Pat Pelino

Navigating Puerto Rico’s New Sales-and-Use Tax

This new tax structure is replete with details calling for education on the business owner’s behalf or partnering with a tax consulting service to help navigate it.

September 25, 2008
by Pat Pelino, CMI, et al.

The Commonwealth of Puerto Rico implemented the Taxpayer Justice Act ("Act 117") into legislation in July 2006 to amend the Puerto Rico Internal Revenue Code of 1994, as amended ("PR Code") and replaced the general excise tax with a state-level sales-and-use tax of 5.5 percent along with a municipal sales-and-use tax of 1.5 percent.

This new tax structure is replete with details that call for education on the business owner's behalf or partnering with a tax consulting service to help navigate it. Understanding the inner-workings of the Taxpayer Justice Act, particularly how it will affect business owners and customers in Puerto Rico and abroad, is complicit with doing business effectively today in the Commonwealth.

Consequently, all parties with a vested interest, including tax professionals and their customers, need to maintain comprehension of the PR Code in Puerto Rico. Understanding how it has changed and evolved, including how taxes should now be collected, reported and paid, is critical for businesses within the Commonwealth of Puerto Rico and for multinational corporations who do business regularly in Puerto Rico, as the changes present challenges that ripple out far beyond the shores of Puerto Rico.

What Has Changed

Effective November 2006, Act 117 eliminated the general excise tax in the Commonwealth of Puerto Rico and added Subtitle BB to the PR Code to impose a state level sales-and-use tax of 5.5 percent while authorizing a municipal level sales-and-use tax of 1.5 percent. Act 229 of October 2006 advances the repeal date of the general excise tax effective immediately after the bill was approved, thus all articles introduced into Puerto Rico on or after October 17, 2006 are exempt from the general excise tax. At the same time, the new legislation did maintain some special excise taxes, which have since become import taxes on merchandise brought into Puerto Rico as well as goods manufactured in Puerto Rico.   

The special excise taxes maintained include:

  • Cement (also subject to the sales-and-use tax except when considered raw material)
  • Cigarettes (also subject to the sales-and-use tax)
  • Gasoline, oil and other products derived from oil
  • Vehicles
  • Alcoholic beverages (also subject to the sales-and-use tax)
  • Certain plastic products manufactured outside Puerto Rico (also subject to the sales-and-use tax)
  • Sugar (may be subject to the sales-and-use tax at the municipal level)

Section 6189 of the PR Code originally only authorized municipalities to impose a sales-and-use tax of 1.5 percent, but Act 80 of July 2007 ("Act 80") amended the PR Code to achieve the "sales-and-use tax uniformity" after July 2007. Act 80 established a mandatory and uniform sales-and-use tax of 1.5 percent to be imposed by all municipalities, subject to the same limitations and exceptions as the 5.5 percent sales-and-use tax without the approval of a municipal ordinance.

Under Act 80, the Secretary of the Treasury will collect one-third (0.5%) of the municipal sales-and-use tax together with the 5.5 percent state sales-and-use tax. Municipalities will collect the remaining two-thirds (1%).

To read more about the new Puerto Rico sales-and-use tax including how the laws are applied and what is now subject to tax, please view the full article: Navigating Puerto Rico's New Sales-and-Use Tax (PDF).

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Patricia L. Pelino, CMI, is a tax consultant for the Vertex Consulting Group and has over 25 years of tax experience. Her responsibilities have included tax advisory and support of sales-and-use tax consulting service Engagements. Her tax experience covers sales, and consumer use tax compliance, particularly in the fields of motor vehicle and equipment leasing, manufacturing and retail. Ms. Pelino has also authored industry white papers and has both developed and presented training sessions on various tax topics. Carlos E. Serrano, Esq., CPA, is the Chair of the Tax Practice Group in the Hato Rey, PR-based law firm of McConnell Valdés. Prior to rejoining McConnell Valdés, Serrano was Assistant Secretary for Internal Revenue of the Puerto Rico Treasury Department. Liz Annette Pérez, Esq., CPA, is an Associate with the Tax Practice Group of McConnell Valdés.

Navigating Puerto Rico’s New Sales-and-use tax, By Pat Pelino, Carlos E. Serrano, and Liz Annette Perez was previously published in the Journal of Multistate Taxation and Incentives, September 2008, Copyright© 2008 Thomson Reuters/WG&L. Reprinted with permission.