Indirect tax ebook - Puerto Rico

General tax application/Time of supply

Tangible Personal Property
Taxable Services
Rights of Admission Fees
Combined Transaction
Exemptions
Certificate of Exempt Purchases
Request of the Exemption Certificate
Timing 
IVU Loto project

A 'taxable item' is any of the following: tangible personal property, taxable services, rights of admission and combined transactions.

The term 'taxable item' excludes the following:

• sale of private or public lottery duly authorized by Puerto Rican law, as well as raffles and bingo games;
• homeowners’ associations’ maintenance fees;
• professional associations’ fees;
• stamps sold by a professional association; and
• stamps sold by the Commonwealth of Puerto Rico and United States Governments, respectively.

Tangible Personal Property

The term 'tangible personal property' excludes the following:

• money, cash equivalents, stocks, bonds, notes, notes payables, mortgages, insurance, securities or other obligations; 
• automobiles, propellers, omnibuses and trucks;
• intangibles (except for software);
• gasoline, aviation fuel, gas oil, diesel oil, crude oil, partially finished and finished derivate products and other blend of hydrocarbons;
• the electric power generated by the Puerto Rico Electric Power Authority or other electricity producing entity; and
• the water supplied by the Puerto Rico Aqueducts and Sewers Authority.
  
  

Taxable Services

The term 'taxable services' excludes the following:

• services rendered to a person engaged in a trade or business (business-to-business exclusion);
• designated professional services regulated by some of the Puerto Rico State Department Examining Boards or by the Puerto Rico Supreme
• Court (i.e. lawyers, engineers, CPA’s and appraisers, among others);
• services provided by the Commonwealth of Puerto Rico and its Municipalities;
• educational services including the costs of enrolment offered by entities regulated by the General and Higher Education Councils (i.e. tutorial
• courses offered by teachers certified by the Department of Education of Puerto Rico, continuing education courses offered by colleges or professional associations);
• interest and other charges for the use of money;
• insurance services and commissions, including warranty services, life and health insurance contracts among others;
• health, medical and hospital services; and
• services rendered by a person whose annual business volume does not exceed $50,000.
  
  

Rights of Admission Fees

The term 'rights of admission fees' includes the amount of money paid for:

• admitting one person or vehicle with people inside it into any place of entertainment, sports, or recreation;
• the privilege of entering or remaining in any place of entertainment, sports, or recreation, including, but not limited to movie theaters, theaters, open theaters, shows, exhibitions, games, races, or any place where the fee is charged through the sale of tickets, entrance fees, seat charges, charges for exclusive area, season tickets fees, participation charges, or other charges;
• the receipt of any item of a measured value in the admission or entrance or duration of stay or accommodation in any location of an exhibition, entertainment, sport, or recreation; and
• the fees and charges paid to private clubs and membership clubs that provide recreation facilities, including, but not limited to golf, tennis, swimming, sailing, athletic canoeing, exercise and physical exercise facilities, except those that do not operate for profit, and the exercise facilities property of, or operated by, any hospital.
  
  

Combined Transaction

A transaction is considered a combined transaction when it consists of the sale of two or more tangible personal properties or services, where the tangible personal properties or services are different and identifiable, and the tangible personal properties or services are sold at one non-itemized price. Every combined transaction shall be considered a sale of taxable items. The term 'different and identifiable tangible personal properties or services' exclude:

• packaging materials, such as containers, boxes, pallets, sacks, bags, and bottles, and other packaging materials which are included in retail sales but are incidental or immaterial to the sale, such as wrapping paper, labels, instruction manuals, grocery sacks, shoeboxes, dry cleaning garment bags, postal service boxes and envelopes, among others; and
• taxable tangible personal property obtained free of charge with the purchase of another property or service, when the sales price of the property or service acquired does not change with the inclusion of the property that is free of charge.
  
  

Exemptions

Finally, there are certain taxable items that are exempted from the imposition of the SUT, such as:

• taxable items sold for use and consumption outside of Puerto Rico;
• taxable items introduced to Puerto Rico temporarily, which are directly related to the production of films, constructions, trade shows, conventions, seminars, or for other purposes, and which are re-exported from Puerto Rico by the same person who imported them;
• raw material and the machinery and equipment used on the manufacture process;
• taxable items available for sale in air or maritime terminal stores to persons traveling outside of Puerto Rico's jurisdictional borders;
• taxable items acquired by agencies from the Governments of the Commonwealth of Puerto Rico and United States, respectively;
• taxable items introduced by any person who wishes to establish or re-establish his or her residence in Puerto Rico;
• admission fees for sports events or other types of events sponsored by public or private elementary schools, intermediate schools, high schools, universities or colleges that provide educational services.;
• food and food ingredients;
• prescription drugs that are to be consumed by a human being, that can be acquired solely and exclusively with a medical prescription;
• the rate for the lease or rental of real property for commercial purposes, the rate for the lease or rental of real property paid by a student, for his or her student housing, and by an individual, for what constitutes his or her main residence;
• taxable items purchased to be re-sold by a duly registered merchant;
• certain machinery, equipment, surgical material and other items acquired by hospitals and other entities that provide health related services;
• boats and vessels to be used to provide bunkering services;
• funeral services up to the amount of four thousand dollars ($4,000); and
• promotional giveaways imported to Puerto Rico for a convention, seminar, trade show, etc.
  
