REG-115559-23

These proposed regulations would apply the Excise Tax Procedural Regulations in 26 CFR part 40 to excise taxes imposed by chapter 50A of the Code (and thus to the section 5000D tax), with some limited exceptions.

A. Proposed amendments to §40.0-1

Section 40.0-1(a) provides generally that the regulations in part 40 set forth administrative rules relating to the excise taxes imposed by chapters 31 through 34, 36, 38, 39, and 49 of the Code. Proposed §40.0-1(a) would amend that provision by adding chapter 50A of the Code to the list of Code chapters subject to the part 40 regulations.

B. Proposed amendments to §40.6011(a)-1

Section 40.6011(a)-1(a)(1) provides that the return of tax to which part 40 applies must be made on Form 720, Quarterly Federal Excise Tax Return, according to the instructions applicable to the form. Section 40.6011(a)-1(a)(2) provides, in part, that a return must be filed for the first calendar quarter in which liability for tax is incurred (or tax must be collected and paid over) and for each subsequent calendar quarter, whether or not liability is incurred (or tax must be collected and paid over) during that subsequent quarter, until a final return under §40.6011(a)-2 is filed.

Proposed §40.6011(a)-1(d) would provide that a return that reports liability imposed by section 5000D must be made for a period of one calendar quarter, and that a return must be filed for each calendar quarter in which liability for the section 5000D tax is incurred. Therefore, under these proposed regulations, taxpayers would be required to report any section 5000D tax liability on Form 720; however, taxpayers would not be required to file subsequent returns for quarters in which they incur no section 5000D tax liability.

C. Proposed amendments to §40.6302(c)-1

Section 40.6302(c)-1(a) provides that except as provided by statute or by §40.6302(c)-1(e), each person required under §40.6011(a)-1(a)(2) to file a quarterly return must make a deposit of tax for each semimonthly period (as defined in §40.0-1(c)) in which tax liability is incurred. Section 40.6302(c)-1(e) provides a list of taxes that are excepted from the semimonthly deposit requirement.

Proposed §40.6302(c)-1(e)(1)(vi) would add the section 5000D tax to the list of taxes that are excepted from the semimonthly deposit requirement. Therefore, under these proposed regulations, taxpayers with section 5000D tax liability would not be required to make semimonthly deposits of the section 5000D tax.

In addition to proposing the addition of a new part 47 to 26 CFR chapter 1, proposed §47.5000D-1 would provide an introductory provision under part 47 that would designate 26 CFR part 47 as the “Designated Drugs Excise Tax Regulations.”

Pursuant to the Memorandum of Agreement, Review of Treasury Regulations under Executive Order 12866 (June 9, 2023), tax regulatory actions issued by the IRS are not subject to the requirements of section 6 of Executive Order 12866, as amended. Therefore, a regulatory impact assessment is not required.

The collections of information contained within these proposed regulations will be submitted to the Office of Management and Budget (OMB) for review in accordance with the Paperwork Reduction Act (PRA) (44 U.S.C. 3507(d)). See 5 CFR 1320.11. The Treasury Department and the IRS request comments on the information collection burdens related to the proposed regulations. Commenters are strongly encouraged to submit public comments electronically. Written comments and recommendations for the proposed information collection should be sent to https://www.reginfo.gov/public/do/PRAMain, with copies to the IRS. To find this particular information collection, select “Currently under Review - Open for Public Comments” and then use the search function. Submit electronic submissions for the proposed information collection to the IRS via email at pra.comments@irs.gov (indicate REG-115559-23 in the subject line). Comments on the collection of information must be received by December 1, 2023. Comments are specifically requested concerning:

Whether the proposed collections of information are necessary for the proper performance of the functions of the IRS, including whether the information will have practical utility;

The accuracy of the estimated burden associated with the proposed collections of information (see below);

How the quality, utility, and clarity of the information to be collected may be enhanced;

How the burden of complying with the proposed collections of information may be minimized, including through the application of automated collection techniques or other forms of information technology; and

Estimates of capital or start-up costs and costs of operation, maintenance, and purchase of services to provide information.

