with three non-substantive modifications. Specifically, the final regulations modify proposed §§ 40.0-1, 40.6011-1(d), and 40.6302(c)-1 by clarifying that the section 5000D tax is imposed on “the sale of” designated drugs. The language, as modified, more closely tracks the language of section 5000D(a). <HD SOURCE="HD1">II. Timing of the Publication of the Proposed Regulations</HD> A commenter stated that the Treasury Department and the IRS acted prematurely when publishing proposed regulations related to procedural rules prior to publishing substantive rules for the section 5000D tax and requested that the Treasury Department and the IRS withdraw the proposed regulations until substantive rules are published. The section 5000D tax is a self-executing tax—that is, the section 5000D tax is effective and applicable regardless of whether implementing regulations are published by the Treasury Department and the IRS. <E T="03">See Sundance Helicopters, Inc.</E> v. <E T="03">United States,</E> 104 Fed. Cl. 1, 11 (2012) (in determining whether the issuance of regulations is a precondition to the application of a statute, the court followed Tax Court precedent in <E T="03">Estate of Neumann</E> v. <E T="03">Comm'r,</E> 106 T.C. 216 (1996) (setting out the rule that “a tax statute is self-executing if the regulation referred to in the statute deals only with how, not whether, the tax is to be applied.”)). Further, under section 5000D(b)(1), the first date that a manufacturer, producer, or importer could be liable for the section 5000D tax is October 2, 2023. As a result, publication of the proposed regulations was not premature because liability can arise under section 5000D in the absence of substantive regulatory guidance, and taxpayers needed this procedural guidance on how to meet their tax reporting and payment obligations for section 5000D tax liability incurred on and after October 2, 2023. Accordingly, the Treasury Department and the IRS are finalizing the proposed regulations without adopting this comment. <HD SOURCE="HD1">III. Quarterly Filing Requirement</HD> A commenter expressed concern regarding the proposed regulations' quarterly filing and payment requirement. Specifically, the commenter stated that—in the absence of substantive guidance such as clarification of what sales are subject to the section 5000D tax—it is “impossible” for the IRS to determine that a “quarterly cadence” for filing returns and paying the section 5000D tax is rational. Further, the commenter stated that the quarterly filing requirement will be overly burdensome on taxpayers. Generally, § 40.6011(a)-1(a)(2)(i) requires that taxpayers subject to Federal excise tax must file a Form 720, <E T="03">Quarterly Federal Excise Tax Return,</E> beginning with the first calendar quarter during which their Federal excise tax liability arises. Once the first Form 720 is filed, a taxpayer is generally required to continue filing Forms 720 for every calendar quarter thereafter—regardless of whether additional Federal excise tax liabilities are incurred during a particular subsequent calendar quarter—until the taxpayer permanently ceases all operations with respect to which the Federal excise tax liability was incurred. <E T="03">See</E> §§ 40.6011(a)-1(a)(2)(i) and 40.6011(a)-2(a)(1). Failure to file subsequent quarterly returns after filing the first Form 720 may result in the assessment of penalties under section 6651(a) of the Code. In developing the proposed regulations, the Treasury Department and the IRS recognized that in the context of the section 5000D tax (under which a taxpayer may incur liability in a particular calendar quarter and then never incur liability again in subsequent calendar quarters), to require a taxpayer to continue to file Form 720 for every calendar quarter following the filing of its first Form 720 even if no tax liability is incurred in subsequent calendar quarters would be both unnecessary for tax administration and unduly burdensome on the taxpayer. As a result, the proposed regulations exempted taxpayers that incur a section 5000D tax liability (section 5000D taxpayers) and report that tax liability on a timely filed Form 720 from the general requirement to file subsequent Forms 720 if no section 5000D tax liability is incurred during a subsequent calendar quarter. Specifically, proposed § 40.6011(a)-1(d) required a taxpayer to file a subsequent Form 720 only if a new section 5000D tax liability arises during a particular calendar quarter. Regarding the requirement to pay a section 5000D tax liability quarterly with the taxpayer's Form 720, generally, §§ 40.6071(a)-1(a) and 40.6151(a)-1 require that Form 720 filers must pay the tax shown on the return at the same time the return is filed. Providing a different rule for section 5000D taxpayers would introduce unnecessary complexity into the excise tax filing and payment regime. An increase in complexity could lead to taxpayer confusion and likely result in a greater burden on both taxpayers and the IRS with little to no be ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 32k characters. Full document text is stored and available for version comparison. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━