Understanding the Puerto Rico Business to Business Sales and Use Tax Exemption
In Puerto Rico services rendered to another person are subject to the sales and use tax. That is unless an exception applies, such as the business to business exemption, AKA the B to B exemption. To be more precise in this case it is an exclusion from the definition of what is a taxable service. Generally, when a business sells services to another business the B to B exemption applies relieving the seller from the responsibility of collecting the sales and use tax.
To the surprise of many of my clients the business to business exemption does not apply or work automatically. This exemption actually requires certain documentation to relieve the seller of the responsibility of withholding sales and use taxes. In an audit, if the seller of the services cannot prove that it was relieved from the responsibility to withhold sales and use taxes through the required documentation it could be liable for the tax.
Under that scenario the friendly B to B exemption could turn into an unexpected enemy for taxpayers that have inadvertently overlooked this requirement. Realistically speaking many taxpayers may think an audit is unlikely. However, a properly run business won’t chance a costly audit, especially if it can be easily avoided by complying with the paperwork.
I will go through this compliance issue step by step in the most common situation, when services are sold to a person engaged in a trade or business or carrying out activities for the production of income in Puerto Rico. Other procedures should be taken into consideration when selling services to a person not engaged in a trade or business and other circumstances, as applicable. However, that subject is beyond the scope of this article.
What does a business need to do to comply with the documentation requirements of the B to B exemption? First, the seller and the buyer must be registered in the Puerto Rico sales and use tax Merchant Registry. Second, the payments for such services must be a deductible ordinary and necessary expense paid or incurred by the buyer in the operation of its business or for the production of income. And third, the buyer must provide the seller with an exempt purchases certificate Form AS 2916.1.
In summary, a merchant seller of services, to ensure that he is relieved from withholding sales and use taxes in B to B transactions should observe the following guidelines:
1) The seller and buyer should each keep a copy of the others sales and use tax Merchant Registration Certificate;
2) The buyer should certify that he is exempt by providing the seller with the exempt purchases certificate Form AS 2916.1 and by marking the B to B exemption in the form;
3) The seller should inspect the certificate to verify that it is properly completed and will keep the document on file for a minimum of six years;
4) An exempt purchases certificate will be required for each transaction unless the service is provided on a continuous basis.
This is a good opportunity for businesses with frequent B to B transactions to verify their documentation procedures and get up to date if necessary. We have also seen the challenges of implementing these guidelines. Such as when a client refuses to provide a seller with an exempt purchases certificate, or situations were a business contracts services with a person outside of Puerto Rico. Tough decisions may be required. Remember it’s not a choice, if a client does not cooperate in providing the required documentation, the seller is required to withhold the sales and use tax, if not the seller could be liable for the sales tax.
This article is for illustrative purposes and is not tax advice, for more information or if you have questions you should contact your tax professional to determine if you are complying with the B to B exemption and not rely solely on this article. Current as of January 1, 2013.