Thursday, April 21, 2016

Wal-Mart Sues Puerto Rico Over Tax Changes



I had seen the headline, but it was busy season and there were other priorities.

Now I have had time to look into the matter.

I am referring to the Wal-Mart v Zaragoza-Gomez decision. It has to do with Puerto Rican taxes.

You may know that Puerto Rico is a U.S. territory. I have bumped into it professionally only a couple of times over the last dozen or so years. It simply is not a component of my practice.

What you may not know is that Puerto Rico has its own taxes. It is similar to a state in that regard, but there are differences. For example, if you are a resident of Puerto Rico you do not have to file a U.S. tax return – unless you have income in the U.S. You then file a U.S. return, but only for the U.S. income.

Puerto Rico however is now on the precipice of bankruptcy. They decided to bring-in more money to the fisc by changing a tax rule or two:

·        Tripling the “tangible personal property” tax rate from 2.5% to 6.5% on purchases from vendors located off the island.
·        Eliminating the option for the Treasury Secretary to exempt, in whole or part, a 20% tax on services provided by related entities or by a home office upon proof that the price charged was equal or substantially similar to the price which would occur with an unrelated person.

There was a problem, however: the tax, as changed, applied to only one taxpayer: Wal-Mart.


Granted, Wal-Mart is also the island’s largest corporate taxpayer, but one would think the politicians would employ some … deniability … before they culled the Arkansan wildebeest from the herd. Shheessssh.

Now, 6.5% does not sound like a lot, but I suppose one has to specify what it is being multiplied against. 

·        If net profit, that would leave 93.5% of profit left over. That is pretty good.
·        If cost of sales, then we need one more piece of information.
We need to know the gross profit.
Say that you bought something for $93. You sold it for $100.  Your gross profit is $7. Now you have to pay tax. That tax is calculated as 6.5% times $93 or slightly over $6. Your profit was $7.
That is not so good.

Wal-Mart said that the effect of the changes was an effective tax rate of over 90%, so I am thinking we are not too far off with the above example.

Wal-Mart did what it had to do: it sued.

The District Court was sympathetic to Puerto Rico’s financial plight:

·        It gives us no pleasure, under these circumstances, to enjoin a revenue stream that flows directly into Puerto Rico’s general fisc.”
·        … we, too, are citizens of this island and we, too, must suffer the consequences….”
·         … we are here because … has left the plaintiff, Wal-Mart, with nowhere else to turn.”

The government argued that Wal-Mart would simply have to pay the tax and sue for refund. Wal-Mart’s argument was “not yet ripe,” as it had not been denied a refund of its taxes. Furthermore, Wal-Mart could “afford to pay” the tax.

The Court pointed out the obvious: it would likely take a generation for the case to resolve, at which point Puerto Rico might be as able to repay Wal-Mart as it is to have winter sports. 

This is not a remedy, but a cynical means of extracting more unconstitutional revenue from an innocent taxpayer without the deterrent effect of having to pay it back…,” said the Court.

The government said it would appeal.

The judge just took away $100 million from the people of Puerto Rico and gave it to Wal-Mart. Now I have to look for that money somewhere else,” said Governor Alejandro Garcia Padilla.

I have no particular sympathy for Wal-Mart, other than the deep belief that any government desirous of being perceived as legitimate is mandated to deal fairly with its citizenry. Taxation is especially sensitive, and this is the equivalent of having you pay for all the new sidewalks in the neighborhood because you have the nicest house.

Smart person moves out of the neighborhood.

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