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The IRS and Treasury have proposed new rules for applying excise taxes to drugmakers that refuse to negotiate drug prices with Medicare under the 2022 tax and climate law, specifically targeting manufacturers and importers responsible for the initial sale of the drugs.

In the proposal announced Tuesday, both the IRS and U.S. Department of the Treasury explained that while the Inflation Reduction Act (IRA) clearly imposes taxes on "manufacturers, producers, or importers" of certain brand-name prescription drugs, the law does not clearly define these terms. The agencies have proposed that the tax apply to the entity that makes the first sale of the drug, or in the case of an importer, to the entity that first sells the drug once it has entered the U.S.

This approach aligns with nearly a century of case law regarding excise taxes, where the tax is generally imposed on the initial seller in the supply chain. The IRS and Treasury specified that the tax would typically apply to those who are considered drugmakers — those who physically or chemically create the drugs — rather than wholesalers, repackagers, or retail pharmacies that may sell the drugs later in the process.

The proposal further clarifies that suppliers who receive a drug that has been designated for the tax under the IRA, but who are not involved in the first sale, will not be responsible for paying the excise tax.

The Inflation Reduction Act permits Medicare to negotiate the prices of certain prescription drugs to reduce costs, especially for drugs without generic or biosimilar alternatives. As part of the law, drug companies that refuse to participate in price negotiations face a tax penalty, ranging from 65% to 95% of their sales, under Internal Revenue Code Section 5000D.

The proposed rules also allow drugmakers to adjust their pricing for reporting purposes to reflect the common discounts and rebates often found in the prescription drug supply chain. This adjustment aims to ensure accurate reporting of the drug prices subject to the tax.

Additionally, the proposal outlines the criteria for identifying drug sales subject to the tax, which will apply when a drugmaker sells a drug at a non-negotiated price during the IRA's designated time periods. Drugmakers may also use percentages outlined in a separate safe harbor proposal to determine which sales are taxable, though the IRS and Treasury acknowledged that this process may be complex.

Furthermore, the proposed rules include provisions that ensure the excise tax will not be included in the drug’s price if it is separately charged on the invoice. However, if the tax is not separately stated, the government will assume that the cost of the tax is included in the drug’s overall price.