Puerto Rico: Federal district court enjoins enforcement of AMT

Puerto Rico: District court enjoins enforcement of AMT

The U.S. District Court for the District of Puerto Rico issued an opinion and order permanently enjoining the Secretary of the Puerto Rico Treasury from enforcing a component of the commonwealth’s alternative minimum tax (AMT). Notably, in the view of the federal district court, the AMT imposed on tangible property and services transferred from an “out-of-island entity” to a Puerto Rico affiliate discriminated against interstate commerce and also violated the Equal Protection Clause.

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The case is: Wal-Mart Puerto Rico, Inc. v. Zaragoza-Gomez, No. 3:15-CV-03018 (JAF) (D. P.R. March 28, 2016).  Read the federal district court’s 109-page opinion [PDF 578 KB]


In 2015, Puerto Rico adopted certain changes to its AMT regime. These changes were aimed, in large part, to raise revenue in light of the commonwealth’s fiscal crisis.  Specifically, the legislation (Act 72 of 2015) adopted increases in the tangible property tax component of the corporate AMT.  Similar to the federal income tax AMT, the commonwealth’s AMT is owed whenever the taxpayer’s “tentative minimum tax” exceeds the taxpayer’s “regular” income tax. In other words, a taxpayer calculates tax under both regimes and pays tax that results in a higher amount. 

There are two components of the “tentative minimum tax.” One applies to income subject to certain adjustments. The other applies to the gross value of goods and services sold or otherwise provided to the corporate taxpayer by a related party or home office located outside of Puerto Rico. The second measure was comprised of two parts: (1) an expenses component; and (2) a tangible property component. The expenses component imposes a 20% tax on services provided to the taxpayer by a related party or home office outside Puerto Rico. The tangible property component imposes a 2% tax on the gross value of goods sold or transferred to the taxpayer by a related party or home office outside of Puerto Rico.  

Act 72 increased the tangible property rate from a flat 2% to a graduated rate ranging from 2.5% to 6.5%.  In this case, the result of Act 72 was that the taxpayer would be required to pay a 6.5% tax on each item of inventory transferred to it from the U.S. parent company. To get a sense of the economic effect of the revised AMT, the court noted that the taxpayer had paid $40 million in estimated income taxes for the year ending January 15, 2016, and $30 million of that was related to the new AMT. In December 2015, the taxpayer filed this action seeking an injunction against the enforcement of the AMT and a ruling that the AMT violates various clauses of the U.S. Constitution. 

Federal district court’s opinion

In a lengthy option, the court first addressed the commonwealth’s fiscal challenges and in great detail outlined the burdens and hurdles facing taxpayers seeking a refund of erroneously collected corporate income taxes. The court concluded that, if the taxpayer had to vindicate its federal rights by means of a tax-refund action, it would have to keep paying several tens of millions of dollars in AMT to Puerto Rico but, under present circumstances and law, Puerto Rico would not fully refund that money for decades, if at all. Thus, the court rejected the Secretary’s claim that the taxpayer could obtain a “plain, speedy and efficient remedy,” by filing a tax refund action. Notably, the court noted that the commonwealth could not provide a remedy if it were unable to pay a refund. 

Next the court addressed the constitutionality of the AMT, holding that on its face, the AMT clearly discriminates against interstate commerce.  The tangible property and expenses taxes applied only to “cross-border transactions” with out-of-state entities. Thus, in the court’s view, by design, the AMT does what it is not supposed to do—it taxes a transaction or incident more heavily when it crosses state lines than when it occurs entirely within the state. The Secretary even conceded that the tax applies only to transactions “between Puerto Rico taxpayers and their cross-border affiliates.” Because the AMT facially discriminated against interstate commerce, the court concluded that it was “virtually per se invalid.” 

The court also held that the AMT violated the Equal Protection Clause because its facial discrimination against multistate businesses engaging in controlled interstate transactions was arbitrary and served no legitimate state purpose.  The mere generation of tax revenue could not be a legitimate state purpose under an equal protection analysis because “acceptance of [that] contention . . . would eviscerate the Equal Protection Clause in this context.” 

Given the commonwealth’s fiscal situation and the likelihood that a refund would take years, the court permanently enjoined and declared invalid the sections of the law comprising the second measure of “tentative minimum tax,” that consist of the tangible-property tax and the expenses tax. 


For more information, contact a KPMG tax professional in Puerto Rico:

Rolando Lopez | +1 787-622-2765 | rlopez@kpmg.com

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