On April 29, 2017, the Governor of Puerto Rico signed into law House Bill No. 849. As a result, Act 25 of April 29, 2017 (“Act 25-2017”) was created to improve the Sales and Use Tax (“SUT”) collection on online purchases of taxable products in Puerto Rico, but, its practical application, affects more than just your standard household online purchases.
Some of the most significant changes of Act 25-2017 include modifications to:
- Section 4010.01(h) of the 2011 Puerto Rico Internal Revenue Code (the “Code”), to expand the concept of nexus to consider as Non Withholding Agent, online or remote sellers who lack physical presence in Puerto Rico, but sell tangible personal property to purchasers located within Puerto Rican boundaries.
- Section 6080.14 of the Code, to establish that the Department of Treasury (the “Department”) will be responsible for collecting not only the State SUT portion of 10.5%, but also a 1% Municipal Use Tax.
On June 15, 2017, the Department issued Administrative Determination 17-04, to provide the following:
- August 1, 2017 as the effective date the Department will begin to collect the 1% Municipal Use Tax for tangible personal property purchased and imported into Puerto Rico for use and consumption; and
- July 1, 2017 as the effective date for the applicability of Act 25-2017 provisions to merchants considered as Non Withholding Agents of the SUT and their duty to comply with the notification and reporting requirements to purchasers in Puerto Rico.
- The Department is in the process of preparing applicable rules and regulations, but, in the meantime, they are willing to accept requests from Non Withholding Agents to coordinate the responsibilities in case they convert to Voluntary Withholding Agents (explained below).
Eligible resellers are exempt from this 1% Municipal Use Tax with respect to taxable items for resale.
SUBSTANTIAL NEXUS REDEFINED FOR SUT PURPOSES
A merchant will be considered to have a substantial nexus with Puerto Rico for SUT purposes if:
- it executes sale and purchase agreements in Puerto Rico, and when direct marketing is conducted through any means available, including, but not limited to, mail, press, radio, television, internet sites, social media, billboards, catalogs, or through any other means, whether electronic or not, and its sales are delivered through mail or any other means of transportation to Puerto Rican purchasers in a continuous and recurring manner in the seller’s ordinary course of business; or
- when it sells and sends tangible personal property from any state or foreign country to any person in Puerto Rico through the internet for use, distribution, or consumption in Puerto Rico (or storage to then be used or consumed in Puerto Rico), if such sale and delivery of tangible personal property is done in a continuous and recurring manner in the seller’s ordinary course of business.
WHO WILL BE CONSIDERED A “NON WITHHOLDING AGENT”?
Any merchant who sells tangible personal property ordered through any means, including, but not limited to, catalogs, regular mail, social media, e-commerce, etc., and whose only contact with Puerto Rico is sending the ordered item to a Puerto Rico resident or to someone engaged in trade or business in Puerto Rico, regardless of the fact such person was the one who placed the order or not.
Any merchant considered as a Non Withholding Agent will not be required to collect the SUT. However, the merchant will be required to comply with certain notification and reporting requirements.
NOTIFICATION REQUIREMENTS FOR NON WITHHOLDING AGENTS
Effective July 1, 2017, a Non Withholding Agent must provide the purchaser a notification in writing stating that:
- Sales may be subject to SUT in Puerto Rico; and
- It is the purchaser’s responsibility to declare and pay the corresponding SUT to the Department.
Such notification must be included in every sale invoice, receipt, or any other document that documents the sale.
Additionally, a Non Withholding Agent will be required to submit quarterly notices (due by the last day of the month following the quarter end) to the Secretary of Treasury (the “Secretary”) regarding purchases made by the Puerto Rican buyers. Such notice or report should include:
- Seller’s name and address,
- Purchaser’s name and delivery address,
- Purchases’ dates,
- Value of purchase and description, and
- Whether the purchase is exempt or taxable
Also, an annual notice must be provided to all Puerto Rico purchasers that acquired merchandise on or before January 31 of each year. Such notice must include the information of the quarterly reports.
Act 25-2017 indicates penalties will apply to those who do not comply. The penalties for those who fail to comply with the notification and reporting requirements are as follows:
|Penalties for Failure to comply
Failure to notify the buyer of his/her
responsibility to pay SUT, and to include
said notification in the sale’s invoice or receipt
|$100 for each failure
|Failure to submit Quarterly Report
||$5,000 for each failure
|Failure to file Annual Notice to Puerto Rico
purchasers and copy to the Treasury
|$500 for each failure
Act 25-2017 broadens the situations in which it shall be understood that a merchant is subject to reporting and/or remittance requirements under the SUT regime for selling taxable items into Puerto Rico. Thus, if you run an online business or sell via affiliates or non-affiliates tangible property into Puerto Rico, you should carefully consider the implications of Act 25-2017 since you may be affected beginning on July 1, 2017.Nonetheless, Act 25-2017 provides for a Non Withholding Agent to voluntarily request to be considered a Withholding Agent (“Voluntary Withholding Agent”). In such case, the Voluntary Withholding Agent will be responsible for collecting and remitting the SUT to the Department. Although such classification would likely eliminate the need to meet the notification and reporting requirements mentioned above, as a withholding agent, the Voluntary Withholding Agent would then likely be responsible to meet other reporting and remittance requirements as those would be agreed upon during the registration process with the Department.
COLLECTION OF USE TAX
Effective August 1, 2017, every person who purchases and imports a tangible personal property for use and consumption in Puerto Rico shall remit the total SUT payment of 11.5% to the Department. The Department will be responsible for the remittance of the 1% portion to the corresponding municipality(ies).
Also, effective on the same date, any merchant who has a bond that guarantees the SUT payment in purchases of imported property can use such bond against the total SUT amount, including the corresponding Municipal Tax amount, applicable to purchases of tangible personal property that said merchant makes for use and consumption in Puerto Rico. Merchants who do not have such bond will be required to pay the SUT for all the products, prior to the release of the merchandise. As a result, bonded registered merchants are encouraged to review their bonds and ascertain the amounts cover the additional 1%. Those merchants who wish to increase the amount of their bond can do so by notifying the increase through a letter addressed to the Director of Consumer Tax Bureau no later than July 31, 2017.