The Internal Revenue Code of Puerto Rico, or Código de Rentas Internas de Puerto Rico, states that most digital goods, including SaaS, audio and audiovisual works, NFTs, and downloaded and streamed content, are all subject to sales and use tax in this U.S. territory.
While SaaS is taxable, companies offering SaaS will be required to follow Puerto Rico's tax laws only if they have established nexus in the territory.
This guide will explain Puerto Rico’s sales and use tax rules, including nexus thresholds, so companies doing business in Puerto Rico can ensure compliance.
Why this matters
Any company that sells to customers in Puerto Rico could become responsible for collecting and remitting sales tax payments once the company has sufficient connections to Puerto Rico.
When a company establishes nexus and doesn't collect tax on taxable products, including SaaS, or fails to comply with Puerto Rico’s tax laws, that company may be subject to fines and other penalties, as well as reputational damage and other consequences.
It’s important for SaaS companies to track where they have nexus and stay up-to-date about state-and territory-specific rules, which vary by jurisdiction and are subject to change.
SaaS taxation rules in Puerto Rico
Act 52-2022 made major changes to the Internal Revenue Code of Puerto Rico of 2011.
One thing the act did was amend Section 4010.01 of the code to include digital products in the territory's definition of taxable items. Amendments included the following:
- Amendments to Section 4010.01(aa) make clear that digital products are included in the list of taxable items in Puerto Rico.
- Section 4010.01(fff) expands the definition of taxable digital products to include videos, photos, apps, games, music, and computer programs that are delivered electronically or by digital transfer through streaming. This includes items purchased outright and items that are accessed via a subscription.
- Section 4010.01(ggg) makes clear that NFTs and all digital audiovisual products that are transferred electronically and that include a digital access code are treated the same way as other taxable digital products and subject to sales and use tax.
- Section 4010.01(hhh) lists a variety of other digital products that are subject to sales and use tax, including greeting cards, video games, electronic games, memberships to electronic groups that provide exclusive electronic or audiovisual data, news and information products, digital storage products, and software products.
Essentially, Puerto Rico wanted to make very clear that sales and use taxes apply to pretty much anything of value that is transmitted digitally.
Compliance in Puerto Rico
Puerto Rico taxes more digital goods than most jurisdictions. As a result, anyone selling digital products in Puerto Rico should be aware that those products may be subject to taxes.
However, this doesn't mean every business must register for sales tax, collect the tax, file forms, and remit tax payments. There are two key factors that determine whether a company must fulfill tax obligations.
Nexus in Puerto Rico
Any person considered a "merchant" under Puerto Rico’s Internal Revenue Code Section 4010.01(h) may be obligated to collect sales and use tax. A merchant is any person who is engaged in the sale of taxable items in Puerto Rico, including wholesalers.
This obligation is triggered when the merchant establishes physical or economic nexus in Puerto Rico.
Physical nexus refers to having an actual physical presence in the territory, for example, by:
- Maintaining a physical place of business, such as an office, distribution warehouse, or sales office.
- Employing workers, independent contractors, direct or indirect representatives, or agents in Puerto Rico who try to generate business or who transact business on the company's behalf.
- Owning tangible personal or real property in Puerto Rico.
- Having an affiliate relationship with an entity based in Puerto Rico.
- Installing, assembling, or providing maintenance for products in Puerto Rico.
Puerto Rico also requires merchants to collect and remit sales and use tax if they have economic nexus, or a certain amount of economic activity, there. U.S. states and territories were granted the right to establish economic nexus rules by the Supreme Court, with their decision in the 2018 case, South Dakota v. Wayfair, Inc.
In Puerto Rico, you establish economic nexus if you have:
- $100,000 or more in annual sales.
- 200 or more transactions in a year.
Once nexus is established, your company must collect tax on SaaS and other taxable digital or physical products sold to Puerto Rico customers.
Marketplace facilitator laws in Puerto Rico
Like many locations throughout the U.S., Puerto Rico has a marketplace facilitator law, which is found in Section 4010.01 (ddd) of the Internal Revenue Code.
This law defines marketplace facilitators as companies that aid in the sale of tangible property, specific digital property, or other taxable services through a marketplace. The marketplace could be a store, website, or similar type of platform.
When your business sells its products or services on a marketplace (as defined by Puerto Rico), the marketplace facilitator must collect the sales and use tax in all transactions within the market. You do not have to collect taxes on those sales, as the marketplace takes care of this for you.
Many merchants who sell digital goods on sites like Etsy and eBay will find that marketplace facilitator laws apply.
Importance of accurate tax collection and remittance
Complying with Puerto Rico laws is essential.
Puerto Rico has the authority to conduct an audit of your company to determine compliance with sales and use tax, and if you are found in violation, you could owe fines, fees, and back taxes.
To avoid this:
- Register to collect sales tax in Puerto Rico as soon as you establish economic or physical nexus.
- Begin charging tax on taxable items, including SaaS.
- If you sell to exempt buyers (such as some schools, nonprofits, and government agencies), make sure you have exemption certificates on file and keep track of filing requirements.
- File sales and use tax returns as required.
- Remit tax payments on schedule.
By taking these steps, your company can operate effectively in Puerto Rico without serious risk of penalties for noncompliance.
Staying compliant nationwide
Many companies do business in multiple U.S. states and territories. If yours is one of them, you need to know when you meet nexus requirements in each and every jurisdiction.
You also need to complete all your registrations in a timely manner, and learn the rules regarding the taxability of SaaS in every jurisdiction where you have customers. This is where a sales tax compliance platform like Numeral can be an invaluable business tool.
Numeral can help you to monitor sales, track nexus, and register when and where required. It can also help you make sure you charge tax on the right products, and it monitors updates to tax laws that may affect your company’s compliance.
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Additional resources for staying compliant
For companies that want to learn more about Puerto Rico tax rules, here are some additional resources:
Final thoughts
Puerto Rico has unique rules for the taxation of digital goods, and companies selling SaaS and other digital products must be aware of their obligations if they want to avoid fines and other problems.
Let Numeral help you to protect your company's financial security by ensuring that you're compliant with sales tax rules in the U.S. states and territories, as well as in more than 60 countries across the globe.
