Global Tax Alert (News from Americas Tax Center) | 15 August 2013

Puerto Rico issues guidance on effective date of sales and use tax reseller exemption certificates and issuance of provisional certificates

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In light of the recent enactment of the “Redistribution and Adjustment to the Tax Burden Act” (Act 40-2013), Puerto Rico’s Treasury Department (PRTD) has issued various administrative determinations regarding the modifications made to the reseller’s exemption certificate program for sales and use tax purposes.

Pursuant to Section 4020.07 of the Internal Revenue Code for a New Puerto Rico, as amended, effective on 1 August 2013, the exemption granted through the reseller’s exemption certificate was eliminated. However, the PRTD has issued Administrative Determinations 13-06 and 13-07 (AD 13-06 and AD 13-07) to extend the effective date of the elimination provisions and also to provide rules to manage the 1% municipal license tax portion of the sales and use tax obligation.

Administrative Determination 13-06 – extends effective date of elimination from 1 August 2013 to 16 August 2013

AD 13-06 extends the effectiveness of any reseller’s certificate of exemption, expiring between 30 June 2013 and 31 July 2013 until 15 August 2013. Moreover, AD 13-06 establishes that all reseller’s certificates of exemption issued before the approval of Act 40-2013 will expire on 15 August 2013.

Administrative Determination 13-07 – Provisional Reseller Certificate and Municipal Exemption Certificate

Act 40-2013 provides the rules and requirements for a merchant that acquires taxable items for resale to request a reseller certificate. Since the exemption to acquire taxable items without paying the sales tax has been eliminated effective 16 August 2013, holding a reseller certificate will not exempt this type of merchant anymore. One of the two key purposes of holding a reseller certificate is to identify the reseller merchant as one that is allowed to claim a credit with respect to sales tax collected on its purchases subject to pertinent limitations. The reseller certificates have an expiration period of one year.

The other important aspect for a merchant reseller of having such certificate is related to the 1% municipal sales tax component obligation as it was ruled by AD 13-07.

While the PRTD finalizes the process of revising the merchants’ records to determine if the existing resellers are eligible to have a reseller certificate under the new rules noted before, AD 13-07 authorizes the Secretary of the PRTD to issue provisional reseller certificates as a way to identify resellers that have the right to claim a credit for sales and use tax on items purchased for resale. These provisional certificates have an effective period of less than a year, which is likely to be nine months. Every merchant must request a final and official reseller certificate before the provisional reseller certificate expires.

The provisional exemption reseller certificate as noted before will also serve to exempt merchants from paying the 1% municipal sales and use tax portion which is collected by the municipalities.

Therefore, the merchant with a provisional certificate or the final certificate, as applicable, will be able to claim the credit for the sales tax collected on their purchases of taxable items only against the 6% of the total sales tax obligation (5.5% state/PRTD component and .5% municipal component) that is remitted to the PRTD.

Implications

Merchants that hold valid exemption reseller certificates prior to the amendments made by Act 40-2013 should receive the provisions reseller certificates on or before 16 August 2013. If the merchant’s records at the PRTD show non compliance with the sales and use tax filing and payment obligations for a period of nine months or more within a 12-month period, the provisional certificate will not be issued. Merchants will have to approach the PRTD to clarify their tax status in order to clear this situation and obtain their certificates; otherwise, they will not be allowed to claim the credit or be exempted from the 1% municipal sales tax portion.

Merchants selling to resellers need to update their records and systems to be able to collect the sales tax on their sales of taxable items to resellers starting on 16 August 2013, with generally the only exception of merchants with an eligible reseller certificate.

It is important to note that special rules would be applicable for purchases made by resellers from suppliers that are not registered merchants in Puerto Rico for sales and use tax purposes.

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
  • Rosa M. Rodríguez
    +1 787 772 7062
    rosa.rodriguez@ey.com
  • María T. Riollano
    +1 787 772 7077
    maria.riollano@ey.com

EYG no. CM3734