Walmart Sues Puerto Rico, Claiming an Unfair and Onerous Tax Burden

The New York Times -By MARY WILLIAMS WALSHFEB

Antonio Hernández Brignoni, in the Walmart parking lot in Hatillo, P.R., says the corporation can afford its taxes. Credit Dennis M. Rivera Pichardo for The New York Times

Antonio Hernández Brignoni, in the Walmart parking lot in Hatillo, P.R., says the corporation can afford its taxes. Credit Dennis M. Rivera Pichardo for The New York Times

The last thing Puerto Rico would seem to need is another fight about money.

But the island’s government, already facing multiple battles over billions of dollars in debt, was in yet another courtroom on Wednesday, locked in a legal dispute with its biggest sales-tax collector and its biggest private employer — the mighty retailer Walmart.

This time the dispute is not about bond payments, but taxes: the taxes that Puerto Rico is charging Walmart for the goods it brings from its distributors off the island — including in the United States — to sell in its stores in Puerto Rico.

In May, the island raised the special tax on those goods to 6.5 percent from 2 percent for the largest retailers. Walmart filed suit in December, saying the increase left it with an effective income tax of 91.5 percent.

The tax “sentences Walmart in Puerto Rico to death, for a crime there is no evidence it committed,” Walmart’s lawyer, Neal S. Manne, told the court.

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“No business can operate for long in an environment where 91.5 percent of its net income is confiscated through taxes,” the company said in its complaint.

Walmart argues that the tax is illegal — a violation of both the Commerce Clause and the Equal Protection Clause of the United States Constitution. Walmart says it was singled out for the tax increase and is the only entity in Puerto Rico subject to such a high tax burden.

Puerto Rico has countered that Walmart can well afford to pay the tax and should because of the profits it reaps on the island.

Both sides of the dispute are making oral arguments this week before Judge José Fusté, of the United States District Court in San Juan, who agreed to an expedited hearing of the case, at Walmart’s request.

Suppose, the company said in seeking a quick ruling, that it pays the tax now but it is later found to be unconstitutional. Given Puerto Rico’s perilous financial situation, the government will have surely spent the money by then, or even be bankrupt, the company posited. Then Walmart would not be able to get a refund.

The fight is not just playing out in a courtroom. It has engaged residents as well, who have a classic love-hate relationship with the retailer.

Some love it because it employs them, sells some of their locally made products and gives them access to goods they might not otherwise find on the island. Others hate it because, they say, it crowds out local competition and disrupts Puerto Rican neighborhoods and daily routines. Walmart has 55 stores in Puerto Rico, including some operated under different names, and it employs almost 15,000 people.

And now that Puerto Rico’s government is nearly out of cash and still has a $72 billion debt to be paid, some are incensed that Walmart is balking at the tax, contending that as one of the largest retailers in the world, it can well afford to pay. They hooted at the notion that the tax was a “death sentence.”

“They have a lot of money,” said Antonio Hernández Brignoni, 83, wheeling a shopping cart through a bustling Walmart parking lot in the small city of Hatillo on a recent day. “Come here at midnight and you’ll see how much money they make.”

Midnight, he explained, was when Walmart’s managers would be counting the cash in the till.

But the company counters that the tax rate is “three times the average effective tax rate that Walmart’s affiliated companies pay worldwide,” making it one of the highest taxes in the world.

Much of the courtroom discussion so far has centered on Puerto Rico’s finances, with Judge Fusté expressing frustration over the government’s failure to produce audited financial statements for 2014 and 2015. Members of Congress have made much the same complaint in hearings on how to help Puerto Rico unwind its debts.

On Wednesday, Melba Acosta Febo, president of Puerto Rico’s Government Development Bank, offered testimony on the island’s financial problems and warned that they were worsening.

In making its case for a quick ruling, Walmart noted in court filings that Puerto Rico has been unable to pay much smaller tax refunds, due to individual taxpayers, since 2014. It also cited a 2010 tax case in which the Supreme Court of Puerto Rico found another tax unlawful, but did not order a refund “because of the difficult state of the public finances in our country.”

“There is no doubt that the situation is complex and demands judicial creativity,” the court said.

Puerto Rico’s finances have become even more grim since that ruling, and last year the government issued a five-year plan of economic reforms intended to reassure creditors that it was going to bring its budget into balance and spur business investment and growth. Walmart is not disputing the need for economic reforms, but argues that the new tax runs counter to the goals.

To keep the proceedings moving quickly, Judge Fusté began hearing two issues simultaneously this week: whether his court has jurisdiction and whether the tax is constitutional. Puerto Rico says the case does not belong in federal court and is seeking to have it moved to a court of the commonwealth.

The tax at issue was signed into law last year, amending a previous corporate alternative minimum tax.

Like the federal version, Puerto Rico’s alternative minimum tax is payable whenever it exceeds the taxpayer’s “regular” income tax. In other words, taxes are calculated both ways and the company pays the higher amount.

While Walmart said it believed that even the previous rate of 2 percent was discriminatory, it had not affected Walmart since the alternative tax had generally been lower than regular income tax. But the increase has changed that calculation.

Puerto Rico said it based the tax on the same mechanism that the federal government uses for its alternative minimum tax.

Reasoning that a larger company with more transactions would have more ability to game the numbers, Puerto Rico’s lawmakers imposed higher rates on the biggest companies. The highest, 6.5 percent, applies only to businesses on the island with revenues of more than $2.75 billion.

Walmart argues that it appears to be the only one meeting that description.

It also said it appeared that Puerto Rico’s lawmakers were playing Robin Hood when they pushed Walmart’s tax rate skyward. It quoted the House Speaker, Jaime Perelló Borrás, as telling fellow lawmakers that by taxing Walmart more, they were able to tax Puerto Rico’s homegrown businesses less. That meant the tax was discriminatory, Walmart said.

Rómulo Soto, a shopper in Hatillo, said he liked Walmart because of its vast offerings and he said he would be sorry if it closed. But he was unpersuaded by its complaints about being singled out unfairly for a high tax rate.

“They are selling more, so they should pay more taxes,” he said. “Right now, all the money that they generate here just goes back to the States. If they pay more taxes here, it’s going to help our whole society.”

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