Wal-Mart Stores, Inc. (NYSE:WMT) argued the “Walmart tax” imposed by Puerto Rico discriminated against the global retail giant. To improve its internal finances, the Puerto Rican government tried to apply a tax on firms like Wal-Mart. But a federal judge ruled that such a tax was illegal.
Wal-Mart Stores, Inc. Beats the ‘Walmart Tax’
Wal-Mart is the largest non-government employer on the island with 48 stores. Well, if a new tax continued then it would have likely shut down those stores.
In May 2015, the Puerto Rican government signed a law that would increase the tax businesses paid on products they buy from “related parties” off the island. The tax would go up from two percent to 6.5 percent, and would only affect the island’s firms that had $2.75 billion or more in revenues.
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That would then just be one business.
Six months later, Wal-Mart launched a lawsuit against Puerto Rico Treasury Secretary Juan Zaragoza Gomez. The retailer argued the tax hike broke the U.S. constitution’s commerce clause by taxing interstate commerce. It also added prior to the trial that the tax was discriminatory because the retailer was the only firm big enough to meet that revenue threshold.
Under the new tax, Wal-Mart said, the retailer would pay 114 percent of its island profits in taxes. This meant that it would not be able to maintain operations in Puerto Rico for an extended length of time.
In the capital city of San Juan, federal judge Jose Antonio Fuste agreed. He ruled that the new tax was illegal. Although he wasn’t pleased with his decision considering the state’s poor finances, officials didn’t have right to “take revenue that it’s not entitled to, to pay for essential services.”
Puerto Rico promised to appeal the decision.
Wal-Mart was pleased with the ruling. A spokesperson for the retailer, Lorenzo Lopez, said it was a “victory” for the firm and its customers, employees, suppliers and farmers “who depend so heavily on us.”
Wal-Mart Stores, Inc. Won’t Solve Puerto Rico’s Crisis
Last summer, Puerto Rico Governor Alejandro García Padilla admitted that its $72 billion debt is “unpayable.” Padilla explained that its debt cannot be paid back, but bankruptcy wouldn’t be an option, either.
Facing a deepening financial crisis, the island territory will likely fail to make $23.9 billion worth of debt payments over the next 10 years. The administration’s updated fiscal and economic growth plan confirmed its payment deficit will soar to $16 billion over the next five years. The lack of funds stems from declining revenues and growing annual interest payments.
Puerto Rico has been working very hard with bondholders, creditors and even the U.S. government on some sort of recovery plan.
Earlier this year, U.S. Treasury Secretary Jack Lew penned an open letter to Congress urging action. Lew suggested to House Speaker Paul Ryan to provide help to Puerto Rico in the form of a bailout. It’s unclear if President Obama or the Congress plan to intervene with a bailout.
In any event, Lew believes Washington must act to not only help 3.5 million Americans, but also because two-thirds of U.S. pension and retirement funds have Puerto Rico government and municipal bonds. If the crisis worsens then these funds could lose billions of dollars.
So how did Puerto Rico get into such a fiscal hole? For many years, the island put out bonds to pay for its budget deficits. Investors imbibed these bonds because they can’t be taxed at any level of government. But once Congress ended tax breaks for U.S. firms working in Puerto Rico, the island’s economy started to tumble.
This meant that Puerto Rico tried to alleviate the situation by doubling its debt load in the form of bond sales. Island officials didn’t want to make any tough choices, like cutting back or laying off government workers, which accounts for a quarter of the labor market. Despite the level of debt, the economy stagnated and now officials are overwhelmed by its debt.
Puerto Rico can’t file for bankruptcy. However, the Obama administration has mulled over extending Chapter 9 bankruptcy protections to Puerto Rico. This would cover one-third of its debt.
For a glimpse into reckless spending by politicians, one municipality has an ice rink. An ice rink in the Caribbean!
So, no, Wal-Mart will not help bail out Puerto Rico.