Taxation in Puerto Rico

Taxation in Puerto Rico consists of taxes paid to the United States federal government and taxes paid to the Commonwealth government. Payment of taxes to the federal government, both personal and corporate, is done through the IRS, while payment of taxes to the Commonwealth government, whether personal or corporate, is done through the Departamento de Hacienda de Puerto Rico.

Puerto Rico is an unincorporated territory of the United States and Puerto Ricans are US citizens, however, Puerto Rico is not a US state, but a Commonwealth. Consequently, while all Puerto Rico residents pay federal taxes, only some residents are required to pay federal income taxes. The U.S. federal taxes all residents must pay include US customs taxes,[1] federal commodity taxes, and federal payroll taxes (Social Security taxes, Medicare taxes, and Unemployment taxes).

Not all Puerto Rico employees and corporations pay federal income taxes. Federal law requires payment of federal income tax from the following residents and corporations only: federal government employees in Puerto Rico,[lower-alpha 1][lower-alpha 2][4] residents who are members of the United States military, those with income sources outside of Puerto Rico, those individuals or corporations who do business with the federal government, and those Puerto Rico-based corporations that intend to send funds to the United States. Other employers and employees pay no federal income taxes, although they still pay all other federal taxes.

Federal taxes

Commonwealth-wide payment of Federal taxes

Contrary to popular belief,[5] all Puerto Rico residents pay federal taxes, just as mainland Americans do. Specifically, the following federal taxes are paid by all residents of Puerto Rico: Customs taxes,[6][7][lower-alpha 3] Federal commodity taxes,[9] and all payroll taxes, including: (a) Social Security taxes,[10] (b) Medicare taxes,[11] and Unemployment taxes: "Residents of Puerto Rico...are obliged to pay exactly the same Social Security and Medicare taxes that fellow U.S. citizens in the 50 states and the District must pay. For most of [Puerto Rico]'s wage-earners, moreover, those outlays far exceed the federal income-tax liabilities they would bear if Puerto Rico were a state."[12]

Payment of Federal income taxes

Contrary to common misconception,[13] residents of Puerto Rico do pay federal income taxes. As with any state, however, those Puerto Rico residents who fall below the federal tax threshold (i.e., "the poor") do not pay federal income taxes at all. This IRS threshold was $24,400 per year in 2019 for married couples.[14][15] Considering that the median income in Puerto Rico is $20,166[16] a large portion of the population earns too little to have to file federal tax returns even if Puerto Rico was a state. The result is that the bulk of Puerto Rico residents do not pay federal income taxes. It has been estimated that close to 50% of PR residents live below the poverty line, [17] adding another reason why most residents would not have to pay any federal income taxes.

Notwithstanding the above federal income tax payor qualification statistics, the following Puerto Rico residents are required to file and pay the US federal income taxes:

  1. Puerto Rico residents who work for the federal government (e.g., postal employees, federal agents of any of the federal executive and judicial branches, etc.)[18][19][lower-alpha 4]
  2. Puerto Rico residents who do business with the federal government[21]
  3. Puerto Rico residents who are members of the U.S. military[22][23]
  4. Puerto Rico residents who earned income from sources outside Puerto Rico[24]
  5. Puerto Rico-based corporations that intend to send funds to the U.S.[25]

In fact, Puerto Rico residents pay more in federal income taxes every year than do residents of six other US states: "From 1998 up until 2006, when Puerto Rico was hit by its present economic recession, Puerto Rico consistently contributed more than $4 billion annually in federal taxes and impositions into the national fisc." This was more that the IRS collected from taxpayers in six States of the Union: Vermont, Wyoming, South Dakota, North Dakota, Montana, and Alaska, as well as the Northern Mariana Islands.[26][27] Data from the IRS also shows that even while the Commonwealth was going through its economic crisis, it still collected a "sizable amount" of taxes from Puerto Ricans. For example, from 2010 to 2015 the IRS collected about $3.5 billion every year from Puerto Rican taxpayers in the Island.[28] Even despite being without electricity for nearly one year, as well as without running potable water during much of that time after the 2017 Hurricane Maria, as well as through the 2020 earthquake swarm, Puerto Ricans continued to pay "sizable amounts" in federal taxes to the IRS: $3.4B in 2017 and $3.4B in 2018: "That in 2018 the IRS collected approximately $3,443,334,000 from Puerto Rico taxpayers clearly undermines the contention that Puerto Rico residents do not contribute to the federal treasury."[29]

