A federal court ruling in favor of Wal-Mart in a tax dispute with Puerto Rico has at least temporarily eliminated about 0.48% of the island government's revenue stream.
U.S. District Court for Puerto Rico Judge José Fusté told Puerto Rico Monday that it had to roll back its tax rates on goods and services bought from the United States to 2% from 6.5%. The retailer Wal-Mart Puerto Rico had sued Puerto Rico Treasury Secretary Juan Zaragoza against the increase, which Puerto Rico Gov. Alejandro García Padilla signed May 29, 2015.
Wal-Mart continues to remit sales taxes to Puerto Rico's government. Under the ruling, it will also send either the island's normal corporate income tax or the 2% tax, whichever is the higher amount.
The law signed in May 29, 2015, Law 72, included a graduated tax rate on goods and services imported from the states by multinational companies operating in Puerto Rico. The graduation depended on their gross revenue in the commonwealth. This tax on imported goods and services was called an alternate minimum tax, being an alternative to the island's corporate income tax. Wal-Mart said in a filing it was the only company subject to the 6.5% rate.
Wal-Mart claimed in its complaint that the 6.5% tax effectively taxed its income at 91.5%.
Fusté ruled that Law 72 ran contrary to the Dormant Commerce and the Equal Protections clauses of the U.S. Constitution and the Federal Relations Act.
Wal-Mart runs 55 stores and employs nearly 15,000 people there, according to its complaint.
The company estimated in early December 2015 that Law 72 was going to require it to pay $45.1 million in its fiscal year 2016 under the 6.5% rate. This would have been $25.9 million more than it would have paid without the alternate minimum tax. Wal-Mart's fiscal year 2016 ended Jan. 31.
If the current fiscal year had similar sales levels to the last fiscal year, about $44.4 million of Wal-Mart's taxes to Puerto Rico would be for the alternate minimum tax. This would be about 0.48% of the revenue Puerto Rico's General Fund.
"Today's ruling is a victory not only for Wal-Mart Puerto Rico but also for our customers, our more than 14,000 Puerto Rican associates, and the many Puerto Rican suppliers and farmers who depend so heavily on us," a spokesman for Wal-Mart said in an email.
Spokespeople for Puerto Rico's Treasury and Government Development Bank did not respond to a request for a comment on the ruling. Puerto Rico is in a desperate fiscal situation. According to Fusté, if the government had not undertaken a series of "extraordinary and unsustainable liquidity measures" the bank balance of Puerto Rico Treasury Single Account (the government's primary store of cash) on Dec. 31, 2015, would have been negative $1.478 billion.
