Wal-Mart Puerto Rico, Inc. v. Zaragoza-Gomez, Nos. 16-1370

CourtUnited States Courts of Appeals. United States Court of Appeals (1st Circuit)
Writing for the CourtLYNCH, Circuit Judge.
Citation834 F.3d 110
Parties Wal-Mart Puerto Rico, Inc., Plaintiff, Appellee, v. Juan C. Zaragoza-Gomez, in his official capacity as Secretary of the Treasury of the Commonwealth of Puerto Rico, Defendant, Appellant.
Docket NumberNos. 16-1370,16-1406
Decision Date24 August 2016

834 F.3d 110

Wal-Mart Puerto Rico, Inc., Plaintiff, Appellee,
v.
Juan C. Zaragoza-Gomez, in his official capacity as Secretary of the Treasury of the Commonwealth of Puerto Rico, Defendant, Appellant.

Nos. 16-1370
16-1406

United States Court of Appeals, First Circuit.

August 24, 2016


Margarita L. Mercado-Echegaray , Solicitor General, Department of Justice, Commonwealth of Puerto Rico, and Susan Seabrook , Washington, DC, with whom H. Marc Tepper , Philadelphia, PA, Buchanan Ingersoll & Rooney PC , and Susana Peñagaricano-Brown , Assistant Solicitor General, Department of Justice, Commonwealth of Puerto Rico, were on brief, for appellant.

Joseph S. Grinstein , with whom Neal S. Manne , Houston, TX, Shawn Rabin , Steven M. Shepard , New York, NY, Susman Godfrey LLP , Juan A. Marqués-Díaz , Francisco G. Bruno , Alejandro J. Cepeda-Diaz , and McConnell Valdés LLC Hato Rey, PR, were on brief, for appellee.

Before Lynch, Thompson, and Kayatta, Circuit Judges.

LYNCH, Circuit Judge.

Wal-Mart Puerto Rico, Inc. (“Wal-Mart PR”) brought this suit against the Puerto Rico Secretary of the Treasury to challenge the lawfulness of Puerto Rico's corporate alternative minimum tax (“AMT”), as amended in May 2015. The district court held that it had jurisdiction over the suit and enjoined the enforcement of the AMT after concluding that the AMT violates the dormant Commerce Clause; the Federal Relations Act, 48 U.S.C. § 741a ; and the Equal Protection Clause. Wal – Mart P.R., Inc. v. Zaragoza – Gómez, No. 3:15–CV–03018, 174 F.Supp.3d 585, 652–53, 2016 WL 1183091, at *51 (D.P.R. Mar. 28, 2016).

We affirm, which continues the injunction against enforcement of the AMT against Wal-Mart PR. The federal district court did have jurisdiction because Wal-Mart PR, at the time of suit, lacked a plain, speedy, and efficient remedy in the Puerto Rico courts due to changes in legislation and regulation. As applied to these facts, those changes imposed a maximum recovery limit of $3 million per year against a potential tax reimbursement judgment by the Puerto Rico courts of over $200 million total ($30 to $40 million a year) and an estimated 4.6 years to judgment. Even that annual $3 million would not have been guaranteed to be paid, especially in light of mandated priorities putting other debts ahead of taxpayer debt. As to the merits of the Commerce Clause challenge, the AMT is a facially discriminatory statute that does not meet the heightened level of scrutiny required to survive under the dormant Commerce Clause.

I. Facts

The Commonwealth of Puerto Rico is in dire financial straits. Puerto Rico v. Franklin Cal. Tax – Free Tr., ––– U.S. ––––, 136 S.Ct. 1938, 1942, 195 L.Ed.2d 298 (2016) ; Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”), Pub. L. No. 114–187, 130 Stat. 549 (2016). As the district court summarized its findings:

[T]he Commonwealth is being crushed under the weight of a public debt that is
834 F.3d 113
larger than its gross national product, Puerto Rico's annual budget is running a structural deficit that is about [to] explode into the multibillion-dollar range, the government's cash reserves are about to dry out, its credit rating is at junk status, it has started to default on its debt obligations, and it has no place to turn for external funding, including the possibly-insolvent Government Development Bank.

Wal – Mart P.R., Inc., 174 F.Supp.3d at 602, 2016 WL 1183091, at *8.1

A. The Amended AMT

Against this backdrop, the Puerto Rico legislature, in an effort to raise more tax revenue, amended the AMT in May 2015, as part of Act 72 of 2015. We begin by discussing the general structure of the AMT in order to explain the two ways in which Act 72 amended the AMT.

