Sales Tax Changes in Puerto Rico – What Taxpayers Need to Know to Remain Compliant
Pursuant to the enactment of Laws 40 and 117 of 2013, and Laws 18, 19 and 80 of 2014, the sales and use tax regime that applies in the Commonwealth of Puerto Rico has undergone a deep transformation, making their taxation system quite different from those that apply throughout the continental United States.
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While the 1% city-level tax largely remains a pure and simple sales tax, the 6% Commonwealth-level tax now more closely resembles a value-added tax in that it applies at all stages of the commercial chain. In other words, the 6% tax is not only paid by the final consumer, it is also paid by the importer, the wholesaler, the distributor, and the retailer. To avoid the “cascade effect” that could accompany a multi-stage tax, Puerto Rico has enacted regulations allowing businesses that purchase goods for resale to deduct the tax paid on purchases from the tax due on sales. In the end, the burden of the tax is borne only by the final consumer. If that sounds like a VAT to you, you are not alone. To implement all these changes and to manage the credit mechanisms, the Puerto Rico Department of Treasury (Hacienda) has established a number of new taxpayer requirements. This article will discuss some of the most significant changes that have occurred in Puerto Rico and the immediate requirements that organizations must meet to remain compliant. New Registration, Filing and Payment Website All entities doing business in Puerto Rico are required to register via the new portal created by the Hacienda to manage the submission of tax returns and tax payments. The new website is called “Portal Integrado de Comerciantes” or more simply, “PICO.” Taxpayers can access the PICO site through the following link: http://comerciantes.hacienda.pr.gov/. Registration is mandatory for all taxpayers and effective for all August returns filed in September. These filings and payment must be made through the PICO website. To register via PICO, taxpayers will need two pieces of information:
- Their existing Hacienda Merchant Registration Number (Numero de Registro de Comerciante).
- Their Employer Identification Number (businesses) or Social Security Number (individuals).
Based on the above information, PICO will specify a “base location” for your business that will be utilized for the purpose of managing the obligations for all your other locations on the island. Accordingly, registrants will not need to register each of their business locations via PICO, provided they all utilize the same EIN. Deadlines for Registration Businesses importing goods for resale were required to complete the registration process prior to August 1, 2014. All other businesses should complete the process by September 1, 2014. New Filing and Payment Requirements
- Starting with the August returns due in September, the filing deadline for the Commonwealth return has been moved from the 10th to the 20th of each month. The tax return process has been significantly changed and can only be filed online. Paper returns will no longer be accepted.
- On the 10th of each month, taxpayers will be required to file a new tax return if they bring in goods from outside Puerto Rico (including from the mainland United States) for resale and opt to become a “bonded business.” The requirements associated with imports for resale are discussed in more detail below.
- If sellers have goods delivered via mail or air, where no bill of landing is provided, the importer will be required to include them in the monthly return as well. However, in certain cases Hacienda may establish a different deadline to file and pay the use tax due when goods are delivered to the island electronically, via mail or air.
- With respect to payments, the Hacienda has stated that beginning with August returns, all payments must be made electronically via PICO. No other form of payment will be accepted. Electronic payments can be made using either the ACH credit or ACH debit mechanism.
Bonded vs. Non-Bonded Taxpayers and Resale Obligations As noted above, the 6% Commonwealth-level tax is a multi-stage tax. This means businesses bringing goods from outside the island for resale are required to pay use tax upon import. To meet this obligation, businesses are given the following two options:
- Non-Bonded Option: Non-bonded businesses must make a full use tax payment prior to withdrawing their resale items from customs (note that goods coming from the US into Puerto Rico must clear customs as if they were coming from abroad).
- Bonded Option: Bonded businesses are allowed to have their goods clear customs without a prior use tax payment. However, as described above, use tax must be paid by the 10th day of the next month subsequent to import.
The Hacienda issued Circular Letter 14-03 describes the procedure necessary to become a bonded business:
- First, the taxpayer must make a formal request to the Director of Consumption Taxes.
- Second, the taxpayer must be up-to-date with all tax obligations.
