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Apply a 4% rate to eligible business to business software purchases in Puerto Rico

Background

In Puerto Rico, many tangible personal property purchases or taxable services are subject to an 11.5% sales and use tax rate, while certain business to business services and maintenance services for computer programs may be subject to a lower 4% rate. An exemption certificate (Form AS 2916) must be used by a purchaser that is exempt from the sales and use tax, or any merchant who, upon receiving a service provided by another merchant, is entitled to acquire it subject to a lower tax rate.

The AvaTax codes SC100122, SC070321 and SC070121 represent business to business sales of computer software services. As of July 1, 2022, Avalara has updated the taxability rules for those codes to return the full taxable amount in Puerto Rico.

AvaTax users with valid exemption documentation must create a custom tax rule to apply the lower tax rate to transactions in Puerto Rico that involve these tax codes.

Steps

  1. In AvaTax, go to Settings > All AvaTax Settings.
  2. Next to Custom Rules, select Manage.
  3. Select Tax Rules and then select Add a Tax Rule.
  4. Name and date your rule:
    • Enter a descriptive name that makes the rule easy to find.
    • Select an effective date when the rule should start applying to your transactions. Select an expiration date if this rule should only be used for a certain period of time.
  5. For Rule Type, select Rate Override Rule.
  6. Adjust the rule applicability settings:
    • For country, select United States.
    • For region, select Puerto Rico.
      • If you want to limit this rule to apply only to purchases in a specific jurisdiction within Puerto Rico, select that jurisdiction.
    • For tax type, select Sales or sellers use tax.
    • For rate type, select Services.
    • For tax code, enter one of the three tax codes listed at the bottom of this article.
  7. Adjust the tax treatment settings:
    • For rate, enter 4%.
    • Select Advanced Options. Under What jurisdictions does this rule apply to, select This Jurisdiction and All Jurisdictions Within It.
  8. Save the tax rule.

If your transactions in Puerto Rico involve the tax codes listed below, repeat the above steps for each tax code.

Tax code Description

SC100122

Computer software maintenance contracts / agreements - optional - prewritten software (electronically downloaded) for business use only - downloaded updates and support services

SC070321

Computer software implementation - training only - optional - prewritten software - electronically downloaded for business use only

SC070121

Computer software implementation - optional - prewritten software - electronically downloaded for business use only 

 

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