Puerto Rico has proposed an amendment to the Puerto Rico Municipal Code that would allow taxpayers to elect a different method of calculating the personal property tax on inventory value. Specifically, for tax years 2024 through 2028, this amendment would allow taxpayers to calculate the tax by determining the average inventory valuation for tax years 2021, 2022, and 2023 and applying the tax rate in effect for tax year 2024. Alternatively, taxpayers could continue using the current calculation method, which bases the tax on Article 7.148(a) of the Municipal Code and applies the tax rate for the tax year at issue (i.e., 2024, 2025, 2026, 2027 or 2028).

Under the proposed method, taxpayers would calculate the average value of their inventory as follows:

1. Existing manufacturers, merchants or businesses — As of January 1, 2025, a manufacturer, merchant or existing business that has been valuing and paying personal property taxes on its inventories for at least three years would use the average value of the inventory, as reported on the personal property tax returns for tax years 2021, 2022 and 2023, to determine the value of the inventory subject to the personal property tax in tax years 2024 through 2028.
2. New manufacturers, merchants or businesses — As of January 1, 2025, a manufacturer, merchant, or business that has paid personal property taxes on its inventory for less than three years would base the inventory value on the average value of the inventory on the first personal property tax return that covers 12 months of operations.

A special rule would apply to the year in which a business has been in operation for less than 12 months and the first year in which the business has been in operation for 12 months of the calendar year. Under that rule, the current method would apply, instead of the proposed elective method. Taxpayers, could, however, elect the proposed method for determining the average value of their inventory in subsequent years.

It appears taxpayers could choose between the current method and the proposed method when calculating their personal property tax on inventory for tax years 2024 through 2028.

The bill also would add new paragraph (h) to Article 7.138 of the Municipal Code, which would require the CRIM to notify the taxpayer of a tax deficiency for the years in which the tax base established in Article 7.148 of the Municipal Code prevails.

Implications

This measure is expected to encourage taxpayers to increase inventory levels in Puerto Rico without potentially incurring additional personal property tax liabilities. The proposal is aimed at addressing shortages of food, medicine and essential goods in Puerto Rico by allowing taxpayers to forecast and control property tax costs by selecting the most cost-beneficial method for calculating the personal property tax on inventory value. The proposed amendment would be effective 90 days after its enactment.

As currently drafted, the proposal would apply for the first time to tax year 2024. Considering that personal property tax returns for tax year 2024 are due (without extension) on May 15, 2025, the effective date or implementation of the legislation could change.