The fact that only some residents of Puerto Rico pay federal income taxes is no different than it is in other states: whether Connecticut (the state that pays the most federal taxes per adult resident) or Mississippi (the state with the lowest average federal tax burden); in every state only some residents pay federal income taxes, and Puerto Rico is no different.[30] In fact, about 50% of Americans in the mainland do not pay federal income taxes.[31]

As the cutoff point for income taxation in Puerto Rico is lower than that imposed by the U.S. IRS code, and because the per-capita income in Puerto Rico is much lower than the average per-capita income on the mainland, more Puerto Rico residents pay income taxes to the local taxation authority than if the IRS code were applied to the island. This occurs because "the Commonwealth of Puerto Rico government has a wider set of [fiscal] responsibilities than do U.S. State and local governments."[32] As a result, the Commonwealth government imposes a separate income tax to make up for revenue funds that would otherwise be available through state-like funding resulting from federal income tax. This greater set of responsibilities as compared to a US state occurs because the body politic is commonwealth, not a state. That is, because the percentage of people in Puerto Rico below the federally-defined poverty line is much greater than that of any state in the Union, even if Puerto Rico were a state --and therefore the federal tax laws applied the same as in the rest of the states-- it would still be true that a significant portion of Puerto Rico residents would not be paying federal income taxes anyway. The net effect is that, whether or not Puerto Rico was a state, some Puerto Ricans would not be paying federal income taxes. However, this is not now (2020) nor would be later (if Puerto Rico became a state) any different than it is in the 50 States and DC, where some Americans do not pay federal income taxes.

Difference between "federal income taxes" and "federal taxes" in general

It is common for Americans everywhere, including the mainland, to equate paying "federal income taxes" with paying "federal taxes".[33][34] This results in (false) claims that Puerto Rico residents do not pay (1) federal income taxes, (2) federal taxes, and even (3) taxes, in general. All three of these claims are untrue.[35] As a result, there is a lot of confusion regarding this subject, leading to significant misinformation. The fact is, Puerto Rico residents do pay federal taxes, including federal income taxes.[36]

In a case heard at the US Federal Court of Appeals for the First Circuit, in Boston, the Court itself called out the misconception that Puerto Rico residents do not pay federal taxes when even the well-trained Appellant's attorneys had themselves, on the record, made the mistake of confusing the payment of the federal income taxes and the more generic payment of federal taxes. The Court then pointed out that this confusion came to the peril of the Appellant attorneys' own client, the US Government.[37][lower-alpha 5]

Federal taxation and Federal representation

While Puerto Rico residents pay Federal taxes, they have no equitable representation in the US Federal government. The argument has been made that although Puerto Rico residents pay federal taxes, including federal income taxes, they have no voting representatives in the US Congress. They also cannot vote for the US president either.[40] The United States allows Puerto Rico to send one sole representative to the House of Representatives of the US Congress, but this Comisionado Residente has the voice power but not the vote power in the plenary of the US Congress. This arrangement has been criticized as taxation without representation.[41][42]

It has been estimated[43] that, because the population of the Commonwealth is greater than that of 50% of the States, if Puerto Rico were a state, it would have six to eight seats in the House, in addition to the two seats in the Senate.[44][45][46] This lack of representation means that for over 100 years of colonial rule Puerto Rico has been making contributions towards funding US social programs yet it has received little and at times (as in the case of the Supplemental Security Income) nothing in return for lack of voting that would favor the Puerto Rican economy.

Disparity between Federal taxes paid and benefits received

While Puerto Rico residents pay all Federal taxes, and many also pay federal income taxes, they do not get an equitable amount of benefits as compared to the states in the Union. For example,

  1. As residents of Puerto Rico pay into Social Security, Puerto Ricans are eligible for Social Security benefits upon retirement, yet they are excluded from the Supplemental Security Income (SSI),[47] which Stateside residents receive.
  2. Medicare providers in Puerto Rico receive less-than-full state-like reimbursements for services rendered to beneficiaries in Puerto Rico even though Puerto Rico residents paid fully into the system.[48]
  3. The Island receives less than 15% of the Medicaid funding it would normally receive if it were a U.S. state.[49]
  4. In general, "many federal social welfare programs have been extended to Puerto Rico residents, although usually with caps inferior to those allocated to the states." [50][lower-alpha 6]

Additional Puerto Rico Federal tax payment facts

The Commonwealth government has its own tax laws. Puerto Rico residents are also required to pay US federal taxes,[51][52][53][54][55][56] although most residents do not have to pay the federal personal income tax.[57]

In 2016, Puerto Rico paid $3.5 billion into the US Treasury.[58]

