Sales and Use Tax Exemption for certain merchants

November 28 2017

In the aftermath of Hurricane María, Puerto Rico has faced many difficulties with the communication systems, power, and the partial or complete closing of businesses, which have negatively impacted the continuity of business activities in the island’s economy. Consequently, the Governor of Puerto Rico issued Executive Order No. OE-2017-056 (“OE-2017-056”), authorizing the Secretary of the Puerto Rico Treasury Department (“Secretary”) to take any necessary measure for an effective tax administration during Puerto Rico’s state of emergency due to Hurricane Maria.

Moreover, due to the challenges faced, the Governor issued Executive Order No. OE-2017-068 (“OE-2017-068”) on November 8, 2017, to temporarily exempt small and medium companies (“PYMES”) from the Sales and Use Tax (“SUT”), including the SUT payment from the purchase of inventory for resale. Furthermore, OE-2017-06 orders the Secretary to establish the eligibility requirements that must be met to have right to such exemption, and states that PYMES will not be able to shift any SUT related charge to the consumer, if the same is covered by the exemption.

  1. Administrative Determination 17-26 (“AD 17-26”)

On November 10, 2017, the PRDT issued Administrative Determination No. 17-26 (“AD 17-26”) to provide a temporary State and Municipal SUT exemption to certain PYMES which volume of business (“VOB”) do not exceed $1,000,000.   

SUT temporarily Exemption

The temporary exemption will cover the period from November 20, 2017 to December 31, 2017 (“Temporary Period”). As stated in AD 17-26, to be consider an Exempt Merchant the following requirements must be met:

  • VOB cannot exceed $1,000,000; and
  • Merchant cannot be considered a Large Taxpayer.

To determine if the merchant meets the VOB requirement, the total VOB (including exempt and taxable sales) reported in the SUT Monthly Returns (“SUT Returns”) for the 12 months from August 2016 to July 2017 will be taken into consideration. In the case of merchants whose date of commencement of operations was after August 31, 2016, the VOB will be determined as follows:

However, new merchants whose date of commencement of operations was after July 31, 2017 and whose Merchant Registration was completed in SURI, will be considered Exempt Merchants and will not be required to collect the SUT during the Temporary Period.

Also, to be considered eligible for the exemption, merchants who are Withholding Agents, must be in compliance with the filing of the corresponding SUT Returns as of the period of July 2017.

Exempt Merchant’s Temporary Certificate

The PRDT will evaluate the SUT Returns filed for the months from August 2016 to July 2017 by every merchant and will issue an Exempt Merchant’s Temporary Certificate through SURI, which will state that the merchant is a Non-Withholding Agent. Such Certificate will substitute the original Merchant’s Registry Certificate temporarily. As mentioned before, for merchants whose date of commencement of operations was after August 2016, the PRDT will evaluate the SUT Returns for the months that such merchant was operating and will annualize the reported sales to determine if the exemption applies. 

The Exempt Certificate is available through SURI since November 15, 2017. Every Exempt Merchant will need to place the Certificate in a visible area in the business location so that clients are notified of the SUT exemption during the Temporary Period. The non-compliance by the merchant will result in the revocation the such exemption.

In addition, those merchants who believe they qualify as Exempt Merchants and who did not receive the Exempt Certificate through SURI, can send a request through SURI using the “Send a Message” link available in the online portal.

Moreover, the Exempt Merchants to which the temporary exemption applies to, must submit the corresponding SUT Return in the same form and manner as established in the PR Internal Revenue Code (“PR Code”). Nonetheless, the total sales subject to the SUT exemption will need to be reported in Part D – Exempt Sales.

Temporary Exemption in purchases of inventory for resale

In addition to the abovementioned SUT exemption, an Use Tax exemption will be provided to every Exempt Merchant, only, in purchases of inventory for resale. To have right to such exemption, the Exempt Merchant must complete Form As 2916.1 – Certificate for Exempt purchases and for services subject to the 4% Special SUT and submit it along with a copy of the Temporary Exempt Certificate. Merchants with taxable sales made to an Exempt Merchant during the Temporary Period, and who receives from the Exempt Merchant the completed form and the certificate, will not be required to collect SUT from the transaction. For inventory purchases from abroad, the Exempt Merchant will be able to declare the purchased goods through SURI.

The SUT temporary exemption is not applicable to the use tax on personal tangible property purchases or in the payment for services received from the Exempt Merchant.

Applicability based on the Accounting method

For merchants with an Accrual Basis of accounting, and who, in their ordinary course of business, do not receive the payment at the time of sale, transactions billed during the Temporary Period will be the ones considered as exempt, if sold by an Exempt Merchant. However, for merchants whose method of accounting is Cash Basis for SUT purposes, the transactions, which payment is collected during the Temporary Period, will be considered as exempt.

Non-compliance by Exempt Merchants

Merchants who retain SUT from the exempt transactions discussed herein will be subject to a penalty of $100.00 for each invoice, receipt or any other type of evidence of the sale.