Was Puerto Rico Marine Management entitled to Texas's sales-tax exemption for the United States government, and could other carrier exemptions apply?

Plain-English summary

The Texas Comptroller denied Puerto Rico Marine Management Inc. the sales-tax exemption available to the United States government. The agency's Legal Services Division concluded that the company had not shown it was entitled to be treated as a federal agency or instrumentality for that exemption.

The denial did not foreclose every exemption. The letter said particular purchases might qualify under Section 151.330 and the common-carrier rules. A properly completed exemption certificate had to be issued to the supplier for a specific qualifying purchase.

The attached internal memorandum reviewed conflicting historical authorities about Puerto Rico's status and emphasized that the taxpayer bore the burden of clearly bringing itself within an exemption. The memorandum recommended denying the federal-agency theory without more specific authority.

What this means for you

A broad governmental-status claim did not establish exemption. The taxpayer still could analyze individual purchases under narrower interstate-shipment or carrier provisions and support any claim with the required certificate.

Common questions

Did the company receive the United States government exemption? No.

Did the letter say no purchase could ever be exempt? No. It identified possible interstate-shipment and common-carrier exemptions for qualifying purchases.

Was an exemption certificate required? Yes, for a specific purchase claimed exempt under those rules.

Did the memorandum conclusively define Puerto Rico's constitutional status? No. It described the status as unsettled across different historical contexts and focused on the company's failure to prove this Texas exemption.

Citations and references

• Tex. Tax Code § 151.330 — interstate shipments and common carriers.
• Comptroller Rule 3.297 — carriers and potentially qualifying purchases.
• Comptroller Rule 3.287 — exemption certificates.
• Tex. Tax Code § 151.309 and 34 Tex. Admin. Code Rule 3.322(b) — cited for the United States government exemption.
• 48 U.S.C. § 731 et seq. — authority cited by the company for Puerto Rico's status.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8703L0800G06

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

BOB BULLOCK
Comptroller March 9, 1987

Puerto Rico Marine Management Inc.
P. O. Box 3170
Edison, New Jersey 08818

Dear ***:

Thank you for your letter of January 16, 1987 concerning an exemption
from Texas sales and use tax for Puerto Rico Marine Management Inc.
(PRMMI), as an agency of the United States government.

Your letter was referred to our Legal Services Division for review. As
a result of Legal's research into the matter, Puerto Rico Marine
Management is not entitled to the same exemption from sales tax as the
federal government.

PRMMI may qualify for certain exemptions, however, under Section
151.330 Interstate Shipments and Common Carriers, of the sales tax law.
I have enclosed a copy of Rule 3.297 Carriers, which outlines the types
of items which may qualify for exemption. In order to claim an
exemption on a specific purchase, a properly completed exemption
certificate must be completed and issued to the supplier. Rule 3.287
Exemption Certificates, is also enclosed. Copies of the sample
certificate may be made to use as needed.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change.

If you have any questions or need more information, please call me at
1-800-252-5555 toll free from anywhere in Texas. The regular number is
512/463-4600. You may write me at the Tax Administration Division.

Sincerely,
Julie Pesl
Tax Policy Section
Tax Administration Division

INTEROFFICE BOB
BULLOCK
MEMORANDUM
COMPTROLLER OF
PUBLIC ACCOUNTS

March 4, 1987

TO: Bob Frederick

FROM: Cheri Witter

SUBJECT: Puerto Rico Marine Management, Inc.,
Request for sales tax exemption

Puerto Rico Marine Management, Inc. has requested an exemption
from Texas sales and use tax. Puerto Rico Marine Management, Inc.
(PRMMI)is the operating company and general agent for Puerto Rico
Maritime Shipping Authority, an entity which appears to be an agency
or instrumentality of the government of Puerto Rico. For purposes
of considering the exemption, I will assume they are a government a-
gency of Puerto Rico.

