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Puerto Rico Swaps Sales Tax for VAT

  • Mar 25, 2016 | Gail Cole

puerto rico vat

Puerto Rico is transitioning from sales and use tax to value added tax (VAT). The United States territory increased and broadened sales tax in 2015 and initially hoped to implement VAT on April 1, 2016. Yet an administrative determination issued at the end of December 2015 grants the Puerto Rico Tax Department 60 days of wriggle room, which it is taking. The latest date given for the launch of the new system is June 1, 2016.

VAT v sales tax

As its name implies, VAT is applied whenever value is added along the supply chain and culminates with a tax on the sale to the final purchaser. Sales tax is applied only once, on retail sales to the final consumer. Credits apply to business inputs in the VAT system, while sales tax generally applies to most business inputs (other than items purchased for resale and exemptions imposed legislatively). VAT is often included in the final price; sales tax must be separately stated.

When it’s all said and done, VAT typically generates more revenue for governments than sales tax. However, the Puerto Rico will not apply VAT to raw materials imported by manufacturers. This is normally a large source of tax revenue and the exception could negatively impact Puerto Rico’s bottom line. On the other hand, it could prevent manufacturers from abandoning Puerto Rico in the wake of the tax changes.

Periodically, there is talk of implementing VAT elsewhere in the United States. Many eyes will be on Puerto Rico in the coming months and years, gauging the effects of swapping sales tax for value added tax.

Additional details are available in Ley Num. 72-2015 and Administrative Determination No. 15-26.

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Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
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.