The Internal Revenue Code establishes that any taxable item purchased for official business by government agencies or departments may be exempt from paying Sales and Use Tax (SUT). This applies to both USA and Puerto Rico departments, agencies, public corporations or municipalities; and includes persons or entities acting on their behalf.
The Treasury Department (TD) recently issued Internal Revenue Circular Letter No. 19-13 (CC RI 19-13) with the objective to:
- Clarify the criteria that qualifies a person or entity to become a Government Agent.
- Establish the process to be followed by the Government Agent to request the Exemption Certificate of Government Agent and the service charge that applies
- Clarify the effectiveness of the Certificate of Government Agent
- Establish the renewal process
Applicability of the SUT Exemption to Government Agents
The SUT exemption is not granted to entities for merely having contracts with the Government, and for purchasing taxable items subject to SUT, related to their services. In order to qualify for the exemption, the entity must request and obtain from the Treasury Secretary a certificate that identifies it as a Government Agent. Any taxable item acquired by the person or entity for private purposes other than those stated in the contract with the government agency will be subject to taxation.
Any entity that works or acts on behalf of the government and wants to be considered a Government Agent for exemption purposes, must comply with the following requisites:
- Become a merchant registered at the Merchants Registry and registered in the Internal Revenue Unified System (SURI).
- Filed the income tax returns for the last five (5) years. Payed all taxes imposed by the TD, including those he has payed as a withholding agent; or, they have an active payment plan if there are any outstanding debts.
- The entity must have been created exclusively to perform official services for the government as its agent.
- Obtain the certificate issued by the Government entity for which it works that confirms that, in effect, the entity works and is an agent of the government agency. It must include a description of the duties and activities it will be carrying out; the term of the appointment as an agent; reference to the contract signed and a breakdown of the taxable items that are to be acquired on behalf of the government agency.
- Have a duly signed contract with the government agency for which it acts as an agent.
CC RI 19-13 reaffirms that the person, company or entity must have been created exclusively to provide the services itemized in the contract with the government agency or department. In addition, it points out that the entity cannot transfer to sub-contractors the Exemption Certificate issued to it.
How to Present the Request the Certificate of Government Agent
The request must be made by means of a letter to the Assistant Secretary of Tax Policy, and must include the following information:
- Name of the Government Agent, employer’s identification number, number of Merchant’s Registry, physical and postal address, telephone number, and name and email address of the contact person of the Government Agent.
- Evidence that the entity was exclusively created to act as a government official as its Government Agent. To this effect, the Government Agent must provide a copy of the certificate of incorporation or Authorization Certificate to do business in Puerto Rico issued by the State Department of Puerto Rico. It must show that the entity was organized to do business in Puerto Rico with the only purpose to officially act on behalf of the government as its agent.
- Copy of the certificate issued by the government entity in name of the person that confirms that: the person is in effect an agent for the government entity; and a breakdown of the taxable items the Government Agent is to purchase on behalf of the government entity.
- Copy of the contract signed between the Government Agent and the government entity for which it is performing services under the contract. The contract must specify the relationship with the agent, and the specialized expertise of the agent for which the contract was approved.
- If the request is filed by an authorized representative, a duly signed Power of Attorney and Representation (Model SC 2745) must be enclosed.
The request may be filed either in person or by mail.
Service Charge for the filing of the Request
The TD establishes a $1,000 service charge for the filing of the request. It must be paid through the Virtual Collections Office. A copy of the payment receipt of the $1,000 service charge issued by the Virtual Collections Office must be included.
The service charge will be in effect for any Certificate of Government Agent filed after the publication of CC RI 19-13.
Effectiveness of the Exemption Certificate of Government Agent
The Exemption Certificate will apply only to the taxable items listed on the request for SUT exemption. It will apply in retrospect from the date the request was filed if the criteria have been complied with. It will not apply to taxable items acquired before that date; and it will be in effect up to the end of the contract with the government agency or two years, whichever is less.
Renewal of the Exemption Certificate of Government Agent
If the Government Agent wants to continue been considered as such after the Exemption Certificate has expired, it may renew the certificate by following the steps described on CC RI 19-13.