PRMMI claims that the government of Puerto Rico "has the same status
as that of the United States" and is entitled to the same exemption
from sales and use taxes that the U.S. government has, citing 48 U.S.C.A.
Sec. 731 et. seq. as authority. The United States, its agencies and
instrumentalities are exempt from sales and use tax. TEX. TAX CODE ANN.
^U
151.309 (Vernon 1982); Comptroller's Sales Tax Rule, 34 TEX. ADMIN. CODE
^U
3.322(b).Other states and their agencies and instrumentalities are not
exempt, however. TR0482 (1/11/78); letter from sales tax division of
1/25/77 (found on MTIS 7701IL0050D04).

Puerto Rico has a unique status. The act changing Puerto Rico's status
from a territory to a commonwealth (48 U.S.C.A. Sec. 731 et. seq.) does
not clearly define that status. Courts have determined its status on a
case-by-case basis in trying to decide if it is more like a territory or
more like a state.

Several cases have considered whether the government of a territory is
an agency or instrumentality of the United States. These cases are not
completely clear themselves, and are in a different context (Internal
Revenue Code Sec. 911, foreign source income). In Groves v. United
States, 533 F.2d 1376, 1383 (5th Cir. 1976) cert. denied, 429 U.S. 1000
(1976), the court said that the government of the Trust Territory of the
Pacific was an agency of the United States. Accord, Bell v.
Commissioner,
278 F.2d 100, 101 (4th Cir. 1960)(government of American Samoa); but see
McComish v. Commissioner, 580 F.2. 1323, 1327 (9th Cir. 1978) (government
of Trust Territory of Pacific not a U.S. government agency). Although
reaching different results, these cases focus on the degree of control
exercised by the U.S. government. Even if a territory's government is
an agency of the U.S. government, Puerto Rico is not clearly a territory,
as its government has a great deal of autonomy.

In U.S. v. Quinones, 758 F.2d 40 (1st Cir. 1985), the court said that
after 1952, Puerto Rico ceased being a territory subject to Congress'
plenary power, and that the government of Puerto Rico was no longer a
federal government agency exercising delegated power. Id. at 42.
Congress
maintains similar powers over Puerto Rico as it has over the states. Id.
at 43. Although a clear statement that Puerto Rico is not a territory and
its government not a federal government agency, Quinones presents several
problems. The case involved applying Federal law to allow the admission
of
evidence that Puerto Rican law would have excluded, and Puerto Rico was
being treated as a state for purposes of resolving the conflict. Another
problem is that the territory clause of the U.S. Constitution is still
being applied to Puerto Rico by the U.S. Supreme Court. In Harris v.
Rosario, 446 U.S. 651 (1980) the court cited the territory clause to
support the proposition that Congress could treat Puerto Rico differently
than the states. Rosario involved the expenditure of federal money for
welfare programs and upheld the power of Congress to provide lower
reimbursement to Puerto Rico than to the states.

Puerto Rico's status has been baffling to a number of courts, including
one that said that Puerto Rico's status was "unprecedented" but that it
was "unnecessary to define the exact nature of the relationship." Arbona
v. Kenton, 126 F. Supp. 366, 369 n. 11 (D.C.N.Y. 1954). Since the
request for an exemption would not involve the expenditure of Federal
funds as in Harris v. Rosario, that case would seem to be no obstacle to
treating Puerto Rico more like a state than a territory (assuming a
territorial government is a United States government agency) and
disallowing an exemption based on Puerto Rico's status.

If PRMMI wants to pursue an exemption, it should point to more specific
authority than it has so far. Puerto Rico's status as a commonwealth,
rather than as a state or territory, has resulted in a large number of
cases considering its status in a wide variety of situations (e.g., does
the government of Puerto Rico have sovereign immunity). The taxpayer
has the burden of clearly bringing itself within an exemption, which it
has not done. Without authority giving Puerto Rican government agencies
status as an agency or instrumentality of the U.S. government, there
seems to be no reason to give an agency of the Puerto Rican government
more favorable treatment than an agency of the Oklahoma government.