Court Strikes Down Puerto Rico ‘Wal-Mart Tax’

BOSTON (CN) - Puerto Rico's so-called "Wal-Mart tax" is unconstitutional, the First Circuit ruled, finding that the financially struggling commonwealth cannot force the retail giant's local affiliate to pay a special tax on corporations.

Wednesday's decision strikes a stiff blow to the cash-strapped island that is operating with a $70 billion debt.

The intent of the amended tax law at issue was to prevent multi-national companies from eliminating their tax rate by importing goods and materials purchased at artificially inflated prices in jurisdictions with much lower tax rates, according to the First Circuit ruling written by Judge Sandra Lynch.

A company could essentially offset its local tax burden with artificially inflated business costs. Puerto Rico attempted to counter these efforts by creating an alternative minimum tax on the total value of imported goods if that amount exceeded what that company would have otherwise paid in taxes.

Wal-Mart Puerto Rico argued that their company was the only one that met the threshold for the local government to charge the alternative tax, which Puerto Rico did not deny, according to the ruling.

"Indeed, the new top rate under the amended AMT is alleged to be essentially a 'Wal-Mart tax,' passed to raise a specific level of revenue from Wal-Mart PR in light of Puerto Rico's budget crisis," Lynch wrote.

Wal-Mart PR operates 48 stores in Puerto Rico, which employ about 14,300 people, making it the island's largest employer. The company imports about $700 million in products each year from its parent company, Wal-Mart.

For the fiscal year 2016, Wal-Mart PR's tax bill was $46.5 million, $32.9 million of which came from the new tax.

The company sued in December 2015, seeking an injunction against the continued enforcement of the tax law and a declaration that it is unlawful.

In March of this year, a federal judge in Puerto Rico struck down the tax law and granted Wal-Mart PR its requested injunction.

Puerto Rico's treasurer, Juan Zaragoza-Gomez, argued that Wal-Mart PR's claims were irrelevant because the company had yet to formally file a tax return for 2015.

The First Circuit disagreed Wednesday, citing the fact that the retail company had already made quarterly tax payments in anticipation of the increased tax rate.

The Boston-based appeals court also ruled that the Butler Act, which generally forbids the district court in Puerto Rico from ruling on tax cases, did not apply to the case, because the law allows for cases to remain in the district court when there is no other speedy remedy available.

Finally, the First Circuit ruled that Puerto Rico's tax law violated the "dormant" Commerce Clause, which mandates that transactions across state lines cannot be taxed any differently from transactions that occur within the state.

"It is indisputable that the amended AMT discriminates," Lynch wrote for a three-judge panel. "It taxes only cross-border transactions between a Puerto Rico corporate taxpayer and a home office or related entity outside of Puerto Rico."

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