On August 24, 2016, the U.S. Court of Appeals for the First
Circuit in Wal-Mart Puerto Rico, Inc. v. Juan C.
Zaragoza-Gomez held that Puerto Rico’s corporate
alternative minimum tax (the “AMT”) violated the
dormant Commerce Clause and affirmed the district court’s
injunction against enforcement of the AMT against Wal-Mart Puerto
Rico, Inc. (“Wal-Mart PR”). The AMT is a tax equal to
the amount (if any) by which a corporate taxpayer’s tentative
minimum tax exceeds its regular tax on income. The tentative
minimum tax is calculated, in part, from the value of goods and
services sold or otherwise provided to a corporate taxpayer by a
related entity or home office located outside of Puerto Rico. As
amended in May 2015 to increase its rate on large taxpayers,
Wal-Mart PR alleged that the AMT, if enforced, would have applied
at its highest rate only to Wal-Mart PR and would have made
Wal-Mart PR’s total tax liability for 2016 132% of its total
annual income. Wal-Mart PR estimated that in future years it
would have paid $40 million per year as a result of the AMT and
that its annual effective tax rate would have been over 300%. In
December 2015, Wal-Mart PR sought an injunction against the
continued enforcement of the AMT against it and a declaration that
the AMT was unlawful under the dormant Commerce Clause (among other
reasons). In March, the U.S. District Court for the District of
Puerto Rico sided with Wal-Mart PR and permanently enjoined and
declared invalid, under both federal constitutional and statutory
law, the AMT.
As a threshold matter, the First Circuit held that the Butler
Act and the doctrine of comity did not deprive the federal courts
of jurisdiction over Wal-Mart PR’s suit in the absence of a
plain, speedy and efficient remedy in Puerto Rico. In light of
recent legislation in Puerto Rico that placed an annual cap on
certain judgments and prioritized other debts over tax refunds, the
First Circuit concluded that Wal-Mart PR lacked a plain, speedy and
efficient remedy in the Puerto Rico courts. Reaching the merits,
the First Circuit held that the AMT as amended is facially
discriminatory and does not meet the heightened level of scrutiny
required to survive under the dormant Commerce Clause. Because the
AMT (as applied to Wal-Mart) applies only to inter-jurisdictional
transfers within a corporate family, and because narrower
alternatives exist that would address Puerto Rico’s
profit-shifting concerns, the First Circuit held the AMT to be
The First Circuit’s Wal-Mart decision is
significant on several counts in Puerto Rico’s present
circumstances. It deprives Puerto Rico of a significant source of
revenue. It also opens federal courts to challenges to the validity
of other taxes in Puerto Rico applicable to non-Puerto Rican
companies, such as the Puerto Rican excise tax applicable to
related-party purchasers of goods manufactured in Puerto Rico.
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