Puerto Rico considers repealing inventory tax
Business leaders and officials discuss eliminating the tax and finding a substitute to support municipal funding.
The potential repeal of Puerto Rico’s inventory tax requires a substitute tax to ensure that cash-strapped municipalities continue receiving funds distributed annually by the Municipal Revenue Collections Center (CRIM, in Spanish) from inventory tax collections, according to the Puerto Rico Retailers Association (ACDET) president, José González. He stated that the business sector remains opposed to the inventory tax.
“We have requested and we have been working toward the elimination of the inventory tax,” González said in an interview with News is my Business. “The inventory tax limits the availability of products in Puerto Rico. And if there were to be an emergency, it could affect availability for the consumers. The emergency could be a hurricane, or as recently happened at the docks in Jacksonville [Florida] that supplies 80 percent of food to Puerto Rico … if that strike had lasted longer, it would have caused a serious shortage of products.”
He explained that if a hurricane were to impact Jacksonville, similar supply disruptions could arise if the docks suffer damage.
The CRIM distributes between $200 million and $230 million annually to municipalities from the inventory tax.
“The inventory tax is paid by businesses that operate … in Puerto Rico, but those businesses that sell online to Puerto Rico, don’t pay inventory tax. Every day, online sales are increasingly taking a larger share of the retail sales market and they have an advantage over all the retail sales businesses in Puerto Rico,” González said, adding that the tax rate varies by municipality.
Businesses pay between 8% and 10% of their average annual inventory value to the municipality each year.
“We have been in constant communication with the mayors, the governor, lawmakers, with the Financial Oversight and Management Board and CRIM about this topic, and there is consensus that this tax has to be eliminated,” González said, emphasizing that “everyone is clear on that is has to be eliminated.”
He noted that the debate now centers on finding an appropriate mechanism for its elimination. Various alternatives have been explored, “that everyone agrees with,” he said, but ““it remains on hold” due to the recent elections.
“We hope the governor will call a special session before year-end to address this specific issue,” he added.
Meanwhile, Naranjito Mayor and CRIM board member Orlando Ortiz, of the New Progressive Party, said that House Bill 1798 would freeze the inventory tax for five or six years, followed by a review.
“The last approval for freezing the tax for five years and at the end of that [last] year it would be eliminated, that wasn’t what we had agreed on. We had agreed that it would be frozen, and then reviewed to see what would substitute it,” Ortiz said. “What can’t happen is that it be eliminated without a substitute income, because it would create a financial crisis for municipalities, and that is why I believe the governor did not approve the bill.”
The mayor explained that lower inventory levels in establishments result in reduced tax payments.
An amendment passed by lawmakers allows CRIM to conduct a broader analysis of the inventory tax’s future during this six-year period. The tax would remain for calendar years 2023 to 2028, with specific valuation dates, using the average annual inventory value declared in the 2023 personal property tax return and the tax rate for fiscal year 2024.
Last month, San Juan Mayor Miguel Romero presented a report on financial and administrative activities for fiscal year 2024. He announced plans to propose a municipal ordinance to eliminate the inventory tax for businesses with annual sales of up to $500,000.
“We’ve heard a lot about the impact of the inventory tax and how it raises the cost of food and essential goods that directly affects your pockets,” Romero said. “However, we have not seen concrete actions to solve it. We, committed to promoting the economic development of San Juan, take the lead and the initiative again. This measure will positively impact more than 75% of businesses in San Juan, helping to reduce costs, create jobs and further foster our economic growth.”