Residents of Puerto Rico pay into Social Security, and are thus eligible for Social Security benefits upon retirement. However, they have been excluded from the Supplemental Security Income. On 10 April 2020, the U.S. Court of Appeals for the First Circuit ruled that residents of Puerto Rico were eligible for SSI benefits, finding that the residents of Puerto Rico make substantial contributions to the federal treasury in higher amounts than taxpayers in at least six states and the territory of the Northern Mariana Islands.[59]

Only certain residents of Puerto Rico are required to file federal income tax forms. According to the Internal Revenue Service:

In general, United States citizens and resident aliens who are bona fide residents of Puerto Rico during the entire tax year, which for most individuals is January 1 to December 31, are only required to file a U.S. federal income tax return if they have income sources outside of Puerto Rico or if they are employees of the U.S. government. Bona fide residents of Puerto Rico generally do not report income received from sources within Puerto Rico on their U.S. income tax return. However, they should report all income received from sources outside Puerto Rico on their U.S. income tax return. Residents of Puerto Rico who are employed by the government of the United States or who are members of the armed forces of the United States also should report all income received for their services to the government of the United States on their U. S. income tax return. United States citizens or resident aliens who are not bona fide residents of Puerto Rico during the entire tax year are required to report all income from whatever source derived on their U.S. income tax return. However, a U.S. citizen who changes residence from Puerto Rico to the United States and who was a bona fide resident of Puerto Rico at least two years before changing residence can exclude from U.S. taxable income the Puerto Rican source income received while residing in Puerto Rico during the taxable year of such change of residence.[60]

Bona fide residents of Puerto Rico cannot claim deductions and/or credits allocable to or chargeable against Puerto Rican source income that is excluded from a U.S. tax return. The deductions and credits not attributable to specific income must be divided between excluded income from sources in Puerto Rico and income from all other sources to find the part that can be deducted or credited on a U.S. tax return. Examples of deductions not attributable to specific income include alimony, the standard deduction, and certain itemized deductions such as medical expenses, charitable contributions, and real estate taxes and mortgage interest on your personal residence. Personal exemptions are generally allowed in full. If you have taxable Puerto Rican source income on your U.S. income tax return, then you can claim a credit for foreign taxes paid to Puerto Rico. However, you are not allowed to claim a credit for foreign taxes paid with respect to Puerto Rican source income that is excluded from a U.S. tax return. Therefore, to properly calculate your foreign tax credit, you must reduce your foreign taxes paid by the amount of taxes allocable to excluded Puerto Rican source income.[61]

Employers in Puerto Rico are subject to both Federal Insurance Contributions Act (FICA) tax (a payroll withholding tax, which funds Social Security and Medicare) and the Federal Unemployment Tax Act (FUTA). Employers in Puerto Rico must withhold the employee portion of FICA taxes from their employees' wages and contribute the employer portion of FICA.[62]

Commonwealth taxes
Main article: Internal Revenue Code (Puerto Rico)

The main body of domestic statutory tax law in Puerto Rico is the Código de Rentas Internas de Puerto Rico (Internal Revenue Code of Puerto Rico). The code organizes commonwealth laws covering commonwealth income tax, payroll taxes, gift taxes, estate taxes and statutory excise taxes.[63][64][65] All federal employees,[66] those who do business with the federal government,[67] Puerto Rico-based corporations that intend to send funds to the US,[68] and some others also pay federal income taxes (for example, Puerto Rico residents who earned income from sources outside Puerto Rico[69] In addition, because the cutoff point for income taxation is lower than that of the US IRS code and because the per-capita income in Puerto Rico is much lower than the average per-capita income on the U.S. mainland, more Puerto Rico residents pay income taxes to the local taxation authority than if the IRS code were applied to the island. That occurs because "the Commonwealth of Puerto Rico government has a wider set of [fiscal] responsibilities than do U.S. State and local governments."[70]

As residents of Puerto Rico pay into Social Security, Puerto Ricans are eligible for Social Security benefits upon retirement but are excluded from the Supplemental Security Income (SSI) (Commonwealth of Puerto Rico residents, unlike residents of the Commonwealth of the Northern Mariana Islands and residents of the 50 States, do not receive the SSI),[71] and the island actually receives less than 15% of the Medicaid funding it would normally receive if it were a state. However, Medicare providers receive less-than-full state-like reimbursements for services rendered to beneficiaries in Puerto Rico even though the latter paid fully into the system[72]

