Municipal business tax: who pays and how much

It is the tax on volume of business that the Municipal Code authorises municipal legislatures to impose and collect within their territorial limits, whose proceeds are used to cover their budgets. It is not the same as the municipal sales tax or the property tax: Article 7.199 itself clarifies that the power to impose patentes neither deprives nor limits the municipality’s powers to impose taxes, excises, licences, fees, rates and charges on other items, and that taxing an object or activity is a separate and distinct act from the tax on volume of business.

Article 7.201 says every person engaged in providing any service for profit, in selling any good, in any financial business or in any industry or business in the municipalities of Puerto Rico shall be subject to the patente, except where otherwise provided. The exceptions and exemptions live in Article 7.206, which we did not read and therefore do not summarise here.

• Being engaged in providing any service for profit, in selling any good, in a financial business or in any industry or business in the municipality (Article 7.201).Verified against the official source
• Computing the patente on the volume of business of the accounting year ended within the immediately preceding calendar year, using the same accounting year as the income tax return; if no return is filed, the natural year (Article 7.204(a)).Verified against the official source
• If the business did not operate for the whole previous year, computing on the volume of the period actually operated, raised to an annual basis (Article 7.204(a)).Verified against the official source
• Paying separately, within the same municipality, on the total volume base of each industry or business subject to a different patente type, at the rate prescribed for each (Article 7.203).Verified against the official source
• Notifying the Director de Finanzas in writing of a temporary cessation, a transfer of operations or a permanent cessation, on or before thirty (30) days after the next semester begins (Article 7.204(a)(2), (3) and (4)).Verified against the official source
• On permanent cessation, handing back the patente certificate together with the written notice (Article 7.204(a)(4)).Verified against the official source

• The municipal legislature’s ordinance setting the fiscal year’s tax rate, which must be approved at least thirty (30) days before the declaration filing date (Article 7.201).
• The letter from the Director de Finanzas of the municipality of origin certifying the business was in compliance up to its closure date, where operations are transferred to another municipality (Article 7.204(a)(3)).
• To claim the credit for taxes of the same nature paid outside Puerto Rico, a certified copy of the return filed in that jurisdiction or reliable evidence of payment (Article 7.204(b)).

1. 1

   Step 1: The two ceilings, and the twenty-five-dollar floor

   Article 7.202 carries the numbers everyone looks for. Every person engaged in any financial business shall be charged a patente that in no case may exceed one and a half per cent of their volume of business attributable to operations in the imposing municipality. Every person engaged in providing any service, in selling any good or in any industry or business not covered by that first group, a patente that in no case may exceed fifty hundredths of one per cent of that volume. And subsection (d) sets the floor: in every case, the amount to collect shall be the figure resulting from the computation or twenty-five dollars, whichever is greater.

2. 2

   Step 2: Those are ceilings, not the rate you will be charged

   Article 7.201 says the tax rates applicable in each fiscal year are set by the municipal legislatures, and Article 7.199 says that if a municipality imposes the patente at a rate below the maximum, a proportional reduction of those maximum rates applies to every industry or business of the same nature in that municipality. Article 7.202(c) further authorises lower rates to incentivise a business within an industry, commercial sector or geographic area, considering the business’s volume within its sector, the nature of the business, its location and that it be current on its state and municipal taxes; and it allows staggered or progressive rates reaching the maximum in two years, and even exoneration from payment, always uniformly for businesses of the same nature within each industry and sector.

3. 3

   Step 3: The ordinance comes thirty days before the declaration

   Article 7.201 sets two calendar rules worth keeping in mind. The municipal ordinances setting the rate must be approved at least thirty days before the date fixed by law for filing the volume-of-business declaration. And if by 1 July of a fiscal year no ordinance has been approved by the municipal legislature to impose that year’s rate, the rate authorised for the previous fiscal year stays in force; the same applies to subsequent years until the municipal legislature changes it.

4. 4

   Step 4: Which year it is computed on

   Article 7.204(a) says the patente shall be computed by the person subject to it on the basis of the volume of business done during their accounting year ended within the immediately preceding calendar year, and that this accounting year must be the same one used to prepare and file the income tax return with the Treasury Department; if no such return is filed, the accounting year shall be the natural year. And if the person did not carry on industry or business for the whole previous year, the patente is computed on the volume of the period they did, raising that volume to an annual basis.

5. 5

   Step 5: If you have branches in the same town

   Article 7.199 distinguishes two cases within the same municipality. Where a person has offices or warehouses separate and distinct from any other business or industry carried on at the main office or house, in the same municipality, the patente is imposed on them separately. But where the industry or business is carried on both at the main house and at any branch or warehouse of it, in the same municipality, the patente is imposed only on the main house, on the basis of the total volume of business of the main house and all its branches and warehouses.