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. P.R. Laws Ann. tit. 13, § 30073(a).2 The tentative minimum tax is defined as the higher of two measures. Id.§ 30073(b). The first measure, which is not relevant here, is calculated from the corporate taxpayer's income. Id.§ 30073(b)(1). The second measure, which is at issue here, is calculated from the value of goods and services sold or otherwise provided to the corporate taxpayer by a related entity or home office located outside of Puerto Rico. Id.§ 30073(b)(2).

This second measure is the sum of two components: an expenses tax and a tangible-property tax. Id. The expenses tax is a 20% tax on services provided to the corporate taxpayer by a related party3 or home office4 outside of Puerto Rico. Id.§ 30073(b)(2)(A). The tangible-property tax is a tax on the goods sold or transferred to the corporate taxpayer by a related party or home office outside of Puerto Rico. Id.§ 30073(b)(2)(B). Prior to the 2015 amendment, the tangible-property tax was a 2% flat tax. The 2015 amendment provided new graduated rates for the AMT's tangible-property tax, with a top rate of 6.5% for corporate taxpayers with $2.75 billion or more in gross sales in Puerto Rico.

The Secretary acknowledged that the purpose of the expenses and tangible-property taxes is to prevent multistate corporations doing business in Puerto Rico from shifting profits off the island by purchasing goods and services from related mainland entities at artificially inflated prices. The concern is that by manipulating prices for such transactions between related entities, a multistate taxpayer can shift profits to another jurisdiction with a lower tax

834 F.3d 114

rate and thereby artificially deflate its Puerto Rico income tax burden. The AMT accordingly applies only to transactions between a Puerto Rico taxpayer and a related entity located outside of Puerto Rico.

The absence of a potential problem of profit-shifting from a Puerto Rico taxpayer to a related entity outside of Puerto Rico may be indicated by a transfer price that is the same as the price at which unrelated parties would arrive through arm's-length negotiation. As such, prior to the 2015 amendment, the AMT statute provided that the Secretary could tax a related-party transaction at a lower rate if he found that the transfer price paid by the taxpayer to the related entity was “equal or substantially similar to the [price] for which such related party sells such property to an unrelated party.” Id.§ 30073(d)(4). In addition to the new graduated rates for the tangible-property tax, the second significant change in the 2015 AMT amendment was the elimination of this exemption.

The Secretary conceded in testimony before the district court that the amended AMT is no longer targeted at profit-shifting through transfer-pricing abuse but is instead simply “a revenue raising measure.” The district court credited this testimony and found that the amendment to the AMT was intended to raise tax revenues from multistate mega-retailers like Wal-Mart PR. Wal-Mart PR further alleges, and Puerto Rico does not dispute, that it is the only corporation that meets the sales threshold for the top tangible-property tax rate of 6.5%. Indeed, the new top rate under the amended AMT is alleged to be essentially a “Wal-Mart tax,” passed to raise a specific level of revenue from Wal-Mart PR in light of Puerto Rico's budget crisis.

B. Wal-Mart PR

Wal-Mart PR is the largest private employer in Puerto Rico. It operates forty-eight stores in Puerto Rico and employs around 14,300 people. Each year, it buys around $1.6 billion of inventory locally and over $700 million of inventory from its parent company, Wal-Mart Stores, Inc., and related mainland entities. Each year, Wal-Mart PR earns roughly $3 billion in sales in Puerto Rico.

Wal-Mart PR's tax year begins on February 1. The tax year commencing February 1, 2015 and ending January 31, 2016 (which we will call Fiscal Year 20165 ) was the first year in which Wal-Mart PR was subject to the new graduated tangible-property tax rate in the amended AMT.

In Fiscal Year 2012, Wal-Mart PR's total income tax liability to Puerto Rico was $19.9 million. The following year, it was $18.6 million. But in Fiscal Year 2016, Wal-Mart PR's total tax liability rose to approximately $46.5 million, of which approximately $32.9 million would have been attributable to the amended AMT had the district court not enjoined that tax.6 Wal-Mart PR alleges that the amended AMT, if enforced, would have made its total tax liability 132% of the company's total annual income. The AMT makes this percentage

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possible because the AMT taxes the transfer of goods and services to the corporate taxpayer, and it is not keyed to the taxpayer's income. For 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 PR estimates that in future years, it will pay $40 million per year as a result of the amended AMT and that its annual effective tax rate will be over 300%.

II. Procedural History

On December 4, 2015, Wal-Mart PR commenced this action against Puerto Rico Secretary of the Treasury Juan Zaragoza-Gómez in his official capacity. Wal-Mart PR sought, under 42 U.S.C. § 1983, an...