In general, "many federal social welfare programs have been extended to Puerto Ric[o] residents, but usually with caps inferior to those allocated to the states."[73][lower-alpha 7] A common misconception is that customs taxes (also called import/export taxes) collected by the U.S. government on products manufactured in Puerto Rico are all returned to the Puerto Rico Treasury. That is not the case, and such taxes are returned to the Puerto Rico Treasury only for rum products. Even then, the US Treasury keeps a portion of the taxes.[74]

Sales tax
Main article: Puerto Rico Sales and Use Tax

The Puerto Rico Sales and Use Tax (SUT, Spanish: Impuesto a las Ventas y Uso, IVU) is the combined sales and use tax applied to most sales in Puerto Rico. The tax is composed of two portions: 1.0% that belongs to the municipality where the sale was executed, and 10.5% that belongs to the state government. Furthermore, half of the portion that belongs to the state government is destined to the Urgent Interest Fund Corporation (COFINA) to pay the public debt of Puerto Rico, making it a three-tier tax. The amount of the tax changes from 11.5% to 7% when you buy prepared food on restaurants, foodtrucks, fast foods, or on any certified 7% tax prepared food establishment.

On 4 July 2006, the government approved Law Number 117, The 2006 Contributive Justice Law, establishing a tax with a 5.5% rate at state level and an optional 1.5% rate at municipal level. The tax went into effect on November 15, 2006. The tax is better known as the Sales and Use Tax' (Impuesto sobre Ventas y Uso), often referred to by its Spanish acronym "IVU". The law amended Article B of the Code and created sub-article BB. On 29 July 2007, the government approved Law Number 80, making the tax mandatory for all municipalities of the commonwealth. Also, the tax rates were changed to 6% at the state level and 1% at the municipal level.

On 1 July 2006, the first Commonwealth-wide sales tax was approved with a 5.5% rate at state level and an optional 1.5% rate at municipal level. The adoption of the municipal tax was mixed. The tax went into effect on November 15, 2006. Since the tax reform of July 2007, the tax is applied in all 78 municipalities of the archipelago and at Commonwealth level. On February 6, 2008, the governor of the Commonwealth proposed to remove the state part of the IVU. Also, with the February 6, 2008 changes, the tax rates are now 6% at the state level and 1% at the municipal level.[75] On 1 July 2015, the sales tax rate was increased to 11.5%, in response to the archipelago's suffering economy. The new tax contributes 1% to the municipality and 10.5% to the state.[76] The IVU was scheduled to expire on 1 April 2016, to be replaced with a value-added tax (VAT) of 10.5% for the state level, with the 1% IVU continuing for the municipalities.[77] On 2 May 2016 the House of Representatives voted to repeal the adoption of value added tax (VAT), followed shortly by the Senate on 5 May 2016. The Legislature has decided to continue the existing Sales and Use Taxation (SUT) system.[78]

