The Puerto Rico Institute of Statistics offered details of the new methodology used by the Puerto Rico Trade & Export Company to estimate the value of the island’s retail sales starting in October 2016.
During a roundtable discussion at the Institute, in which representatives of several private businesses and professional associations participated, it was revealed that the previous methodology presented an overestimation that artificially inflated the value of retail sales by 27 percent in calendar year 2016.
The previous methodology was prepared between the end of 2005 and the middle of 2006, before the Puerto Rico sales tax was implemented.
Subsequently, these statistics were used to project how much revenues the sales tax would generate, a key indicator of the financial health of the Sales Tax Financing Corp., known as COFINA, a subsidiary of the Government Development Bank.
The GDB used this indicator to sell COFINA bonds to a great number of investors between 2007 and 2013, given COFINA’s artificially inflated financial solvency. With the new methodology launched this year, this situation is expected to never happen again, Institute officials said.
The previous methodology was used to estimate the value of retail sales between 2005 and 2016. The original fixed-panel sample was drawn in 2005. This sample excluded important retail sales establishments that have opened operations in Puerto Rico after 2005.
In addition, it included retail sales establishments that closed after 2005, including Farmacias El Amal, Kay-Bee Toys, CompUSA, Clubman, among others. Even though in principle other establishments should have replaced the closed ones, in practical terms the Puerto Rico Trade & Export Company lacked a mechanism to identify establishments that could serve as a replacement, and to ensure they responded.
As a result, the sales of many closed establishments were imputed for years, which in part explain the over-estimation.
Under the new methodology, (1) the data is gathered at the business level (not the establishment level), (2) the businesses are classified using the North American Industrial Classification System (NAICS), instead of the previous Standard Industrial Classification (SIC) which was discontinued in 1997, (3) sales tax data reported to the Puerto Rico Treasury are used to estimate retail sales, and if necessary information gathered by phone, email or web can also be used in the survey, (4) the retail sales of large chain stores is expected to be estimated, and (5) business “births” and “deaths” will be used to annually update the sample in an agile way.
“We’re pleased to be able to begin publishing the results of this important project,” said Mario Marazzi-Santiago, executive director of the Institute.
“We’ve spent too many years trying to get the Puerto Rico Trade & Export Company to have a sense of urgency in resolving the overestimation in retail sales. It is extremely worrisome that administration after administration, this statistical error, a situation, which borders on fraud, was used to issue debt,” Marazzi said.
“The overestimation had concrete effects that caused more investors to buy COFINA bonds, when in reality the sales tax would collect less revenues than these overestimated statistics suggested,” he added.
“But, it should also be remembered that this situation may have been known to some folks, since the Economic Census statistics prepared by the U.S. Census Bureau already suggested this possibility years ago,” Marazzi said.
Denominator of capture rate
The retail sales statistics served as the denominator of the capture rate of the sales tax. As a result, the overestimation of the retail sales caused an underestimation of the capture rate.
This underestimation of the sales tax capture rate was used to project the additional sales tax revenues that would be achieved once the Puerto Rico Treasury Department executed its initiatives to better detect businesses that were not complying with their sales tax obligations, the Institute confirmed.
“However, these additional collections were partly a statistical mirage, resulting from the over-estimation of the value of retail sales of the Puerto Rico Trade & Export Company,” the Institute stated.
According to the government’s Fiscal Plan, as of February 2017, the outstanding value of COFINA bonds was nearly $17.6 billion.