Uphill Battle for Puerto Rico Treasury to Monitor Online Transactions
Editor’s note: This article first appeared in the June 12-18 print issue of Caribbean Business.
While it is true the U.S. Supreme Court cleared the way for treasuries to charge local taxes on transactions between taxpayers and businesses that do not have a physical presence in states and territories, the struggle for Puerto Rico to enjoy this advantage in the short term looks troublesome.
That is because, for the Puerto Rico Treasury to collect its 11.5 percent sales & use tax (IVU by its Spanish acronym), it would have to implement an efficient auditing system that allows it to account for the transactions an online company reports versus the purchases consumers carry out—all while ensuring the exercise does not result in an undue burden on the Interstate Commerce Clause.
Héctor Román Maldonado, a lawyer & economist, said that for Treasury to take advantage of the new rule of law following the South Dakota v. Wayfair case, it will have to analyze having to create a reliable mechanism in which the agency can make sure the taxes charged by the companies are correct.
“I predict a high degree of tax evasion. The [P.R. Treasury] Department must be able to audit inventory. That is the solution for what is reported to correspond with the shipments,” predicted Román Maldonado, who was the chairman of the Puerto Rico Senate Labor Relations, Consumer Affairs & Employment Creation Committee during the former administration.
“Right now, we are moving toward a strong domestic market where Puerto Rico has lost many natural taxpayers and large corporations. Therefore, having a strengthened domestic market, where people are actively looking to buy outside of Puerto Rico to try to avoid an 11.5 percent tax that is quite high, you have to create the credits and exemptions among chain participants, so one oversees the other with the least possible intervention. That’s why the VAT [value-added tax] was talked about so much; it helped with that oversight,” the Universidad Metropolitana professor added.
Discreet, static revenue estimate
Although the 5-4 decision issued by soon-to-retire U.S. Justice Anthony Kennedy ratifies the power of states and territories to impose taxes on all electronic commerce, Puerto Rico’s Treasury Department has preferred to maintain its conservative forecast of $40 million in revenue for this fiscal year.
“One of the priorities of this administration is to create tax equity, and that these taxes are not missed by fictitious advantages of entities,” Francisco Parés Alicea, deputy secretary of the Treasury Department’s internal revenue division, told Caribbean Business. “There must be room to educate these entities to recognize that they are obliged to collect the sales & use tax, so the position of the [local Treasury] Department is that it would still be $40 million, and once legislation is presented, that estimate would be re-evaluated. It is still too early to say the Wayfair case allows us to double our estimates; it would be irresponsible on our part.”
The revenue projection was disclosed following the signing of a confidential agreement reached between the agency and retail giant Amazon, and after scores of companies voluntarily stipulated they would comply with Act 25 of 2017. This law was approved so all foreign corporations that do business with Puerto Rico consumers submit a report through the Suri system with the names and addresses of those customers, so Treasury can compare them with the returns it receives. At that time, the IVU collection rate was about 67.9 percent.
In February 2017, the chairman of the P.R. House Treasury Committee, Antonio “Tony” Soto, said that of the $600 million increase expected by the administration of Gov. Ricardo Rosselló, as a result of raising the capture rate to 85 percent, $100 million to $125 million would come from online purchases. The numbers, which do not distinguish between transactions made by companies with or without a physical presence on the island, contrast with Treasury’s estimate.
In fact, the state that succeeded in getting its law to collect taxes to pass the U.S. Supreme Court test, estimated that $50 million to $58 million is lost in transactions between its taxpayers and online companies with an “extensive virtual presence.” South Dakota–which has a sales tax of 4.5 percent, with city governments able to charge an additional 2 percent–only had 869,666 inhabitants as of 2017, according to the Census Bureau. With 3.3 million residents, Puerto Rico has nearly four times as many residents.
Matter of evasion
“In Puerto Rico, we don’t know a real number [revenue estimate] because there are no credible data on the amount in the e-commerce market that is subject to taxes. Many people see electronic commerce from the point of view of sales, but it also includes goods that are going to be used in Puerto Rico for which a transaction doesn’t exist. Therefore, the degree of tax evasion will be quite high and we have seen that in the Treasury reports,” the economist emphasized.
How will online retail sales in Puerto Rico be affected?
In Román Maldonado’s opinion, e-commerce businesses won’t lose too many customers despite the fact the online retail market suffered a severe blow after the Supreme Court granted a reprieve to brick-and-mortar stores, which had been warning for years that this type of direct competition in the acquisition of goods without charging taxes would lead to their demise.
“This will delay the inevitable a few years, which is that as time goes by, we will have less physical presence, fewer shopping centers, less commercial square footage, because people are moving more and more toward doing electronic transactions. For consumers, this will mean they won’t be able to enjoy the advantages of buying between one or the other [physical versus online store], but that is part of what a competitive market should be, where companies pay what they should,” said the economist, adding that the greater problem lay in the capacity and will of each jurisdiction in controlling evasion.
“The Department of Treasury doesn’t have the resources to effectively control this type of electronic transaction, so I see Treasury leaning more toward reaching agreements with the major economic agents to facilitate the collection of public funds. I don’t see the Treasury as a great [tax] inspector,” Román Maldonado said. Nevertheless, he expressed hope that the agency could become an effective oversight entity in the future.