See also

References
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  17. A Third of Movers From Puerto Rico to the Mainland United States Relocated to Florida in 2018. Brian Glassman. U.S. Census. 26 September 2019. Accessed 28 October 2020.
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  27. See also Internal Revenue Service, SOI Tax Stats - Gross Collections, by Type of Tax and State - IRS Data Book Table 5, available at https://www.irs.gov/statistics/ soi-tax-stats-gross-collections-by-type-of-tax-and-state-irs-data-book-table-5 (last visited 9 April 2020).
  28. Yes, Puerto Rico pays federal taxes. Here’s how much. Ana Campoy. Quartz.com (Referencing an Atlas chart using data from the IRS.) 21 October 2017. Accessed 30 October 2020.
  29. US v. Vaello-Madero, Docket No. 19-1390 (10 April 2020). U.S. Federal Court of Appeals for the First Circuit. Boston, Mass. p. 28. 10 April 2020. Accessed 30 October 2020.
  30. Which States Pay the Most Federal Taxes? Richard Barrington. MSN.com 24 March 2020. Accessed 30 October 2020.
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  33. Puerto Rico Powerball Win Draws Offensive Tweets. Ricardo Arduengo. NBC News. 12 February 2015. Accessed 29 October 2020.
  34. A Winning Powerball Ticket Came From Puerto Rico: Let the Ignorance Begin. Latino Rebels. 12 February 2015. Accessed 29 October 2020.
  35. Puerto Rico Powerball Win Draws Offensive Tweets. Ricardo Arduengo. NBC News. 12 February 2015. Accessed 29 October 2020.
  36. US v. Vaello-Madero, Docket No. 19-1390 (10 April 2020). U.S. Federal Court of Appeals for the First Circuit. Boston, Mass. pp.25-26. 10 April 2020. Accessed 29 October 2020.
  37. US v. Vaello-Madero, Docket No. 19-1390 (10 April 2020). U.S. Federal Court of Appeals for the First Circuit. Boston, Mass. pp.25-26. 10 April 2020. Accessed 29 October 2020.
  38. Fallece Juan R. Torruella, decano de los jueces federales puertorriqueños: El único boricua en servir en el Primer Circuito de Apelaciones tenía 87 años y fue un velerista olímpico. Oscar J. Serrano. Noticel. 26 October 2020. Accessed 4 November 2020.
  39. United States of America v. Jose Luis Vaello-Maderon. Supreme Court of the United States. (Docket number pending.) Accessed 12 November 2020.
  40. Taxation without representation. Julia Kagan. 25 July 2020. Accessed 30 October 2020.
  41. The Political Travesty of Puerto Rico: Like all U.S. territories, Puerto Rico has no real representation in its own national government. David S. Cohen. 26 September 2017. Accessed 30 October 2020.
  42. Taxation without representation. Julia Kagan. 25 July 2020. Accessed 30 October 2020.
  43. Deceitful Tactics Used To Make Puerto Rico A State. Phyllis Schlafly. Eagleforum.org 28 March 2007. Accessed 30 October 2020.
  44. Deceitful Tactics Used To Make Puerto Rico A State. Phyllis Schlafly. Eagleforum.org 28 March 2007. Accessed 30 October 2020.
  45. Puerto Rico: Commonwealth, Statehood, or Independence?: For more than 100 years, Puerto Rico has been a territorial possession of the United States. Both the Puerto Rican people and the U.S. Congress face a difficult choice about the future of this Caribbean island. Constitutional Rights Foundation. Bill of Rights in Action. Fall 2001 (17:4). 2009.] Archived on 2009-06-10.
  46. House Report 110-597 - Puerto Rico Democracy Act of 2007. U.S Congress. House of Representatives. 110th Congress (2007-2008). Second Session. Note: For this report, it is necessary to submit a query from "https://www.congress.gov/", the official U.S. Congress database website, for "House Report 110-597 - Puerto Rico Democracy Act of 2007".
  47. 2114. What are other requirements for SSI eligibility? Social Security Handbook, Section 2114. Social Security Administration. Accessed 28 October 2020.
  48. Puerto Rico Federal Affairs Administration. (p. 252.) Archived on 2011-05-11.
  49. Puerto Rico's Looming 2019 Medicaid Fiscal Cliff. CNE. San Juan, Puerto Rico. 18 September 2019. Accessed 28 October 2020.
  50. Sanford Levinson and Bartholomew H. Sparrow. The Louisiana Purchase and American Expansion: 1803–1898. New York: Rowman and Littlefield Publishers. 2005. p. 167.
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  68. An Overview of the Special Tax Rules Related to Puerto Rico and an Analysis of the Tax and Economic Policy Implications of Recent Legislative Options. Joint Committee on Taxation. US Congress. p. 9, line 1. 23 June 2006. Accessed 3 March 2014. Archived on 3 December 2010.
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  71. 2114. What are other requirements for SSI eligibility? US Social Security Administration. Socialsecurity.gov. Accessed 10 November 2020.
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Notes
  1. In July 2018, approximately 21% of the labor force on Puerto Rico were employed by the government, however, this includes both the commonwealth and federal governments.[2]
  2. In April 2020, there were approximately 14,000 federal employees in Puerto Rico, plus 9,550 retired federal employees, who are (or were) required to pay federal income taxes on local income, for a total of approximately 25,000 federal employees paying federal income taxes. This figure does not include the US military personnel stationed there, who must also pay federal income taxes, nor the various other categories of federal income tax payees.[3]
  3. It is also a misconception that the customs taxes collected by the U.S. on products manufactured in Puerto Rico are all returned to the Puerto Rico Treasury. This is not the case. Such customs taxes are returned only for rum products, and even then, the US Treasury keeps a portion of those taxes.[8]
  4. It has been estimated there are currently some 25,000 federal employees in PR.[20]
  5. The case was appealed to the US Supreme Court by the Trump Administration on 4 September 2020 and it is pending as of 12 November 2020.[38][39]
  6. For a comprehensive coverage of federal programs made extensive to Puerto Rico see Richard B. Cappalli's Federal Aid to Puerto Rico. (1970).
  7. For a comprehensive coverage of Federal programs made extensive to Puerto Rico see Richard Cappalli's Federal Aid to Puerto Rico (1970).


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