Excise Tax on Designated Drugs

DEPARTMENT OF THE TREASURY <SUBAGY>Internal Revenue Service</SUBAGY> <CFR>26 CFR Part 47</CFR> <DEPDOC>[REG-115560-23]</DEPDOC> <RIN>RIN 1545-BQ92</RIN> <SUBJECT>Excise Tax on Designated Drugs</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> Internal Revenue Service (IRS), Treasury. <HD SOURCE="HED">ACTION:</HD> Notice of proposed rulemaking. <SUM> <HD SOURCE="HED">SUMMARY:</HD> This document contains proposed regulations relating to the excise tax on certain sales of designated drugs by manufacturers, producers, and importers during statutorily defined periods. The proposed regulations would provide substantive rules that relate to the imposition and calculation of the tax. The proposed regulations would affect manufacturers, producers, and importers of designated drugs that sell such drugs during statutorily defined periods. </SUM> <EFFDATE> <HD SOURCE="HED">DATES:</HD> Written or electronic comments and requests for a public hearing must be received by March 3, 2025. Requests for a public hearing must be submitted as prescribed in the “Comments and Requests for a Public Hearing” section. </EFFDATE> <HD SOURCE="HED">ADDRESSES:</HD> Commenters are strongly encouraged to submit public comments electronically via the Federal eRulemaking Portal at <E T="03">https://www.regulations.gov</E> (indicate IRS and REG-115560-23) by following the online instructions for submitting comments. Once submitted to the Federal eRulemaking Portal, comments cannot be edited or withdrawn. The Department of the Treasury (Treasury Department) and the IRS will publish for public availability any comments submitted to the IRS's public docket. Send paper submissions to: CC:PA:01:PR (REG-115560-23), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> Concerning the proposed regulations, contact James S. Williford or Jacob W. Peeples at (202) 317-6855 (not a toll-free number); concerning the submission of comments and requests for a public hearing, contact the Publications and Regulations Section of the Office of Associate Chief Counsel (Procedure and Administration) by phone at (202) 317-6901 (not a toll-free number) or by email at <E T="03">publichearings@irs.gov</E> (preferred). </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> <HD SOURCE="HD1">Authority</HD> This notice of proposed rulemaking contains proposed regulations that would amend 26 CFR part 47 (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). These proposed regulations are issued under the express delegation of authority granted to the Secretary of the Treasury or her delegate (Secretary) by section 5000D(h), which states: “The Secretary shall prescribe such regulations and other guidance as may be necessary to carry out the provisions of this section.” These proposed regulations are also issued under the express delegation of authority provided in section 7805(a), which authorizes the Secretary to prescribe all needful rules and regulations for the enforcement of the Code, including all rules and regulations as may be necessary by reason of any alteration of law in relation to internal revenue. <HD SOURCE="HD1">Background</HD> Sections 1191 through 1198 of the Social Security Act (SSA) (42 U.S.C. 1320f to 1320f-7), added by sections 11001 and 11002 of Public Law 117-169, 136 Stat. 1818 (August 16, 2022), commonly known as the Inflation Reduction Act of 2022 (IRA), require the Secretary of Health and Human Services (HHS) to establish a Medicare prescription drug price negotiation program (Program) to negotiate maximum fair prices (MFPs) for certain high expenditure, single-source drugs covered by Medicare. Under the Program, the Secretary of HHS must, among other things: (1) publish a list of selected drugs in accordance with section 1192 of the SSA; (2) enter into agreements with willing manufacturers of selected drugs in accordance with section 1193 of the SSA; and (3) negotiate MFPs for such selected drugs in accordance with section 1194 of the SSA. Under section 1193(a)(3) of the SSA, manufacturers of selected drugs that choose to enter into agreements with the Secretary of HHS and that agree to an MFP commit to provide access to selected drugs at the negotiated prices to MFP-eligible individuals (as defined in section 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 MFP-eligible individuals. Section 5000D was added to a new chapter 50A of the Code by section 11003 of the IRA and is effective for sales on and after August 16, 2022. Section 5000D(a) imposes the section 5000D tax on the sale by the manufacturer, producer, or importer of any designated drug during a day described in section 5000D(b), referred to herein as a “statutory period,” with respect to such