In Puerto Rico, the general rule is that merchants are responsible for collecting and remitting Sales and Use Tax (“SUT”) upon the sale of any taxable item including tangible personal property, taxable services, admission rights, digital products, and mixed transactions. The SUT rate is 10.5% at the state level, and an additional 1% at the municipal level, for an aggregate 11.5%.
Act 25 of April 29, 2017 (“Act 25-2017”) amended several provisions of the Puerto Rico Internal Revenue Code of 2011, as amended (“PR Code”), including subsection (h) of Section 4010.01 of the PR Code, to modify the rules to determine whether a person is engaged in the business of selling taxable items in Puerto Rico, or in other words, if there is a nexus between said person and Puerto Rico for SUT purposes. Furthermore, on June 21, 2018, with the decision in South Dakota v. Wayfair, the United States Supreme Court established that the States have the possibility to impose collection and remittance requirements of the sales tax to out-of-state merchants based solely on their economic presence in a State. In the case of Puerto Rico, the Wayfair decision supports the applicability of Act 25-2017 with respect to the substantial nexus requirements for SUT purposes.
Establishing Nexus with Puerto Rico
The obligation to register and collect SUT applies to any person that is considered a “merchant” under the PR Code Section 4010.01(h). Said Section of the PR Code defines the term “merchant” and includes provisions stating that a person who qualifies as merchant has nexus with Puerto Rico and must generally collect SUT on sales.
Merchant is defined by the PR Code as every person engaged in the sale of taxable items in Puerto Rico, including any wholesaler. For purposes of the definition of merchant, any person shall be considered to be in the business of selling taxable items in Puerto Rico, thus, is considered to have a nexus with Puerto Rico if any the following criteria is met:
Physical Presence/Ownership of Property
1. The person maintains physical place of business or offices in Puerto Rico, or maintains and uses within Puerto Rico, directly or through a subsidiary or affiliate, an office, distribution warehouse, sales office, or an office, warehouse other premises operated by any person, other than a transportation business or carrier acting in such capacity; or
2. The person has employees, independent contractors, direct or indirect representatives, or agents in Puerto Rico who solicit business or transact business on behalf or for the benefit of such person; or
3. The person owns tangible personal property or real property in Puerto Rico.
1. A merchant, including one considered "affiliated" to said person, that is subject to the jurisdiction of the Commonwealth of Puerto Rico with respect to the SUT, makes any of the following on behalf or for the benefit of said person:
a. sells a product line similar to the product line sold by the person under the same or similar trade name to that person;
b. the merchant uses his employees in Puerto Rico or his facilities in Puerto Rico, to advertise, promote or facilitate sales of the person to the buyers in Puerto Rico;
c. the merchant maintains an office, a distribution center, warehouse or storage place, or similar business premises in Puerto Rico to facilitate delivery or performance, as applicable, of taxable items sold by the person to buyers in Puerto Rico;
d. the merchant uses trademarks, service marks or trade names in Puerto Rico equal to or similar to those used by the person;
e. the merchant gives, installs, assembles, or renders maintenance services to the person's buyers in Puerto Rico on taxable items sold by the person to buyers in Puerto Rico;
f. the merchant facilitates delivery of tangible personal property sold to the person's clients located in Puerto Rico, allowing the person's clients to collect the tangible personal property in an office, distribution center, warehouse or similar place of business maintained by the merchant in Puerto Rico or receives in his facilities the merchandise returned by the person's clients who bought directly said merchandise from the person; or
g. the merchant carries out other activities in Puerto Rico significantly associated with the person's capacity to establish and maintain a market in Puerto Rico for the person's sales.
1. The person creates a substantial nexus with Puerto Rico, including, but not limited to, the granting of sale contracts in Puerto Rico, direct marketing or by any other means and mail order sales (including, but not limited to, mail, radio, television, cyber portals, e-commerce or other electronic means, distribution of unsolicited catalogs, or advertisement from magazines, newspaper, billboards, websites, social media or other advertising means of distribution in PR, whether electronic or not). The activities herein described must be made by the person in a continuous, recurrent manner and in the ordinary course of business, as follows:
a. In the case of award of sale contracts in PR, if the merchant has gross sales in PR in excess of $10,000.
b. In the case of direct marketing, if the merchant carries out these activities in Puerto Rico directly or indirectly for the purpose of selling tangible personal property, including specific digital products and services, in Puerto Rico or establishing a market in Puerto Rico.
c. In the case of mail order sales by entities that do not have a physical location in PR, if the merchant has volume of business (total gross sales) in PR in excess of $100,000 or carries out at least 200 transactions during the taxable year.
