Summer 2006-04 Sales tax approved
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Summer 2006-04 Sales tax approved

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Number 64
Summer 2006

Sales tax approved

After a year and a half of speculation, struggle between the Legislature and the governor, and a government shutdown, a 7% or 8% sales tax was imposed.

Act No. 117 of July 4, 2006 (known as the “Taxpayer Justice Act”), amended the Puerto Rico Internal Revenue Code of 1994 in order to establish a sale tax system in Puerto Rico. Act 117 eliminates the infamous 5% (6.6% effective rate) general excise tax.

The sales tax will be divvied up as follows:

5.5% to the central government, effective on November 15, 2006,

1.5% to the municipalities, effective immediately,

an additional 1% to the central government, available in the event that the governor determines an insufficiency in collections for the general fund.




The following items and transactions are exempted from the sales tax:

taxable items in transit, temporarily introduced to Puerto Rico for use in films, construction, trade shows, seminars, etc, and re-exported by the importer,

items used in manufacturing, i.e., raw materials used by manufacturing plants,

items currently exempted from the payment of excise taxes under Section 6(c ) of the Puerto Rico Tax Incentives Act of 1998,

items sold at air or sea terminals stores,

items acquired by the governments of Puerto Rico and the United States,

items belonging to nonresident Armed Services personnel transferred to Puerto Rico,

admission tickets to athletic events, shows sponsored by schools, universities, colleges and other educational institutions.




The following are subject to the sales and use tax: tobacco and its derivatives, alcoholic beverages, candies and sweets, soft drinks, prepared foods (the municipal 1.5% cut appears to apply to all foods, both prepared and unprepared) and certain baked products.




Prescription drugs, over-the-counter medicines, other medical items and personal hygiene items are subject to the sales tax.


Real estate


Not subject to the tax are lease payments for real property constituting the principal residence of the tenant, as well as those derived from commercial lease.




Services are subject to the tax, except for the following:

services rendered to a person dedicated to a business activity,

designated professional services (attorneys, accountants, architects, etc.),

services rendered by the government of Puerto Rico,

interest, charges for the use of money and service charges imposed by financial institutions,

service and insurance commissions,

healthcare, medical and hospital services, and

services rendered by persons whose annual volume of business does not exceed $50,000.




Some telecommunication and incidental services will be subject to the sales tax.




All businesses must have their systems in place by November 15, 2006. At press time Puerto Rico Treasury has not promulgated regulations, registration forms, circular letters or any other official guide on the implementation of the tax.




Some municipalities already had a sales tax system in place before the enactment of Act No. 117. Because Act 117 authorizes municipalities to impose the sales tax through a municipal ordinance, some have taken the position that they do not have to do so, or that they can adopt a tax lower than the 1.5%. In addition, some municipalities have established procedures and granted exemptions different from those in Act 117. Moreover, others are allowing businesses to keep as compensation from 3% to 4% of the tax collected. However, Act 117 requires that municipal sales taxes be consistent and comply with its list of exemptions and limitations.

The following are examples of what some municipalities have done:

Caguas-1% sales tax since October 2005,

Guaynabo-1.5% sales tax since July 15, 2006,

Carolina-1% sales tax since July 1, 2006,

Ponce-1% sales tax since July 1, 2006,

San Juan-1% sales tax since August 1, 2006,

Bayamón-announced a sales tax (unspecified rate).

© 2006 Goldman Antonetti & Cordóva, LLC