Winter 2007-02 The "IVU" kicks off

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Number 66
Winter 2007
Follow up

The "IVU" kicks off

After a year of controversy and much anticipation, last November 15, 2006, the 5.5% Commonwealth sale and use tax, commonly known by its Spanish acronym "IVU," became effective. So did the authorization to municipalities to impose a 1.5% municipal sale and use tax.

According to the Secretary of the Treasury, the Commonwealth sale and use tax generated approximately $51 million dollars in its first period-from November 15 to November 30, 2006-exceeding the original estimate of $50 million.

Consistency problems

However, the biggest challenge to tax implementation has been achieving consistency. Despite all efforts, the Puerto Rico Mayors' Association, the Mayors' Federation, the executive branch and the legislature were unable to reach an agreement regarding the establishment and administration of the municipal tax.

Not all municipalities have enacted municipal ordinances establishing the tax; and some of those that were adopted are inconsistent with-and even contradict-the enabling legislation. This is the result of controversial differences in interpretation of the law, such as whether the municipalities are required to impose the 1.5% rate, if the decision is up to each municipality, or if there is an obligation to impose a municipal sale and use tax at all. As of January 1, 2007:

55 municipalities had adopted a 1.5% tax,

one had adopted a 1% tax and

22 had not adopted any.

This situation has created uncertainty and confusion, principally to people engaged in business in more than one municipality.

Agreement with Treasury

Seven municipalities (Comerío, Dorado, Fajardo, Humacao, Naguabo, Rincón and Trujillo Alto) have reached an agreement with the Puerto Rico Treasury Department to enact consistent municipal ordinances and establish a 1.5% municipal sale and use tax within their jurisdictions. According to Internal Revenue Area Informative Bulletin No. 06-14, all seven have implemented Treasury's Merchant Registry, and have accepted that Treasury be the only agency in charge of the issuance of "Registration and Exemption Certificates" thereunder.

Centralization

They also agreed that the tax bases and exemptions of each municipality follow the pattern of the enabling law. As a result, merchants doing business in one or more of these municipalities charge a total 7% tax (5.5% state tax and 1.5% municipal tax) on all taxable transactions, which is delivered to Treasury.

Treasury is also in charge of administration and enforcement of the municipal tax of said municipalities; and all determinations, circular letters and other administrative pronouncements of the department regarding the Commonwealth tax are also applicable to the municipal tax.


© 2007 Goldman Antonetti & Cordova, LLC