  

Certificate of Exempt Purchases

The Certificate of exempt purchases (Form AS 2916.1) applies to:

• a purchaser registered in the Merchants’ Registry of the Department, that holds a valid Exemption Certificate and purchases tangible personal property for resale, raw materials, or machinery and equipment used in manufacturing;
• a purchaser registered in the Merchant’s Registry of the Department, that received services from another merchant that is also registered in said registry;
• an agency of the Commonwealth of Puerto Rico or the Federal Government that acquires taxable items for its official use;
• a bona fide farmer, duly certified by the Department of Agriculture, that acquires agricultural goods and machinery and equipment used for said agricultural activity;
• a merchant that holds a Total Exemption Certificate, which allows him or her to pay the sales and use tax directly to the Secretary instead of paying it to the seller;
• a saving and credit cooperative and a cooperative ruled by Act No. 239 of September 1, 2004, that acquires items and services;
• a diplomat who holds a valid exemption card issued by the United States Department of State, that entitles him or her to claim an exemption from the SUT;
• a person covered by any special act that provides an exemption from the payment of the SUT;
• a person who acquires taxable items for use or consumption outside of Puerto Rico;
• a higher education institution that acquires taxable items for its official use, as provided by Act. No. 106 of July 11, 2008;
• an individual affected by a disaster who acquires taxable items that constitute basic need articles required for the restoration, repair and needs supply and damages caused by reason of the disaster.

The purchaser must submit the form duly signed to the seller at the moment of the purchase. The sellers are required to keep a copy of this form and the Merchants Registry Certificate in their files for a period of 6 years, counted from the filing date of the Sales and Use Tax Monthly Return, in which the exempt transaction is reported.

Request of the Exemption Certificate

In the case of a registered merchant with volume of business of $500,000 or more the Certificate is sent automatically. If the Merchant does not receive the Certificate, the following documents must be provided to the Sales & Use Tax Office in the Puerto Rico Treasury Department:

• clean Debt Certificate from the Department of Treasury
• filing certificate of income tax returns for the last five years from the Department of Treasury (The report must show that income tax returns for the last five years were filed, if not, the tax filing evidence for the years not showed in the certificate must be provided)
• no debt of SUT.

For the Registered Merchant with a volume of business less than $500,000, the certificate must be renewed in the SUT Office. The following documents need to be provided: 

• clean Debt Certificate from the Department of Treasury, 
• filing certificate of income tax returns for the last five years from the Department of Treasury (The report must show that income tax returns for the last five years were filed, if not, the tax filing evidence for the years not showed in the certificate must be provided).
• most recent Volume of Business Declaration (VOB 09-10) for all municipalities,
• no debt of SUT.

Penalties for not having a valid SUT Certificate of Exemption are very harsh. Merchants must be in compliance with the law in order to be able to take advantage of the exemption and avoid unnecessary complications when trying to obtain credit for taxes paid.

Timing

For purposes of the SUT, every merchant should use the same accounting method used to report his/her income on the income tax return. This means, the merchant will be responsible for the deposit of the SUT with the PRTD when he receives the “payment” from the customer. For these purposes, the term “payment” includes the cash, property or any other service received. It will also include the commitment, written or not, from the buyer to satisfy the sales price plus the SUT of the taxable item.

IVU Loto project

As part of the government's efforts to monitor the Sales and Use Tax, the Puerto Rico Treasury Department requires that first time registered merchants complete the communication named 'Notice of Mechanism for the Selection, Installation, or Adoption of a Fiscal Device for the Ivu-Loto Project' (Form SC 2923). The form includes a questionnaire that consists of nine questions that need to be answered in order to determine if the monitoring device can be installed in the registered business.

The registered merchant has two options for completing the questionnaire included on Form 2923:

1. Visit the internet portal www.ivuloto.pr.gov
2. Calling (787)200-7900 and selecting option #4

Responses to the questionnaire by mail or fax are not accepted, however before responding to the questionnaire a personal identification number (PIN) for each merchant is required to start answering the questionnaire.  Once the merchant finishes the questionnaire, he(she) will be notified whether the business qualifies for IVU Loto and will receive a confirmation number which certifies the participation in the questionnaire process.
 
If you are a registered merchant and have not received your questionnaire, we strongly recommend you access the internet portal and commence the process. You will acquire your PIN at the site.

Failure to complete the questionnaire or to respond the questionnaire could be considered as refusing to implement the IVU Loto Program, and consequently will be subject to the applicable penalties imposed by the Internal Revenue Code for the New Puerto Rico. Among these penalties, any merchant who does not comply with the obligation to install a fiscal device, allow the installation, or modify an existing application, could be subject to a penalty of up to $20,000.  

Information about Puerto Rico:

• Introduction
• Scope
• Registration
• Tax rates
• Reporting & filing
• General tax application/Time of supply