6. 6

   Step 6: And if you operate in more than one town

   The same Article 7.199 resolves it this way: where industries or businesses have their main office established in a given municipality and keep other business organisations, offices, branches or warehouses doing business in other municipalities, the municipal patente must be imposed by each municipality where the main house keeps those offices, branches, warehouses or organisations, on the basis of the volume of business done by or in the name of the main house in that municipality. The detailed rules for apportioning volume between municipalities are in Article 7.200, which is long and which we do not reproduce here.

7. 7

   Step 7: Two different businesses, two patentes

   Article 7.203 is short and clear: any person who within the same municipality is engaged in industries or businesses subject to different patente types shall pay separately on the total volume base of each industry or business, at the rate prescribed for each as the case may be. Where operations are carried on in more than one municipality, the bases are set under Article 7.200 by patente type.

8. 8

   Step 8: Closing for a while: up to five years

   Article 7.204(a)(2) defines temporary cessation as the case where the person ceases operations for a period not exceeding five years intending to resume them in the same municipality where they ceased. That temporary cessation must be notified in writing to the Director de Finanzas of the municipality where the operations sit, on or before thirty days after the next semester begins. On resuming, the volume of business is computed as in the resumption rule in subsection (1), which further refers to Article 7.210.

9. 9

   Step 9: Moving the business to another town

   Article 7.204(a)(3) governs the transfer of operations from one municipality to another. The business must notify the Director de Finanzas of its closure on or before thirty days after the next semester begins. The new municipality shall consider the volume of business reported in the municipality it comes from, provided the original municipality’s Director de Finanzas certifies by letter that the business was in compliance up to its closure date. And if the transfer happens mid-semester, the new municipality shall issue a patente as if that semester had been paid there, and shall have the right to collect the following semesters.

10. 10

    Step 10: Closing for good: the certificate goes back

    Article 7.204(a)(4) defines permanent cessation as the intention to cease operations permanently in the municipality where the business operates and not to operate in any other. And it says what that involves: notifying that intention in writing to the Director de Finanzas where it operates and handing back the patente certificate. Returning the certificate is not decorative paperwork: it is part of what the Act requires in order to close.

11. 11

    Step 11: A credit if you pay the same tax outside Puerto Rico

    Article 7.204(b) grants a credit to financial businesses or industries with branches outside Puerto Rico that pay taxes of the same nature in another jurisdiction, and computes it in three steps: first, determine the percentage that gross income earned outside Puerto Rico represents of the total gross income of the industry or business subject to tax in Puerto Rico; second, apply that percentage to the amount of taxes of the same nature paid outside attributable to the income declared in Puerto Rico; and third, the product of that application is the credit against the patente payable here. To claim it, a certified copy of the return filed in the other jurisdiction, or reliable evidence of payment, must be attached.

12. 12

    Step 12: Buying another business carries its volume with it

    Article 7.205 says that if a person subject to the patente assumes or acquires control of the activities of another person subject to it — as assignee, fiduciary, representative or in any other way — the acquirer’s volume of business shall be determined taking into account both the assignor’s volume of business and the acquirer’s.

Before the municipality where the businesses or industries are located, and specifically before its Director de Finanzas, to whom the Act directs the notices of temporary cessation, transfer of operations and permanent cessation, and who certifies compliance when a business moves to another municipality. The tax rates are approved by the Municipal Legislature by ordinance, so the rate that applies to you is confirmed at your municipality.

• Taking 1.50% as the general rate: that ceiling is only for financial businesses.
• Reading the other ceiling as half a per cent of volume: the Act says fifty hundredths of one per cent.
• Forgetting the floor: in every case what is charged is the computation or twenty-five dollars, whichever is greater.
• Assuming the ceiling is the rate: the rate is set by each municipal legislature by ordinance.
• Counting on the municipality lowering the rate for your business alone: lower rates must be uniform for businesses of the same nature within each industry and sector.
• Using an accounting year different from the Hacienda return’s: the Code requires it to be the same.
• Not raising the volume to an annual basis where the business did not operate the whole previous year.
• Paying a single patente while holding two businesses of different types in the same municipality.
• Believing the main house covers branches in other municipalities: each municipality imposes on the volume done there.
• Closing without notifying the Director de Finanzas in writing within thirty days of the next semester beginning.
• Closing permanently and keeping the patente certificate: it must be handed back.
• Moving municipality without asking the origin municipality’s Director de Finanzas for the compliance letter.

These are the government pages this guide is based on.

• Municipios de Puerto Rico

  Municipios

  bvirtualogp.pr.gov