Puerto Rico Treasury to Turn Online Retailers Into Tax Withholding Agents
Editor’s note: This article was originally published in the July 5 – 11 issue of Caribbean Business.
At a time when Puerto Rico is struggling to rescue its public finances, the U.S. Supreme Court has deployed a lifeline that could help the island generate more local Treasury revenue.
In the fight to charge taxes on online purchases from retailers that have no physical presence in U.S. states and territories, the top court declared the latter winners in a 5-4 ruling in the South Dakota v. Wayfair Inc. case. According to the opinion of Justice Anthony Kennedy, the rule of law in force since 1992 served as “a judicially created tax shelter for businesses that decide to limit their physical presence and still sell their goods and services to a state’s consumer,” and was not in line with current technology and ways of doing business.
This new reality, in addition to strengthening existing legislation in more than 15 states and territories, will result in a substantial increase to their tax base. At the same time, it will provide a respite to traditional businessowners by helping them compete to a certain degree under more equal conditions.
How prepared and quickly will Puerto Rico react to take advantage of this decision? In an interview with Caribbean Business, the deputy secretary of internal revenue at the Puerto Rico Treasury Department, Francisco Parés Alicea, said his technical team is “cautiously and responsibly” evaluating the change, which could raise $40 million in new revenue, based on a conservative projection made after a confidential agreement was reached with e-commerce giant Amazon to charge the sales & use tax (IVU by its Spanish acronym) to local buyers.
This estimate will remain intact until Treasury carries out a process this week that includes two work team meetings, a conference with agency officials who are tax experts, completion of draft legislation that will be sent to the governor’s office in La Fortaleza, so his fiscal team can begin a review process that Parés Alicea said could conclude at the end of July, paving the way for the corresponding legislative process to begin in the next session.
“We are going to present legislation to adapt our sales & use tax regime to the new findings and developments that have occurred as a result of the Wayfair case, but there is still much to be resolved. This is going to open up a Pandora’s box in terms of the number of lawsuits between the tax agencies and these online sellers,” Parés Alicea predicted, adding that they will use the jurisprudence in South Dakota’s case as an example because it overcame the scrutiny of the U.S. Supreme Court, which seeks to avoid imposing an undue burden on interstate commerce.
Among the stipulations the legislation would contain are nonretroactivity in its application, the implementation of software to “avoid paper bureaucracy,” ensuring compliance with the new regulations, and the establishment of a minimum number of transactions for a company to be considered having an “extensive virtual presence.” In the South Dakota law, a minimum of 200 transactions a year, or $100,000 in sales, was established.
What will happen with current agreements?
Long before the South Dakota v. Wayfair decision, Puerto Rico’s Legislative Assembly had taken measures that, although of a voluntary nature, establish documentation requirements for sellers who complete transactions with buyers on the island. That way, the local Treasury obtained additional tools to collect IVU on online sales, but with the good faith of the buyer, who is obliged to remit the tax on his or her online purchase.
Act 25 of 2017 requires businesses with an online presence to send a report to Treasury with the names and addresses of their customers, so the department may oversee and collect the IVU from Puerto Rico businesses and residents that acquire merchandise without self-imposing the tax. If a local business does not wish to submit the information, it has the option to become a withholding agent and remit the tax.
“Since these agreements are about tax matters, as a rule the department cannot speak about internal matters, but I can tell you that of all the agreements we have signed, none is in exchange for remitting less than 11.5 percent of the sales & use tax. In the case of Amazon, we asked it to allow us to tell the public that, indeed, this agreement had been reached, recognizing how integrated Amazon is in the Puerto Rico market,” said the Treasury official, who also urged companies to enter into voluntary agreements before the law forces them to do so.
“At the end of the day, these agreements are entered into because the remote merchant desists from submitting the required reports on who they are selling to, and to avoid that report, collects the sales tax and becomes a retaining agent,” Parés Alicea explained.