MIAMI, FL – AUGUST 18: A Walmart sign is seen on August 18, 2015 in Miami, Florida. Walmart announced today that earnings fell in the second quarter due to currency fluctuations and the retailer’s investment in employee wages and training. (Photo by Joe Raedle/Getty Images)
Wal-Mart Puerto Rico, Inc. (Wal-Mart PR), the Puerto Rico arm of the venerable Wal-Mart chain, has filed a lawsuit against the Commonwealth of Puerto Rico in a bid to overturn certain new tax laws the retailer says are discriminatory and violate federal laws and the U.S. Constitution. The case is Wal-Mart Puerto Rico Inc. v. Zaragoza-Gomez, 15-cv-3018, U.S. District Court, District of Puerto Rico (San Juan).According to the complaint, more Puerto Ricans work for Wal-Mart PR than for any other private employer in the Commonwealth: Wal-Mart PR operates 55 Walmart Stores, Walmart Supercenters, Sam’s Clubs, Super Ahorros, and Amigos stores, employing nearly 15,000 people in Puerto Rico. Wal-Mart PR also asserts that it collects more sales tax on behalf of the Commonwealth than any other company or entity, collecting approximately $100 million in sales tax annually.
In May of this year, Puerto Rico Governor Alejandro García-Padilla signed Act 72-2015 (Act 72) into law. One of the changes as a result of Act 72 was an increase in the Tangible Property Component (TPC) of the corporate Alternative Minimum Tax (AMT). Like the federal AMT, Puerto Rico’s AMT is payable whenever the “tentative minimum tax” exceeds the taxpayer’s “regular” income tax: in other words, you figure the tax both ways and pay the higher amount.
The result, Wal-Mart PR claims, raises the company’s estimated income tax to “an astonishing and unsustainable 91.5% of its net income.” That rate of tax, claims Wal-Mart PR, 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. Further, Wal-Mart PR alleges that it was targeted by the tax increase and is the only entity in Puerto Rico subject to such a high tax burden.
Wal-Mart PR claims that the new law violates the Commerce Clause and the Equal Protection Clause of the U.S. Constitution. While Wal-Mart PR believes that the previous AMT was discriminatory, it had not affected Wal-Mart PR since the company’s “tentative minimum tax” had generally been lower than Wal-Mart PR’s regular income tax, meaning that it was not subject to the AMT. The company did pay the AMT in 2015 “based entirely on Wal-Mart PR’s purchases of goods and services from related entities in the mainland United States.” The AMT tax worked out to about one-seventh of Wal-Mart PR’s total income-tax burden for that year.
That was before the new scheme. Now, according to the complaint, the TPC piece makes the AMT “a very real and crushing burden on interstate commerce” for companies that acquire goods and services from outside of the Commonwealth, companies like Wal-Mart PR. According to the company, its total tax liability will rise to approximately $45.1 million next year, nearly 91.5% of Wal-Mart PR’s estimated net income. Of that $45.1 million tax bill, $25.9 million, or 57.4%, is the result of the AMT. Wal-Mart PR warns that “further increases in this rate, even above 100%, are possible” under the new scheme.
The company did not pursue an administrative remedy, nor did it file in a lower court, because not only would it take awhile but was potentially dangerous considering Puerto Rico’s current financial status. The company noted that “there is a substantial risk that the Commonwealth, even if ordered to do so by the Puerto Rico courts, will be unable to refund the $155 million of unconstitutional tax payments that Wal-Mart PR would be forced to make during its six-year process of requesting a refund through Puerto Rico’s administrative and court systems.” The Commonwealth is currently struggling to restructure $70 billion in debt. The combination of factors, according to Wal-Mart PR, left the company no choice but to file for immediate relief.
Lorenzo Lopez, a Walmart spokesperson, said about the lawsuit, “We are challenging Act 72 because it is unconstitutional and arbitrarily singles out Walmart by imposing an effective tax rate estimated at 91.5%, to our knowledge this is the highest rate of any business on the island and the highest rate anywhere in the world where Walmart operates. While we understand Puerto Rico’s economy is facing tough times and sacrifices need to be made, we are part of the solution and should not be punished for being the largest private employer on the island and one of the largest contributors to its economy. Rather than passing the increased tax costs to our customers in Puerto Rico, many of whom are under intense pressure to provide for their families, we have chosen to defend the jobs we’ve created and the families who rely on them by taking this matter to Federal Court.”
Wal-Mart PR is ultimately owned by Wal-Mart Stores Inc., a Delaware corporation headquartered in Bentonville, Arkansas. The corporate family is collectively referred to as “Wal-Mart” (sometimes referred to as “Walmart”). Wal-Mart operates retail stores in various formats around the world. It is ranked at #20 on Forbes’ list of the World’s Most Valuable Brands and #16 on Forbes’ list of the World’s Most Valuable Companies.
(Author’s note: Updated to include a comment from Walmart. I’ve also reached out to the Commonwealth for comment but, as of this writing, have not received a response. I will update with any statements/additional information.)
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Kelly Phillips Erb
Wal-Mart Sues Puerto Rico Over 'Astonishing And Unsustainable' Tax Increase
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