Cuidado con el Clic: Puerto Rico’s New Value Added Tax (VAT) Includes “Click Through Nexus” and Other Affiliate Nexus Provisions

On May 29, 2015, the Governor of Puerto Rico signed into law Act No. 72, which amended the Puerto Rico Internal Revenue Code of 2011 to add provisions adopting a new value added tax (VAT) to replace the existing sales/use tax. The VAT will result in significant changes to Puerto Rico’s system of consumption taxes, including an increase in the tax rate to 10.5% (now already in effect for sales tax during a transition phase), but Internet retailers may want to pay particular attention to the VAT statute’s nexus provisions.

For example, the new VAT includes “click through” nexus provisions, similar to those enacted in New York and other states, under which a retailer with online affiliates in Puerto Rico may be considered a merchant (“comerciante”) required to collect and remit the VAT. The sales threshold to trigger tax obligations under the statute is $10,000 in sales to buyers in Puerto Rico who are referred to the retailer through its online affiliates in Puerto Rico. The retailer can defeat the application of the statute if it can show that the in-state affiliates did not engage in any solicitation in the territory. See Sec. 4110.01(a)(20)(C)(v).

The Puerto Rico legislature did not stop there. The new VAT also defines a merchant as any company with a related-entity subject to Puerto Rico’s taxing jurisdiction that engages in any of several activities in Puerto Rico that purport to benefit the remote seller, such as using similar trademarks, selling similar products under a similar trade name, and performing certain services for the remote seller. Id. Sec. 4110.01(a)(20)(C)(iv). Like many state sales and use tax statutes, Puerto Rico’s VAT statute also includes a “catch-all” provision, extending its taxing jurisdiction to constitutional limits. Id. Sec. 4110.01(a)(20)(C)(x). Tener cuidado, remote sellers. Beware.