Wal-Mart Puerto Rico, Inc. v. Zaragoza-Gomez

• Decision Date: 28 March 2016
• Docket Number: Civil No. 3:15-CV-03018 (JAF)
• Citation: 174 F.Supp.3d 585
• Parties: Wal-Mart Puerto Rico, Inc., Plaintiff, v. Juan C. Zaragoza-Gomez, in his official capacity as Secretary of the Treasury of the Commonwealth of Puerto Rico, Defendant.
• Court: U.S. District Court — District of Puerto Rico

174 F.Supp.3d 585

Wal-Mart Puerto Rico, Inc., Plaintiff,

v.Juan C. Zaragoza-Gomez, in his official capacity as Secretary of the Treasury of the Commonwealth of Puerto Rico, Defendant.

Civil No. 3:15-CV-03018 (JAF)

United States District Court, D. Puerto Rico.

Signed March 28, 2016

Alejandro J. Cepeda-Diaz, Francisco G. Bruno-Rovira, Juan A. Marques-Diaz, Mcconnell Valdes, LLC, San Juan, PR, Joseph PHV S. Grinstein, Neal S. Manne, Virkram Swaruup, Susman Godfrey LLP, Houston, TX, Shawn J. Rabin, Steven M. Shepard, Susman Godfrey LLP, New York, NY, for Plaintiff.

David A. Schumacher, H. Marc Tepper, Robert J. Fitzgerald, Buchanan Ingersoll & Rooney PC, Philadelphia, PA, Gerardo A. De-Jesus-Annoni, Department of Justice, Jose L. Gonzalez-Castaner, Gonzalez Castaner, CSP, Roberto A. Fernandez-Quiles, Gonzalez Castaner & Morales Cordero Law Office, San Juan, PR, John Warner, Susan E. Seabrook, Caroline C. Setliffe, Buchanan Ingersoll & Rooney PC, Washington, DC, for Defendant.

OPINION AND ORDER

JOSE ANTONIO FUSTE, UNITED STATES DISTRICT JUDGE

The Commonwealth of Puerto Rico (“the Commonwealth” or “Puerto Rico”) is insolvent and no longer able to pay its debts as they become due. The Treasury Single Account, which functions as the Commonwealth's main operating account, will reach an almost $1 billion negative balance by the end of June 2016. The local Commissioner of Financial Institutions has found that the Government Development Bank of Puerto Rico is insolvent, too, which means that it may need to enter receivership. The Puerto Rico Treasury Department harbors significant doubt about the Commonwealth's very ability to persist as a going concern. And, in response to this dire situation, Puerto Rico has enacted laws and regulations that effectively ensure that a large taxpayer, if forced to challenge a patently unconstitutional tax by first paying it and then suing for a refund worth several tens of millions of dollars, will not see the full refund for decades, if at all.

It gives us no pleasure, under these circumstances, to enjoin a revenue stream that flows directly into Puerto Rico's general fisc. For we, too, are citizens of this island, and we, too, must suffer the consequences of the financial disarray on the horizon. But, we are in this position precisely because the Commonwealth's insolvency has left the plaintiff, Wal-Mart Puerto Rico, Inc. (“Wal-Mart PR”), with nowhere else to turn. Now that we are here, we cannot shield ourselves from what we have learned, but must rule on the issues presented and order the relief required by law. In doing this, we agree wholeheartedly with the conclusion reached by one of the expert witnesses at the hearing we held: “[A]t the end of the day, the Commonwealth should not rely on revenue that it's not entitled to, to try to pay for essential services.” (ECF No. 130 at 60.)

Wal-Mart PR is the largest private employer in the Commonwealth. Comprised of Walmart Supercenters, Walmart Discount Stores, Supermercados Amigo, Sam's Clubs, and, until earlier this year, Super Ahorros, Wal-Mart PR currently operates forty-eight stores on the island, employing around 14,300 local residents.¹ Each employee of a Wal-Mart PR store receives a minimum wage of at least $10 per hour, $2.75 higher than the minimum wage set by law in Puerto Rico. Wal-Mart PR sells around $3 billion of merchandise each year and remits more sales tax to the Commonwealth than any other retailer. It buys around $1.6 billion of inventory from local vendors and suppliers each year. It also buys over $700 million of inventory from its parent company, Wal-Mart Stores, Inc., and related affiliates in the continental United States (jointly, “Wal-Mart Stores”). The Puerto Rico Treasury Department (“Treasury”) neither believes, nor suspects, that Wal-Mart PR uses these related-party purchases to shift income or profit off of the island to avoid payment of Puerto Rico income tax. In fact, Wal-Mart PR regularly pays around $20 million in income tax each year and is now paying more than $40 million.