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17 practice notes
  • Great Bay Condo. Owners Ass'n, Inc. v. Gov't of the Virgin Islands & Marvin L. Pickering, Civil No. 2017-33
    • United States
    • United States District Courts. 3th Circuit. District of the Virgin Islands
    • September 28, 2018
    ...was recently applied by the United States Court of Appeals for the First Circuit. In Wal-Mart Puerto Rico, Inc. v. Zaragoza-Gomez, 834 F.3d 110, 112 (1st Cir. 2016), Wal-Mart Puerto Rico, Inc. ("Wal-Mart") challenged the constitutionality of the local Puerto Rican alternative minimum tax. P......
  • Puma Energy Caribe LLC v. P.R., CIVIL 20-1591 (DRD)
    • United States
    • United States District Courts. 1st Circuit. District of Puerto Rico
    • September 22, 2021
    ...dormant Commerce Clause applies to Puerto Rico in the same way that it applies to states.” Wal-Mart Puerto Rico, Inc. v. Zaragoza-Gomez, 834 F.3d 110, 126 (1st Cir. 2016); see Walgreen Co. v. Rullan, 405 F.3d 50, 55 (1st Cir. 2005). “Like a state, therefore, Puerto Rico generally may not en......
  • Wash. Bankers Ass'n v. State, 98760-2
    • United States
    • United States State Supreme Court of Washington
    • September 30, 2021
    ...would still be subject to the increased tax rate, provided it meets the income threshold. Wal-Mart Puerto Rico, Inc. v. Zaragoza-Gomez, 834 F.3d 110, 126 (1st Cir. 2016), concerned an alternative minimum tax imposed on goods sold or transferred to a corporate taxpayer by a related party or ......
  • Wash. Trucking Associations, Nonprofit Corp. v. State, NO. 93079-1
    • United States
    • United States State Supreme Court of Washington
    • April 27, 2017
    ...system for comity purposes is the same standard as ‘plain, speedy and efficient’ under the TIA." Wal-Mart P.R., Inc. v. Zaragoza-Gomez, 834 F.3d 110, 125 (1st Cir. 2016). Although the Supreme Court once stated that "Congress did not equate [the TIA's] ‘plain, speedy and efficient’ with equi......
  • Request a trial to view additional results
17 cases
  • Great Bay Condo. Owners Ass'n, Inc. v. Gov't of the Virgin Islands & Marvin L. Pickering, Civil No. 2017-33
    • United States
    • United States District Courts. 3th Circuit. District of the Virgin Islands
    • September 28, 2018
    ...was recently applied by the United States Court of Appeals for the First Circuit. In Wal-Mart Puerto Rico, Inc. v. Zaragoza-Gomez, 834 F.3d 110, 112 (1st Cir. 2016), Wal-Mart Puerto Rico, Inc. ("Wal-Mart") challenged the constitutionality of the local Puerto Rican alternative minimum tax. P......
  • Puma Energy Caribe LLC v. P.R., CIVIL 20-1591 (DRD)
    • United States
    • United States District Courts. 1st Circuit. District of Puerto Rico
    • September 22, 2021
    ...dormant Commerce Clause applies to Puerto Rico in the same way that it applies to states.” Wal-Mart Puerto Rico, Inc. v. Zaragoza-Gomez, 834 F.3d 110, 126 (1st Cir. 2016); see Walgreen Co. v. Rullan, 405 F.3d 50, 55 (1st Cir. 2005). “Like a state, therefore, Puerto Rico generally may not en......
  • Wash. Bankers Ass'n v. State, 98760-2
    • United States
    • United States State Supreme Court of Washington
    • September 30, 2021
    ...would still be subject to the increased tax rate, provided it meets the income threshold. Wal-Mart Puerto Rico, Inc. v. Zaragoza-Gomez, 834 F.3d 110, 126 (1st Cir. 2016), concerned an alternative minimum tax imposed on goods sold or transferred to a corporate taxpayer by a related party or ......
  • Wash. Trucking Associations, Nonprofit Corp. v. State, NO. 93079-1
    • United States
    • United States State Supreme Court of Washington
    • April 27, 2017
    ...system for comity purposes is the same standard as ‘plain, speedy and efficient’ under the TIA." Wal-Mart P.R., Inc. v. Zaragoza-Gomez, 834 F.3d 110, 125 (1st Cir. 2016). Although the Supreme Court once stated that "Congress did not equate [the TIA's] ‘plain, speedy and efficient’ with equi......
  • Request a trial to view additional results

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