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Puerto Rico's Tax Burden Adjustment and Redistribution Act


 The Tax Burden Adjustment and Redistribution Act.

On June 30, 2013, Puerto Rico enacted the Tax Burden Adjustment and Redistribution Act. It impacts income tax and creates and imposes a "new tax on gross income, as part of the alternative minimum tax (AMT) regime." It also impacts sales and use tax.

Most provisions take effect immediately, however the sales and use tax provisions take effect after July 31, 2013.

Sales and use tax

The Tax Burden Adjustment and Redistribution Act primarily impacts sales and use tax in two areas:

  • Business-to-business (B2B) services, and
  • Reseller exemptions.

Business-to-business services

Historically, B2B services have not been subject to sales tax in Puerto Rico. However, under the Tax Burden Adjustment and Redistribution Act, the following B2B services are taxable:

  • Storage of tangible personal property;
  • Motor vehicle leasing;
  • Computer programming (including the modification of previously designed systems);
  • Installation and repairs of personal tangible property;
  • Certain bank charges and fees;
  • Collection services;
  • Security (armored services);
  • Cleaning and laundry services;
  • Waste management services;
  • Telecommunications services.

There is a curious caveat in the legislation: "To the extent any of these newly taxed services are rendered to related persons, however, no sales and use tax will apply."

Still, exempt services include professional B2B services and tax return preparer services.

Reseller exemption

Historically, businesses with a valid reseller exemption have been able to purchase products for resale tax-free. However, the Tax Burden Adjustment and Redistribution Act repeals the existing reseller exemption. After July 31, these businesses will pay sales and use tax but may "claim a credit for the amount of tax paid against the remittance of sales and use tax collected from their customers."

Sellers "'primarily' engaged in the business of selling goods to 'persons who may acquire such goods exempt from the payment of sales and use tax' or for export purposes" may obtain a new "certificate of eligible reseller" from the Secretary. To be eligible, approximately 80% of their inventory (over a specified three-period) must be sold to an "exempt purchaser or for export." Then and only then is the certified reseller exempt from paying sales and use tax.

Other changes to sales and use tax law

In addition to the reseller exemption and B2B services, the Tax Burden Adjustment and Redistribution Act impacts sales and use tax in several other ways:

  • Effective December 1, 2013, the sales and use tax rate will decrease from 7% to 6.5%, "unless the Legislative Assembly postpones the rate reduction."
  • The back-to-school exemption now applies only to uniforms, textbooks, and specified materials.
  • The exemption for higher educational institutions is repealed.
  • The exemption for "equipment acquired by health service providers for use for administrative or commercial purposes, or for the maintenance of hospital units" is no longer. This equipment is now taxable.
  • Registered merchants must establish "demand deposit accounts" with a financial institution located in Puerto Rico, for sales and use tax collections and deposits.

Tax Credit Unions, not prescriptions

In addition, prescription medication (for human use) is exempt from sales tax, but Credit Unions and other cooperatives are subject to sales tax.

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Gail Cole
Avalara Author
Gail Cole
Gail Cole
Avalara Author Gail Cole
Gail began researching and writing about sales tax in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.