The Bloomberg BNA Tax Management Weekly State Tax Report filters through current state developments and analyzes those critical to multistate tax planning.
Aug. 25 — Puerto Rico's alternative minimum tax is unconstitutional on its face, a federal appeals court ruled, affirming a lower court's injunction that bars enforcement of the tax against Wal-Mart Puerto Rico Inc. ( Wal-Mart P.R., Inc. v. Zaragoza-Gomez, 1st Cir., No. 16-01370, 8/24/16 ).
The U.S. Court of Appeals for the First Circuit said Aug. 24 that it is “indisputable” that the AMT unfairly targets cross-border transactions. The tax applies only to transactions between a Puerto Rican corporate taxpayer and a home office or related entity outside of Puerto Rico and imposes its highest rate of 6.5 percent on only one taxpayer, Wal-Mart.
Wal-Mart Puerto Rico is the largest private employer on the island, with 48 stores and 14,300 employees. In any given year, it spends about $1.6 billion on inventory in Puerto Rico and buys about $700 million in goods from its U.S. parent, Wal-Mart Stores Inc. and other related parties on the mainland, the court said.
In an Aug. 15 letter to the First Circuit, Wal-Mart said it booked net taxable income of $35 million and regular income taxes of $13.7 million before credits for the tax year ended Jan. 31, 2016. Had the AMT been in place, Wal-Mart would have faced an additional $32.9 million in taxes, the company said, resulting in a tax liability of more than $46 million, or 132 percent of its income (2016 Weekly State Tax Report 12, 8/19/16).
Wal-Mart challenged the constitutionality of the AMT in the U.S. District Court for the District of Puerto Rico. On March 28, the district court agreed that the AMT violates the dormant commerce clause, the Federal Relations Act and the equal protection clause.
On appeal, Puerto Rico argued that the district court lacked jurisdiction because Wal-Mart should have first pursued an administrative remedy before filing a petition in state court. Under Puerto Rico law, Wal-Mart must first pay the contested tax and then file a tax return requesting a refund or credit from the Secretary of the Treasury (2016 Weekly State Tax Report 19, 5/6/16).
The First Circuit rejected that argument.
In its Aug. 24 ruling, the First Circuit said that Wal-Mart Puerto Rico lacked a “plain, speedy and efficient remedy in Puerto Rico's courts” because of recent changes in law and regulation that limited the company's recovery to $3 million per year.
Puerto Rico had argued that the suit was barred under the Butler Act, which forbids any suit in federal district court that restrains assessment or collection of tax imposed by Puerto Rico. However, the court said, the parties agreed that the Butler Act includes an unstated exception—“it presumes that the Commonwealth itself provides a ‘plain, speedy and efficient' remedy for a taxpayer harmed by the imposition of an unconstitutional tax.”
However, the court said, given that the company's tax appeal could have taken as long as five years to resolve and that Wal-Mart would have been forced to pay out as much as $200 million in that period, that remedy didn't really exist.
Puerto Rico's dire financial situation makes it likely that the government wouldn't be able to satisfy any judgment that Wal-Mart might win, the court said. In fact, Puerto Rico recently adopted Treasury guidelines prioritizing payment of other government obligations over the payments of tax refunds.
In effect, the court said, “Puerto Rico asserts that it may force Wal-Mart to pay over $200 million in unconstitutionally imposed taxes and make Wal-Mart PR wait a minimum of seventy years for repayment, if then.”
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