Puerto Rico to require use tax notification and reporting, July 2017
- Jun 28, 2017 | Gail Cole
Puerto Rico is experiencing a “monumental fiscal and social crisis,” and part of the plan to solve it involves amassing remote sales and use tax revenue. Act 25-2017, signed into law by Governor Ricardo Rosselló on April 29, 2017, expands the definition of merchant, encourages voluntary collection by remote sellers, and establishes notification and reporting requirements for non-collecting remote sellers.
Expand the definition of merchant
The act modifies the rules that determine if there is a substantial connection between a person and Puerto Rico (nexus). As explained by the Departamento de Hacienda in Administrative Determination No. 17-04, a person “is considered a merchant dedicated to the taxable sales business in Puerto Rico when:
- The person creates a substantial link with Puerto Rico through marketing by any means, including newspapers, radio, television and electronic portals, billboards, and when their sales are dispatched by mail or any other means of transportation to buyers in Puerto Rico on an ongoing, recurring basis and in the ordinary course of business, or
- The person sells and sends or causes tangible personal property to be sent from anywhere outside of Puerto Rico to any person in Puerto Rico through a link on a website, provided that such sales and consignments of tangible personal property are made by the person continuously, recurring and in the ordinary course of business.”
However, the act also establishes a new category of trader: A “non-retention” or “non-withholding” agent is a merchant who performs mail-order sales and “whose sole contact with Puerto Rico is that the buyer is a person resident or engaged in industry or business in Puerto Rico.” “Mail-order sale” is defined as the “the sale of tangible personal property ordered by any means, including but not limited to mail, catalogs, portals, electronic commerce, the internet or other means of communication, whether electronic or not.” Non-withholding agents are not required to collect and remit Puerto Rico sales and use tax.
Encourage voluntarily collection
The act encourages non-withholding agents to voluntarily collect sales and use tax. Those who do so would be obligated to collect and remit tax on sales to persons in Puerto Rico. However, they would not be required to comply with the new use tax notification and reporting requirements detailed below.
Notify and report use tax
As of July 1, 2017, non-withholding remote sellers are required to inform consumers in writing of their obligation to report and pay use tax on taxable purchases. This written notification must be provided each time a sale occurs. Failure to do so will result in a penalty of $100 per violation.
Non-collecting retailers must also send consumers a notice, by January 31 of each year, containing the following information:
- The name and address of the seller
- The name and address of the consumer
- The total amount paid for purchases of tangible personal property during the preceding calendar year
- Dates, amounts, and descriptions of each purchase
- The category of the purchase, including if it is taxable or exempt
- A statement that purchasers need to file an Import Declaration and Tax on Imports Monthly Return (for use tax payment and reporting)
- Any other information required by the Secretary of the Treasury
Failure to provide this annual notice will result in a $500 penalty per violation.
Additionally, non-collecting remote sellers must send quarterly reports containing the above information to the Secretary of the Treasury. This information will help the Secretary enforce use tax compliance and increase collections.
The penalty for failure to provide the quarterly notice dwarfs the other penalties: It is $5,000 per violation.
The Departamento de Hacienda has also issued guidance for individuals who purchase taxable goods online, for personal use or consumption. Circular Letter No. 17-08 explains their obligation to electronically file a Declaration of Use of Imported Goods and Services and remit the use tax owed.
Given its population of close to 3.5 million, Puerto Rico has an understandable appeal to retailers looking to broaden their reach beyond the continental United States. Yet companies should proceed with caution and remain aware. Non-compliance with the new sales and use tax policies can lead to steep penalties.
The team at Avalara Professional Services can help you understand your sales and use tax obligations in all states and the Commonwealth of Puerto Rico. Learn more.