In light of recent sales tax changes, this month, we’d like to take you to the Caribbean and discuss the Puerto Rico tax climate. An archipelago, it consists of the main island and a number of smaller ones, including Vieques, Culebra and Mona. Not every island is populated year-round, but many are popular tourist destinations.

Collectively known as the “Island of Enchantment,” Puerto Rico features beautiful sandy beaches, gorgeous tropical forests, coral reefs and balmy weather.

The islands were first populated by the Taíno, an indigenous Caribbean ethnic group, before being colonized by the Spanish following Christopher Columbus’ arrival in 1493. It remained in Spanish hands until the Spanish-American War, when it was ceded to American control with the signing of the Treaty of Paris of 1898.

As an unincorporated territory of the U.S., Puerto Ricans are U.S. citizens and can move freely between the island and the mainland. However, it does not have a vote in the U.S. Congress and is only represented by one non-voting member in the House of Representatives, referred to as a resident commissioner. Various taxes in Puerto Rico are often similar to those in the U.S., but can have significant changes based on local law.

In September 2017, the islands were ravaged by Hurricane Maria, resulting in significant human fatalities and damage to infrastructure. In December 2019 and January 2020, the islands were rocked by a series of earthquakes, resulting in additional damage to homes and other structures. Overall, recovery has been slow after the disasters, with federal disaster relief funds taking months, or years, to be distributed.

Puerto Rico’s Business Climate

Tourism is an important economic industry for the islands. Popular tourist destinations include Old San Juan, which features 500-year-old buildings and other landmarks, and La Parguera, Lajas, a village on the southwestern side of the main island with a nearby bioluminescent bay.

The largest economic industry is manufacturing, primarily of pharmaceuticals, medical devices and biotechnology. Across the island, Puerto Rico has 49 FDA-approved pharmaceutical plants and the world’s largest modular biotechnology plant for producing recombinant human insulin.

Puerto Rico’s Tax Climate

The Puerto Rico tax climate borrows from federal tax laws, but features legislation that is distinct from the rest of the U.S. For example, while they do not pay U.S. federal income tax, Puerto Rico does levy a personal income tax, with a top marginal rate of 33 percent. Additionally, they collect corporate income tax, with a maximum nominal rate of 37.5 percent.

Due to inheritance laws, Puerto Rico previously collected estate and gift taxes on property willed or inherited after a death. However, in August 2017, Senate Bill 582 was signed into law, which repealed both estate and gift taxes.

Property taxes are also collected, with a maximum tax rate of 9.83 percent.

Puerto Rico’s Sales Tax Structure

Puerto Rico’s general sales and use tax rate was increased to from 7 percent to 11.5 percent in 2015, with the tax rate on prepared foods lowered back to 7 percent following additional tax reform in 2018. Due to this, sales taxes in Puerto Rico are the highest in the U.S., with Tennessee (9.53 percent) and Louisiana (9.52 percent) second and third.

Recently, newly enacted legislation requires marketplace facilitators to collect and remit sales and use tax on all sales made through their platform in Puerto Rico. The law took effect retroactively on January 1, 2020. However, there is legislation currently pending that would move the effective date to October 1, 2020.

The legislation defines a marketplace facilitator as entities that facilitate the sale of tangible personal property, specific digital products or taxable services through promoting, advertising or listing the sales by marketplace sellers. Additionally, marketplace facilitators must directly or indirectly collect payment from the purchaser and transmit it to the marketplace seller.

Before the recent changes, Puerto Rico had been encouraging out-of-state sellers to voluntarily collect and remit tax on sales since July 2017. However, they haven’t been compelled until now.

In regards to the taxation of technology products for sales tax purposes, Puerto Rico imposes sales and use tax on tangible personal property, which includes items, “that can be seen, weighed, measured or touched, or in any other way perceptible to the senses, or that is susceptible to appropriation, regardless of the means of delivery or transfer.” This includes computer software and digital goods such as e-books. There is currently no guidance regarding software-as-a-service goods or cloud-based services.

Many states have annual sales tax holidays, during which certain items the state wants to promote the purchase of (like school supplies, emergency preparedness supplies, or energy efficient appliances) can be purchased sales tax free. Puerto Rico holds back to school sales tax holidays, which apply to school uniforms and applicable supplies.

Random Facts

-San Juan is in the top 25 busiest cruise ports in the world by passengers.
-Puerto Rico uses the U.S. dollar.
-El Yunque Rainforest, located on the main island, is the only tropical rainforest that is part of the U.S. National Forest System.
-Christopher Columbus originally named the island San Juan Bautista, after John the Baptist.
-The national drink of Puerto Rico is the Piña Colada.
-There are over 270 miles of beaches in Puerto Rico.
-Several beaches in Puerto Rico have black sand due to volcanic activity.
-For over 50 years, the largest radio telescope in the world was located in Arecibo, Puerto Rico.

Do You Have Questions About State Taxes? Monika Miles