Defendant Juan C. Zaragoza-Gómez (“Zaragoza”) is the Puerto Rico Secretary of the Treasury (“the Secretary”). Shortly after his appointment to Treasury in late 2014, he wrote a letter to Rafael Hernández-Montañez (“Hernández”), Member of the Puerto Rico House of Representatives and President of its Treasury and Budget Commission, advising the Legislature to modify the Commonwealth's minimum alternative corporate income tax (“the AMT”) to “minimize its impact.” (Pl. Ex. 13 at 21.) In the letter, dated February 18, 2015, the Secretary acknowledged that the AMT's “purpose” at the time was to recapture some of the income that certain “multi-national chains doing business in Puerto Rico” were suspected of exporting off the island by purchasing goods and services from “related entities” at such a high price that these chains “report year after year net operating losses in their subsidiaries or branches in Puerto Rico, even though their sales in Puerto Rico exceed the sales in other countries.” (Pl. Ex. 13 at 22.) To make the AMT more accurately reflect the “fair portion of the taxes” that these chains were allegedly “evad[ing],” Zaragoza wrote that the Legislature needed to cut by 25% the 2% flat tax on interstate transfers of tangible property between related companies or different offices of the same company and to eliminate the 20% flat tax on expenses for interstate services between the same.² (Pl. Ex. 13 at 2, 23.)

The Legislature had other plans, however, because Puerto Rico needed to raise $125 million in new revenue quickly to close a budget gap. Treasury, under Secretary Zaragoza, who did not agree with the Legislature's plan, was tasked with developing an amendment to the AMT that would raise the necessary revenue. After crunching the numbers, Treasury proposed new graduated rates for the AMT's tangible-property tax—whose new top rate of 6.5%, a 325% increase, was designed to capture Wal-Mart PR, the biggest fish in the pond—and also the elimination of a provision that had allowed the Secretary to exempt a tangible-property transfer from the tax upon proof that the transfer price was equal or similar to the price paid in an arm's-length transaction between unrelated parties. These amendments to the AMT were briskly enacted into law—the entire process, from introduction of the bill to signing into law, took only twelve days—in May 2015 as part of Act 72 of 2015 (“Act 72”).

Due to a pre-Act 72 statutory exemption, the tangible-property tax applies only to multistate corporations and their local affiliates when they engage in an interstate transaction with an out-of-state home office or related entity. Under the old 2% rate, the AMT did not cause Wal-Mart PR much concern. But, under the new 6.5% rate, the AMT now taxes and, for the foreseeable future, will tax Wal-Mart PR far more than it earns in net taxable income. After all, each piece of inventory that Wal-Mart PR receives from Wal-Mart Stores will now be taxed at 6.5%. The tax applies even if Wal-Mart PR is unable to sell the inventory or ends up selling it at a loss. Already, for the tax year that ended on January 15, 2016, Wal-Mart PR has paid more than $40 million in estimated income tax to Puerto Rico, around $30 million of which is attributable to the newly-muscular AMT.

On December 4, 2015, Wal-Mart PR commenced this action by filing a complaint against Secretary Zaragoza, in his official capacity, seeking, under 42 U.S.C. § 1983, an injunction against continued enforcement of the AMT and a declaration that the AMT is unlawful under the dormant Commerce Clause, the Equal Protection Clause, and the Bill of Attainder Clauses of the United States Constitution, and also under the Federal Relations Act, 48 U.S.C. § 741a.³ (ECF No. 1.) Wal-Mart PR invokes our subject-matter jurisdiction pursuant to 28 U.S.C. §§ 1331 and 1343(a)(3). (ECF No. 1 ¶ 10.)

A major preliminary issue in this case is whether we even have jurisdiction to hear it. The Secretary insists that Wal-Mart PR must pay the tax and continue paying it, may pursue a refund of the tax before the Treasury Department, which the parties agree would be denied, and then may pursue its legal claims upon appealing the denial of its refund to local courts. That is true, so long as the tax-refund procedure will afford Wal-Mart PR a plain, speedy, and efficient remedy. It will, the Secretary contends, even if Wal-Mart PR will never see its money again because Puerto Rico is too broke to pay it back. All that matters, the Secretary argues, is that Wal-Mart PR will eventually receive judicial review of its legal challenges and a court judgment declaring whether the tax is unlawful and should not be paid. Consider that argument for a second. As we will see, and as the Secretary well knows, each financial quarter that the AMT remains in effect will result in the remittance of over $40 million in unconstitutional taxes (at least $10 million of which will be from Wal-Mart PR) to an insolvent government, without any hope that the victimized taxpayers will be reimbursed in the foreseeable future. That is the very definition of an inadequate remedy.

I. Findings of Fact

From February 2 to 5, 2016, the court held an evidentiary hearing on whether we have subject-matter jurisdiction to hear the case and whether the AMT is valid under federal law. We expedited the hearing due to the urgency expressed by the parties and in keeping with Federal Rule of Civil Procedure 57. The transcript of the hearing is in the docket as ECF Numbers 126 through 131. Pursuant to Federal Rule of Civil Procedure 52(a)(1), these are our findings of fact:

A. The Financial Status of the Commonwealth

The Commonwealth of Puerto Rico is insolvent and unable to pay its debts as they become due. This, no one can doubt. Although the Secretary refused to stipulate to the Commonwealth's insolvency (ECF No, 126 at 148), the ineluctable fact that Puerto Rico is, and will be,...