- Finally, the taxpayer must provide a bond which functions as a guarantee for the payment of use tax due.
The bond amount is determined by the amount of use tax normally due at customs, increased by 25%. According to the Hacienda, the additional 25% is intended to ensure payment of any charge, fine, or interest that may be imposed on the taxpayer in the event of non-payment. The minimum bond amount will not be less than $10,000 but the bond imposed on an individual taxpayer can be increased or decreased depending on their business volume. Further, the Hacienda reserves the right to require payment at customs if the amount of the bond is insufficient to cover the use tax due on goods waiting in customs. Once payment is made on the 10th, the bond can be used again to cover future imports or canceled if no future imports are planned. However, the bond cannot be used to defray any sales tax obligations. Reseller’s Controlled Account of Credits/Cuenta Control de Credito de Revendedor In the true spirit of a VAT, the use tax paid at import becomes a credit against the vendor’s sales tax obligation. One main reason the Hacienda created the PICO portal is to properly administer the credit/debit mechanism that now applies. To that end, the law mandates the Hacienda to create the Reseller’s Controlled Account of Credits (Cuenta Control de Credito de Revendedor) for each taxpayer. The credit available on each controlled account will be increased by any tax paid prior to August 1 by a reseller on purchases of goods for resale; goods for resale purchased on or after August 1, and the use tax paid on goods imported on or after August 1. Conversely, the account value will be reduced by the amount necessary to meet the monthly tax liability of the seller, the amount of tax paid on goods for resale that were returned to the supplier, and use tax paid on goods that resulted in bad debt. The Hacienda strictly controls and must approve the amount of credit available in the controlled account to the extent that those credits derive from imports for resale. Through PICO, the Hacienda will put a process in place to confirm that tax is actually paid on an import before the credit becomes available. The same level of control does not currently exist with respect to credits accrued on intra-Puerto Rico purchase transactions. Limitations on the Use of Tax Credits Only certified resellers are allowed to deduct tax paid on purchases from the sales tax due on sales. However, no matter how much credit a certified reseller has accumulated, they can only offset 75% of the sales tax due in a given month. Any unused credits can be carried forward to the next month and the Secretary of the Treasury retains the ability to issue regulations that may increase or decrease the credit utilization limits. Well – Not Quite a VAT The credit/debit mechanism of Puerto Rico significantly departs from traditional VAT systems in its treatment of services. For example, the sales tax paid on services necessary to effectuate the production or the resale of goods is not deductible from the sales tax due. More generally, in the case of services, the 6% Commonwealth tax functions like a standard sales and use tax, similar to those that apply throughout the rest of the United States. Local Taxes At the local level, the sales tax of Puerto Rico functions as a standard sales and use tax. However, substantial administrative changes are on the horizon. As it stands today, 17 cities/municipalities have their sales tax administered by Hacienda. After July 1st, administration was to be transferred to a new entity called the Corporation of Municipal Financing (COFIM). However, the transfer was subsequently delayed until the deadline for the August returns to be filed in September. Once COFIM is up and running, the Hacienda will continue to retain administration and collection responsibility for the additional 1% tax paid by taxpayers that do not have any physical location in the island. Taxware Knows Tax Rules Taxware is the leading provider of sales, use and value-added tax compliance software, with more than 34 years of experience in the transaction tax compliance business. Whether your business is conducted within the U.S. or around the world, Taxware has software, filing and compliance solutions you need to help get it right. Taxware can integrate with your ERP, POS system, custom-billing application or web store, maximizing your business’ bottom line. With a comprehensive repository of more than 210 million tax rules, Taxware tracks and analyzes tax law changes in approximately 13,000 state and local jurisdictions in the U.S. and nearly 200 countries around the world. Taxware is known for having reliable and robust tax research and world-class technology. 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Together the companies will streamline operations and reduce compliance risk through robust regulatory and tax law expertise combined with best-in-class, cloud-based technology and services that automate and simplify the tax compliance and reporting process. For more information or to find out how we can help with these complex Puerto Rico tax rule changes, please visit contact Taxware or Ask the Tax Expert today.