Puerto Rico Implements New Sales and Use Tax System

The Commonwealth of Puerto Rico has implemented a sales and use tax (“sales tax”) system to replace the general excise tax system. On July 4, 2006, the Governor of Puerto Rico signed into law the Taxpayer Justice Act (Act No.117, H.B. 2193). The new law imposes a municipal sales tax at a rate of 1.5% (effective July 1, 2006) and the Commonwealth sales tax at the rate of 5.5%, with an effective date of November 15, 2006.

The municipal sales tax is administered at the local level, and the Commonwealth sales tax is administered through the Puerto Rico Treasury Department. Therefore, separate registration and filing requirements currently exist.

All persons/businesses making retail sales are required to register with each municipality and the Puerto Rican Treasury to obtain a Retailer’s Registration Certificate, exemption certificates, and tax returns. The exemption certificate must be provided to retailers in lieu of payment of the sales tax. The retailers are required to file monthly sales tax returns by the 20th day following the month in which the tax was collected.

The genesis of the sales tax was the result of a rapid series of political negotiations forced upon the government of Puerto Rico by the financial markets that lost faith in the Commonwealth’s ability to meet bond payment obligations. The sales tax was determined to be a more stable revenue collection model than the general excise tax. In order to implement the new sales tax system overnight, the Treasury Department reviewed state tax models and the Streamline Sales Tax materials to essentially mirror various statutory provisions of various states to arrive at the Puerto Rican sales tax statute. While the sales tax statute has been published, the underlying body of regulation is limited and currently being written by the Puerto Rican Treasury.

Puerto Rico’s rapid implementation of the sales tax in a highly contentious political environment has created differences in interpretation along party lines. Several law suits have been filed to date questioning the constitutionality of the new tax and more are expected as a result of the island-wide tax rate of 5.5% becoming effective November 15, 2006. The legal issues focus on the authority of the Treasury to regulate the municipal authority’s compliance process and whether the combined Commonwealth and Municipal rate is legally 7% or 5.5%.

This current confused transitional environment, in combination with the often inefficient municipal compliance process and the politically charged environment existing in the Commonwealth, requires an additional level of focus to obtain solutions to compliance and consulting issues. Transitional rules for migrating from the old excise tax system to the new sales tax system, as well as industry related concerns, have created a confused state of compliance.