A federal judge in San Juan on Monday threw out a new tax that Puerto Rico had tried to impose on the American retailing giant Walmart, calling it unlawful.
Walmart had argued that the new tax would confiscate more than 100 percent of its profit from operations in Puerto Rico, making it one of the most onerous taxes on earth.
The judge, José Antonio Fusté of the United States District Court in Puerto Rico, said in his opinion on Monday that it gave him no pleasure to throw out the tax, considering the commonwealth’s dire financial condition. But he said it was unlawful and that Puerto Rico’s crisis was not an excuse “to take revenue that it’s not entitled to, to pay for essential services.”
The new tax was more than triple the old rate, he said, “designed to capture Walmart Puerto Rico, the biggest fish in the pond.”
If Walmart paid it on time, and waited to get a refund through the usual channels, it would most likely never see the money again, he added.
Puerto Rico is expected to go through a court-supervised debt restructuring soon, and any request for a tax refund from Walmart would almost certainly get lost in the crowd of bondholders, labor unions, lawyers and others jockeying to recover their money.
Walmart expressed satisfaction with the decision. “Today’s ruling is a victory not only for Walmart Puerto Rico but also for our customers, our more than 14,000 Puerto Rican associates, and the many Puerto Rican suppliers and farmers who depend so heavily on us,” Lorenzo Lopez, a spokesman, said.
The company did not explicitly threaten to leave Puerto Rico if it did not prevail, but it did argue in court that no business could operate for long in a place that confiscated all of its profit.
Walmart, based in Bentonville, Ark., is Puerto Rico’s largest employer outside the government, operating 48 large, busy stores under several names. People joke that since Walmart’s arrival on the island in 1992, they no longer have to go anywhere else, because they can eat all their meals and buy everything they need there.
Walmart is also the island’s biggest remitter of tax revenue. About $15 billion of Puerto Rico’s outstanding debt is backed by a dedicated sales tax that Walmart helps to collect.
Juan Zaragoza, Puerto Rico’s treasury secretary, said in a statement that the treasury believed the federal court had no jurisdiction and should not have handled the case.
“For this reason, from the beginning, we contemplated the possibility of appealing a decision unfavorable to the interests of the people of Puerto Rico,” Mr. Zaragoza said. Officials were still analyzing the lengthy opinion, he said, but would appeal soon. “We will raise on appeal all the procedural errors that, in our opinion, took place during the trial,” he said.
The dispute began in 2015, when Puerto Rico amended its alternative minimum tax for companies. That type of tax tries to catch those who might otherwise use loopholes to avoid paying what they owe. Companies calculate their taxes each way, then pay the higher amount.
The tax changes included a big increase in the rates for companies operating big-box stores on the island. Walmart said in its lawsuit that the highest new rate was reserved for businesses on the island with revenue of more than $2.75 billion, and the only company that met that description was Walmart.
Puerto Rico has had trouble balancing its budget every year for at least a decade. It accumulated a $72 billion debt, in part, by issuing long-term bonds just to get the cash to balance its budget, a practice widely considered unsustainable. At the time the legislature was amending the alternative minimum tax, it was trying to plug a $125 million budget hole.
Walmart also cited evidence that Puerto Rican lawmakers had sought to raise its taxes high enough to pay for other businesses on the island to get a tax reduction. Walmart argued that this violated its rights under the Equal Protection Clause of the United States Constitution, and Judge Fusté agreed.
Puerto Rican officials said the tax changes were appropriate because big companies like Walmart, with branches all over the world, let their supplier branches sell goods to their retail branches at artificially inflated prices. That made the retail outlets look as if they had little or no profits, and therefore had to pay little or no income tax.
They also said the case did not belong in federal court. The right procedure, they said, was for Walmart to pay its tax, apply for a refund and then, when that was denied, bring suit in a Puerto Rican court.
“That is true, so long as the tax-refund procedure will afford Walmart Puerto Rico a plain, speedy and efficient remedy,” Judge Fusté said.
He then described at length the way Puerto Rico has been “kiting checks,” shifting money from one creditor to pay another and “warehousing” money in a vault to claim that it had made payments without deducting the funds from its books.
“The government has been cannibalizing itself at an astonishing rate,” the judge said. He concluded that if Walmart paid the tax on demand, it would be sending the money to an insolvent government that would never pay it back.
Federal Judge in Puerto Rico Calls Walmart Tax Unlawful
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