Retailers: Inventory tax moratorium is ‘right first step’ toward growth
Puerto Rico businesses pay an estimated $220 million in inventory taxes annually.
Puerto Rico Gov. Jenniffer González’s announced plan to submit legislation proposing a five-year moratorium on inventory taxes that retailers pay to municipalities for the stock they have in their facilities has struck a positive chord with businesses.
In separate interviews with News is my Business, the Puerto Rico Retailers Association (ACDET, in Spanish) and the United Retailers Association (CUD, in Spanish) confirmed that the possibility of eliminating the tax and substituting it with another source of income for municipalities could lead to economic growth.
The Puerto Rico inventory tax is a municipal tax imposed on the value of a business’ inventory, including raw materials, finished goods and supplies. It is part of the personal property tax and is levied annually by the Municipal Revenue Collections Center (CRIM, in Spanish).
The tax rate varies by municipality but typically ranges between 5% and 8% of the inventory’s value. It is estimated that Puerto Rico businesses pay about $220 million in annual inventory taxes. The proposal is to keep that number as it is for five years while another plan is developed.
“We thank the governor and the mayors for their prompt response to this freezing project, which is also an important step toward achieving the complete elimination of the inventory tax,” said ACDET President José González. “The issue of inventory tax is important not only for retailers but for all areas of the private sector that have been affected over the years by product shortages and the costs of having inventory in Puerto Rico.”
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 CRIM from inventory tax collections.
If the five-year moratorium is approved in the legislature, it will freeze that $220 million amount, which will not increase.
“The bill will include a provision in case a company reduces its size and, in turn, its inventory. Those companies will have that protection,” González said. “It’s very important to address this issue now because, as we all know, the rate is going to increase with President Trump’s decisions, and we need costs in Puerto Rico to go down.”
Historically, businesses have said the inventory tax creates a disincentive to hold inventory, leading to potential supply chain issues. It particularly affects retailers, manufacturers and distributors who need to maintain large inventories.
The tax and related inventory restraints have been criticized for worsening hurricane preparedness, as businesses are discouraged from stockpiling essential goods.
“Without a doubt, for retailers this first step is an advantage to be able to increase inventory levels during hurricane season, but also for products that have low turnover but are of high value,” González said.
“For example, power generators — retailers who are dedicated to bringing electric generators that can cost thousands of dollars limit themselves from having a lot of inventory because if they do not sell it, they’re stuck with the tax,” he said.
Meanwhile, CUD President Ramón Barquín said, “The elimination of this tax, discussed at the recent meeting with mayors, represents a key step toward the modernization of the tax system and the revitalization of the Puerto Rican business sector.”
“The [financial] support of municipalities cannot continue to fall on the pockets of retailers. It’s time to implement a true reduction in government expenses to achieve greater agility, efficiency, effectiveness, and profitability in public administration,” said Barquín.
“The priority must be to promote an ecosystem where companies can grow without tax obstacles that limit their ability to operate and generate jobs. The elimination of the inventory tax is a necessary step to guarantee a more dynamic and competitive business environment,” Barquín said.
Over the years, the CUD has insisted that the support of municipalities should not depend on taxes that penalize commercial activity. Instead, a structural transformation is proposed that reduces dependence on these revenues and promotes an economic development model based on government efficiency and private sector growth.
CofC ready to testify in favor of elimination
Luis Pizarro, president of the Puerto Rico Chamber of Commerce (CofC), commended the governor for supporting a change to the inventory tax, which he said has been declining as retailers and consumers seek savings.
“While it’s true that we understand the point of view of the municipalities, we also have to understand what this represents for businesses, and it’s a step in the right direction to be talking about freezing this tax for at least five years,” he said.
“But if there’s a moratorium, it’s very important to have something new in place when that transition is over to help municipalities,” he added.
One alternative mentioned is using tax revenue from online sales, which must be assessed to determine if it can offset the revenue currently generated by the inventory tax, Pizarro said.
“We have our testimony ready to submit to the legislature, tomorrow,” he said, adding that the issue has been gaining momentum since late last year and there is a “sense of urgency to address this quickly.”
