First Circuit Says Puerto Rico's AMT Violates the Dormant Commerce Clause

Steven D. Schwinn, John Marshall Law School

The First Circuit ruled today in Wal-Mart Puerto Rico, Inc. v. Zaragoza-Gomez that Puerto Rico's amendment to its Alternative Minimum Tax discriminates against interstate commerce in violation of the Dormant Commerce Clause.

The ruling means that Puerto Rico can't apply its amended AMT against Wal-Mart, the largest private employer in Puerto Rico. The ruling also strikes a blow at Puerto Rico's effort to deal with its fiscal crisis and to prevent multi-state corporations doing business in Puerto Rico from shifting profits off-island by purchasing goods and services from related mainland entities at artificially inflated prices.

The amended AMT provided for a graduated corporate tax on goods sold or transferred to the corporate taxpayer by a related party or home office outside of Puerto Rico (for example, Wal-Mart's offices in the mainland US selling to Wall-Mart Puerto Rico). The top rate, 6.5%, applied to corporate taxpayers with $2.75 billion or more in gross sales. Wal-Mart was the only company big enough to be subject to this rate. Moreover, "[f]or a retailer like Wal-Mart PR that engages in a high volume of transactions with low profit margins on each item sold, this feature of the AMT can result in a particularly high tax liability relative to income."

Wal-Mart sued, and the First Circuit struck the tax. The court said that the tax plainly discriminated against interstate commerce, because it taxed only interstate transactions. Moreover, the court said that the amended AMT wasn't the only way (and therefore wasn't necessary) to meet Puerto Rico's interest in stopping profit shifting:

The amended AMT is a blunt and unnecessary overinclusive approach to combating profit-shifting abuse. It essentially establishes an irrebuttable presumption that all intercorporate transfers to a Puerto Rico branch from related mainland activities are fraudulently priced to evade taxes. In fact, the Secretary all but admits that there are narrower alternatives that target profit-shifting. . . . Having identified numerous less restrictive alternatives to advance Puerto Rico's legitimate local purpose, we hold that the AMT is a facially discriminatory law that does not survive heightened scrutiny under the dormant Commerce Clause.