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Editorial & Column


It’s High Time


December 11, 2003
Copyright © 2003 CARIBBEAN BUSINESS. All Rights Reserved.

What’s the difference between now and every other time the issue of a sales tax has been discussed in Puerto Rico? Answer: this time, apparently, it’s for real.

After years of getting bogged down by partisan politics, the desirability, in fact the urgency, of changing our present system of excise taxes (collected at the ports) in favor of a sales or value-added tax (collected at the point of sale) has finally gained a consensus.

For the first time ever, that consensus crosses political party lines. In fact, we might see legislation to implement the reform as soon as next year. Should election-year politics get in the way–although they have told us they will tackle it in 2004, politicians typically stay away from tax issues in an election year–it is all but certain that after the elections, whichever party wins will present a tax reform legislation package that will include the adoption of a sales tax and the elimination of the import excise tax system.

In essence, they are the same; they are both broad-based consumer taxes. The difference? One you see, and one you don’t. Consumers don’t see the 6.6% excise tax imposed on most goods sold in Puerto Rico because the seller includes it in the price, hiding it if you will. A sales tax, or value-added tax, is calculated and imposed at the cash register, so consumers see it and pay it there.

For years, economists have argued in favor of a point-of-sale tax in lieu of the excise tax. They explain that the excise tax is more costly to consumers because of the so-called "cascading effect." That is, because the excise tax has to be paid up front by the importer to the tax collector long before it is recouped from the consumer, at every step of the distribution chain–from the importer, to the distributor, to the wholesaler, to the retailer–additional markups have the effect of increasing the amount of tax that is eventually paid by consumers at the stores. Furthermore, from the time an item comes into Puerto Rico and the tax is paid, it could be months or even years before that product is sold to a consumer. Money tied up for so long in advance represents additional costs that are also passed on to the consumer. That’s part of the reason so many things are more expensive here than in most places stateside, even in those states that have a sales tax.

The excise tax system is also more burdensome to businesses. Government tax collection offices at ports and airports are open only on weekdays during regular government working hours. Additionally, the excise tax system produces hassles that either tie up inventory at the ports or bog down the free flow of interstate trade between Puerto Rico and the U.S. mainland. The case last year in which air carriers challenged Puerto Rico’s excise tax system in federal court illustrated this point. Elimination of the awkward, burdensome, and costly excise tax system would be a relief to both businesses and consumers.

For years, defenders of the present system have argued that collecting a consumer tax at a relatively smaller number of entry points (ports, airports) was easier and more effective than collecting it at thousands of points of sale. The enormous penetration of point-of-sale electronic transaction technology in Puerto Rico–much higher than on the U.S. mainland–has largely taken care of that problem.

In fact, the main stumbling block to the adoption of a sales tax in Puerto Rico has been partisan politics, with detractors saying that all proponents wanted to achieve was to make the island look more like the states in order to pave the way for statehood. It was a childish argument. Not all states have a sales tax, and many countries around the world have either a sales or a value-added tax. It’s a matter of good economics and better business practices.

Now, both the Popular Democratic Party and the New Progressive Party seem to be in agreement on the merits of a sales tax. They’ve joined the ranks of virtually every business and professional association on the island, including the Chamber of Commerce, Chamber of the Food Marketing & Distribution Industry (MIDA by its Spanish acronym), United Retailers Association, Automobile Distributors Association, Society of Certified Public Accountants, and so on.

Now, let’s just get on with it.

This Caribbean Business article appears courtesy of Casiano Communications.
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