Winter 2004-02 Commission favors sales or value added tax
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Winter 2004-02 Commission favors sales or value added tax

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Number 54
Winter 2004

Commission favors sales or value added tax

In a report rendered to the Puerto Rico House of Representatives on December 5, 2003, the House Treasury Commission recommended replacing the existing excise tax with one on sales or on value added.

In response to House Resolution 3005 of June 3, 2002, the Commission studied both a sales tax and a value added tax as possible substitutes to the present 5% (effective 6.6%) excise tax.


Sales tax


A sales tax is imposed at the time of the retail sale of products. As a result, the obligation to pay the same falls on the consumer. This is the system used by many jurisdictions in the United States. A product that is sold by the manufacturer to a distributor for $100, is subsequently resold to a retailer for $200, and then for $300 to the consumer, is taxed only at the latter stage. Assuming a 10% sales tax, the consumer would pay $330 for the product, of which $30 would be the 10% sales tax, calculated on the $300 retail price.


Value added tax


The value added tax, adopted by the European Economic Community, works differently, as it is applied to each stage of the distribution, coupled with a credit. Using the same example:

the $100 price paid by the distributor would be taxed $10 (i.e., 10% of $100),

the $200 sale from the distributor to the retailer would also be taxed 10% ($20), but would receive a credit of $10 (the $10 paid for the first sale), and

the $300 sale to the consumer would again be taxed 10% ($30) and would receive a credit of $20 (the $10 paid for the first sale and the $10 paid for the second sale).

The end result would be a total value added tax of $30-the same amount resulting from the imposition of the sales tax.


One vs. the other


The report points out some advantages of the value added tax over the sales tax. Principal among them is that the value added tax is self-policing, because each participant in the distribution chain has an interest in protecting his credit, which is contingent upon the payment of the tax in the previous transaction. Another benefit offered by this system is that tax evasion by someone in the distribution chain would only affect a piece of the total tax.

The advantage of the sales tax is the greater administrative cost carried by the value added tax. Multiple-event taxation requires greater resources from both the government and the taxpayers.

However, the Commission did not reach a conclusion as to a final recommendation between the two. “Due to the absence of field studies and statistical sources, it would be imprecise to determine which option would be more efficient and optimum to be selected.”




Also pending determination is the percentage of the tax and the type of product it would be applied to.

The Committee concluded the report by asking for more money to continue studying.

© 2004 Goldman Antonetti