Global Tax Alert (News from Americas Tax Center) | 29 January 2014

Puerto Rico enacts changes to sales and use tax rate effective 1 February 2014

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Puerto Rico’s Governor has signed Act 18-2014, which modifies again the applicable sales and use tax rate, effective 1 February 2014. Act 18-2014 also makes mandatory the collection of the municipal portion of the sales tax on food and food ingredients, which is generally effective 1 July 2014, and includes other changes related to the management of sales and use tax funds.

Seven percent sales and use tax remains effective rate

Under Act 18-2014, beginning on 1 February 2014, the state sales and use tax rate will increase to 6% of the purchase price of the taxable item. Act 18-2014 also reduces the amount of municipal sales and use tax from 1.5% to 1%, effective 1 February 2014. From 1 February 2014 to 1 June 2014, municipalities will be required to impose and collect a fixed 1% sales and use tax in accordance with the authority granted by Section 4020.10 of Puerto Rico’s New Internal Revenue Code of 2011 (2011 Code).

For periods beginning on or after 1 July 2014, municipalities or an appointed trustee can continue collecting the 1% sales and use tax.

Municipal sales and use tax on food

Currently, municipalities, subject to the approval of the municipal legislature, may impose a 1% sales tax on food and food ingredients, even when these articles are exempt from the sales tax under the 2011 Code. Those municipalities that had an ordinance in force at the time Act 18-2014 was enacted allowing them to impose that tax on food and food ingredients can continue charging the municipal 1% sales tax through 30 June 2014, because those ordinances will remain in effect until that date. Beginning 1 July 2014, however, all municipalities will be required to impose the 1% sales tax on food and food ingredients.

Implications

Act 18-2014 basically changes the way that the 7% tax rate is distributed between the state and the municipal components, but the total rate remains 7%. It also eliminates the .05% reduction in the sales and use tax rate approved by Act 138-2013, which was scheduled to take effect on 1 February 2014.

Legislators have alleged that Act 18-2014’s uniformity provisions for imposing taxes on food and food ingredients are designed to better position the government to implement Act 42-2013, which taxes remote sellers on internet sales. Act 18-2014’s uniformity provisions also bolster Act 40-2013’s requirement for merchants to deposit sales and use taxes into accounts in Puerto Rican financial institutions. Puerto Rico’s Treasury Department had postponed this requirement until the Department releases regulations. Merchants should monitor developments in these areas, since these new tax obligations will require taking actions that will likely affect their administration of the tax collection and remittance process.

The payment of the municipal portion of the sales tax by merchant resellers was also officially deferred through Act 117-2013, by presenting a valid municipal exemption certificate, until the Secretary provides guidance on how to claim the credit against this portion. After the approval of Act 138-2013, however, this exemption from the 1% municipal sales tax portion appears to be unavailable. As such, merchant resellers should also be attentive and on the watch for pending guidance from the Secretary to claim the credit against the 1% municipal portion of the sales tax paid on their purchases for resale, as pertinent.

For additional information with respect to this Alert, please contact the following:

Ernst & Young Puerto Rico LLC, San Juan
  • Marcel Ramos
    +1 787 772 7229
    marcel.ramos@ey.com
  • German Ojeda
    +1 787 772 7080
    german.ojeda@ey.com
  • Rosa M. Rodríguez
    +1 787 772 7062
    rosa.rodriguez@ey.com

EYG no. CM4135