The collections of information in these proposed regulations relate to reporting and recordkeeping requirements that will allow section 5000D taxpayers to meet their tax reporting obligations. The collections of information would generally be used by the IRS for tax compliance purposes and by taxpayers to facilitate proper tax reporting and compliance. The reporting and recordkeeping requirements are covered within the form and instructions for Form 720. IRS is seeking OMB approval on the statutorily required revisions to the form. Therefore, collection requirements will be submitted to OMB under control number 1545-0023.

Because the section 5000D tax is a new tax that has never been reported to the IRS, the Treasury Department and the IRS do not have historical data on the number of affected taxpayers. The Centers for Medicare and Medicaid Services (CMS) has selected 10 drugs for price negotiation for initial price applicability year 2026. CMS will select for negotiation a limited number of drugs for each initial price applicability year after that, as outlined in the IRA. Further, manufacturers, producers, and importers of such drugs may or may not become subject to section 5000D tax liability. Based on the foregoing, the IRS estimates that there will be between 0 and 50 taxpayers during the next 3 years.

If a taxpayer has a section 5000D tax liability, it would be required to file Form 720 to report such liability. Form 720 is a quarterly return. A taxpayer would only be required to file Form 720 during calendar quarters in which the taxpayer has a section 5000D tax liability. Therefore, a taxpayer that has a section 5000D tax liability in one calendar quarter but not in subsequent calendar quarters would only be required to file one Form 720.

The respondents with regard to the section 5000D tax are manufacturers, producers, and importers of certain drugs. The Treasury Department and the IRS estimate the annual burden of the collections of information as follows (these estimates, which are for PRA purposes only, are based on the high end of the range of possible taxpayers and the high end of the range of the frequency of responses, in which a taxpayer would have tax liability in all four calendar quarters):

Estimated frequency of responses: Quarterly.

Estimated number of responses: 50.

Estimated burden time per respondent: 6.9 hours.

Estimated total annual reporting burden: 1,380 hours.

A Federal agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid control number assigned by OMB. Books or records relating to a collection of information must be retained if their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by section 6103.

Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it is hereby certified that these proposed regulations will not have a significant economic impact on a substantial number of small entities. This certification is based on the fact that the section 5000D tax is imposed only when certain drug manufacturers, producers, and importers sell certain drugs during periods described in section 5000D(b). The periods described in section 5000D(b) relate to benchmarks in the Medicare Drug Price Negotiation Program, which involves only certain drugs with high Medicare expenditures. If any section 5000D tax liability arises, the taxpayers will primarily not be small entities. As noted earlier, data is not readily available about the number of taxpayers affected, but the number is likely to be limited, in part due to the limited number of drugs selected for the Drug Price Negotiation Program in any particular year. In addition, these proposed regulations will assist taxpayers in meeting their tax reporting obligations by providing clarity on how to report section 5000D tax liability, which will make it easier for taxpayers to comply with section 5000D. Therefore, these proposed regulations will not create additional obligations for, or impose a significant economic impact on, small entities, and a regulatory flexibility analysis under the Regulatory Flexibility Act is not required. Notwithstanding this certification, the Treasury Department and the IRS welcome comments on the impact of these proposed regulations on small entities.

Pursuant to section 7805(f) of the Code, these proposed regulations have been submitted to the Chief Counsel for the Office of Advocacy of the Small Business Administration for comment on its impact on small business.

Section 202 of the Unfunded Mandates Reform Act of 1995 requires that agencies assess anticipated costs and benefits and take certain other actions before issuing a final rule that includes any Federal mandate that may result in expenditures in any one year by a State, local, or Tribal government, in the aggregate, or by the private sector, of $100 million in 1995 dollars, updated annually for inflation. These proposed regulations do not include any Federal mandate that may result in expenditures by State, local, or Tribal governments, or by the private sector, in excess of that threshold.

Executive Order 13132 (Federalism) prohibits an agency from publishing any rule that has federalism implications if the rule either imposes substantial, direct compliance costs on State and local governments, and is not required by statute, or preempts State law, unless the agency meets the consultation and funding requirements of section 6 of the Executive order. These proposed regulations do not have federalism implications, do not impose substantial direct compliance costs on State and local governments, and do not preempt State law within the meaning of the Executive order.