designated drug. In the case of a sale of a designated drug timed for the purpose of avoiding the section 5000D tax, section 5000D(f)(2) authorizes the Secretary to treat such sale as occurring during a statutory period. Section 5000D(e)(1) provides that a “designated drug” is any “negotiation-eligible drug,” as defined in section 1192(d) of the SSA, included on the list published under section 1192(a) of the SSA that is manufactured or produced in the United States, as defined in section 5000D(e)(2), or entered into the United States for consumption, use, or warehousing. Under section 5000D(a), the amount of section 5000D tax imposed on the sale of a designated drug during a statutory period is the amount that causes the ratio of (1) the section 5000D tax, divided by (2) the sum of the section 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” (as defined in section 5000D(d)): <FP SOURCE="FP-2">Applicable Percentage = Tax/(Tax + Price)</FP> The applicable percentage ranges from 65 percent to 95 percent, depending on the number of days a sale is made after the start of a statutory period. Section 5000D(d). As noted previously, section 5000D(h) authorizes the Secretary to prescribe such regulations and other guidance as may be necessary to carry out the provisions of section 5000D. On August 28, 2023, the Treasury Department and the IRS published Notice 2023-52, 2023-35 I.R.B. 650, announcing the Secretary's intent to issue proposed regulations addressing substantive and procedural issues related to section 5000D. Notice 2023-52 described certain rules that those proposed regulations would include and provided taxpayers with interim guidance. On October 2, 2023, the Treasury Department and the IRS published a notice of proposed rulemaking (REG-115559-23) in the <E T="04">Federal Register</E> (88 FR 67690) proposing amendments to the Excise Tax Procedural Regulations under 26 CFR part 40 to address tax return filing and other procedural requirements related to the section 5000D tax applicable to returns filed for calendar quarters beginning on or after October 1, 2023. On July 5, 2024, the Treasury Department and the IRS published a Treasury decision (T.D. 10003) in the <E T="04">Federal Register</E> (89 FR 55507) finalizing, with minor modifications, the proposed amendments to 26 CFR part 40 and adding part 47 to 26 CFR. These proposed regulations would amend the Designated Drugs Excise Tax Regulations by providing substantive rules related to the section 5000D tax, including rules consistent with the substantive rules described in Notice 2023-52. Specifically, these proposed regulations would provide definitions of certain terms, such as “manufacturer, producer, or importer,” “sale,” and “price,” and rules governing the imposition and calculation of the section 5000D tax. Concurrently with the filing for public inspection of these proposed regulations, the Treasury Department and the IRS are releasing Revenue Procedure 2025-9 to provide a safe harbor that taxpayers may use to identify the subset of each sale in units of a designated drug made during a statutory period that is subject to the section 5000D tax. After its release, Revenue Procedure 2025-9 will be published in the Internal Revenue Bulletin ( <E T="03">see</E> § 601.601(d) of the Statement of Procedural Rules (26 CFR part 601)). <HD SOURCE="HD1">Explanation of Provisions</HD> These proposed regulations are organized into two sections: proposed § 47.5000D-2 (relating to definitions) and proposed § 47.5000D-3 (relating to the imposition and calculation of the section 5000D tax). <HD SOURCE="HD2">I. Definitions</HD> Proposed § 47.5000D-2 would provide definitions necessary to clarify the application of section 5000D. <HD SOURCE="HD3">A. Applicable Percentage</HD> Proposed § 47.5000D-2(b)(1) would incorporate the substance of the statutory definition of the term “applicable percentage” provided in section 5000D(d). Proposed § 47.5000D-2(b)(1) would also clarify that, to determine the appropriate applicable percentage for a specific applicable sale, days described in section 5000D(b) are cumulative regardless of whether such days are consecutive. <HD SOURCE="HD3">B. Applicable Sale</HD> Proposed § 47.5000D-2(b)(2) would define the term “applicable sale” to mean the sale transaction that is the subset of each sale in units of a designated drug, as defined in section 5000D(e)(1), by the manufacturer, producer, or importer that will be dispensed, furnished, or administered to MFP-eligible individuals, as defined in section 1191(c)(2) of the Social Security Act (42 U.S.C. 1320f(c)(2)) and any regulations or guidance issued thereunder by the Secretary of HHS. 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