2. The person enters into an agreement with one or several residents in Puerto Rico by which the residents, in exchange for a commission or other consideration, refer, directly or indirectly, potential buyers to the person. The provisions of this paragraph shall not apply if it is shown that the merchant's activities in Puerto Rico do not create a substantial nexus with Puerto Rico.
1. The person sells and sends or causes to be sent, tangible personal property including specific digital products and services of any foreign state or country to any person in Puerto Rico via link on a website, for use, consumption, or distribution in Puerto Rico. The activities herein described must be made by the person in a continuous, recurrent manner and in the ordinary course of business.
- Such activities shall be deemed to be carried out on a continuous, recurring basis and in the ordinary course of business if the merchant has volume of business, that is total gross sales, in Puerto Rico in excess of one hundred thousand dollars ($100,000), or if he carries out at least two hundred (200) transactions during his accounting year.
The person has sufficient connection with or relationship with Puerto Rico or its residents in a manner other than as described; or
Through agreement or reciprocity with another jurisdiction in the United States and such jurisdiction uses its taxing power and jurisdiction over such person in support of Puerto Rico's power; or
The person consents, expressly or implicitly, to the tax imposed; or
The person is a market facilitator or market vendor that sells and sends, or causes to be sent, tangible personal property including specific digital products, and services from any state, territory, or foreign country to anyone in Puerto Rico via a link on an Internet page, for use, consumption, or distribution in Puerto Rico, or for storage to be used or consumed in Puerto Rico.
Such activities shall be deemed to be carried out on a continuous, recurring basis and in the ordinary course of business if the marketplace facilitator or marketplace seller has volume of business, that is total gross sales, in Puerto Rico in excess of $100,000, or if he carries out at least 200 transactions during his accounting year.
Please note that this is a summary of the criteria used to determine if the business has nexus with Puerto Rico for SUT purposes.
Introducing examples of when businesses establish a nexus with Puerto Rico can help clarify the concept and its significance. These examples that Treasury Regulations illustrate will offer valuable insights into the factors that trigger a business nexus with Puerto Rico, whether it's through physical presence, substantial revenue generation, or strategic business operations.
Facts: Merchant "X", has a cyber-portal (website) where individuals, including residents of Puerto Rico, may purchase taxable items at third-party auctions or online sales whose sole business relationship with Merchant "X" is that they pay an amount or charge for participating in the auction of, or included in, the website ("Participating Third Party Merchants"). Individuals who purchase taxable items on the "X" Merchant cyber portal do not purchase them from the Merchant, but from participating Third Party Merchants, but the sale is made through the "X" Merchant website. Merchant "X" carries out direct or indirect marketing activities by any means in Puerto Rico.
Conclusion: Merchant "X" is considered to be engaged in a taxable business for SUT purposes, so it has a nexus with Puerto Rico.
Facts: Merchant "V", a non-resident person from Puerto Rico who is not engaged in industry or business in Puerto Rico, is engaged in the sale of buttons, wholesale and retail, through an internet page. Merchant “V” has no property, employees, or business activities in Puerto Rico. Merchant "V" is engaged in direct or indirect marketing activities by any means in Puerto Rico. Merchant "C" is a resident of Puerto Rico who discovers Merchant “V” through an internet search and decides to buy buttons from Merchant "V" through their website. Merchant "C" is the only person who periodically purchases from Merchant "V" and such transactions do not exceed 200 in the economic year or annual accounting period of Merchant "V", nor did the total amount of sales to Merchant "C" exceeded $100,000 in that year. Merchant "V" has no sales representatives in Puerto Rico and does not have an agreement with any resident of Puerto Rico in exchange for commission.
Conclusion: Merchant "V" is considered to have a nexus with Puerto Rico, because regardless of the volume of business generated, it carries out direct or indirect marketing activities in Puerto Rico by any means, on a continuous, recurring basis and in the ordinary course of business. Merchant "V" shall be deemed to be engaged in the business of sale of taxable items in Puerto Rico until direct or indirect marketing activities cease.
Once it is established that a merchant is considered to have nexus with Puerto Rico, such merchant shall be required to register in the Puerto Rico Treasury Department Merchant’s Registry and shall be considered a merchant until he ceases activities and withdraws his Merchants' Registration Certificate (“MRC”). The merchant shall request registration at least 30 days before commencing operations. The Secretary shall issue a MRC for every commercial establishment included in the application. The application for the MRC can only be executed electronically through the Internal Revenue Unified System (“SURI”, for its Spanish acronym) portal.
At RSM Puerto Rico, our trusted advisors may assist with the detailed evaluation that is necessary to determine if your business could be required to register for Sales and Use Tax purposes. Please contact our tax advisors at (787) 751-6164 | [email protected] for help or more information.