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Wal-Mart v. Puerto Rico: Strong Case, Weak Odds

Stephen L. Carter is a Bloomberg View columnist. He is a professor of law at Yale University and was a clerk to U.S. Supreme Court Justice Thurgood Marshall. His novels include “The Emperor of Ocean Park” and “Back Channel,” and his nonfiction includes “Civility” and “Integrity.”
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Wal-Mart has a strong case on the constitutional merits of its lawsuit challenging a big tax increase levied by the government of Puerto Rico. But that doesn’t mean the retail giant will win. What might shoot down the complaint isn’t the Constitution but limits on the ability of federal courts to interfere with tax collection.

The suit, filed last week, contends that a statute known as Act 72, adopted by the Puerto Rican legislature in May, unconstitutionally singles out Wal-Mart, the island’s largest employer, for inequitable tax treatment. To simplify matters a bit, Act 72 increases the rate at which tangible corporate property that comes from outside Puerto Rico is taxed, from 2 percent to 6.5 percent -- but only on entities doing more than $2.75 billion of business on the island. Wal-Mart alleges that the new tax rate will amount to over 91 percent of its net income in Puerto Rico. Should net income fall, says Wal-Mart, the tax might actually exceed it.

True, Puerto Rico is desperately strapped for cash, and the big-box stores are everyone’s fashionable target. Moreover, even tax rates that seem confiscatory are not on their face unconstitutional. What makes Act 72 different is that the same property that is taxed at 6.5 percent would not be taxed at all if it was purchased from parties within Puerto Rico. In other words, Wal-Mart is taxed at 6.5 percent when it buys tangible property outside the Commonwealth, but at zero percent when it buys the same property on the island. Such a scheme, on its face, would seem to violate what is known as the “dormant Commerce Clause.”

This past spring in Comptroller of the Treasury of Maryland v. Wynne, the U.S. Supreme Court summarized its precedents this way:

The dormant Commerce Clause precludes States from discriminating between transactions on the basis of some interstate element. ... This means, among other things, that a State may not tax a transaction or incident more heavily when it crosses state lines than when it occurs entirely within the State. ... Nor may a State impose a tax which discriminates against interstate commerce either by providing a direct commercial advantage to local business, or by subjecting interstate commerce to the burden of multiple taxation.

Act 72 would seem to do most of these things. True, there is no allegation of multiple taxation, but the statute does provide “a direct commercial advantage to local business” and, more important, taxes “a transaction or incident more heavily when it crosses State lines.”

In its 1997 decision in Camps Newfound/Owatonna, Inc. v. Town of Harrison, the court invalidated a Maine property tax law that favored charities mainly serving state residents over charities mainly serving nonresidents. Justice John Paul Stevens, writing for the majority, borrowed a striking example from his own opinion in a dormant Commerce Clause case three years earlier: “The paradigmatic ... law discriminating against interstate commerce is the protective [import] tariff or customs duty, which taxes goods imported from other States, but does not tax similar products produced in State. ... Such tariffs are so patently unconstitutional that our cases reveal not a single attempt by a State to enact one.”

Why is the example striking? Because what Stevens describes is what Puerto Rico has enacted: Act 72 taxes property goods imported from outside the Commonwealth but exempts similar goods produced within. This is precisely the danger against which the dormant Commerce Clause is aimed.

I should add in fairness that academics have been hard on the dormant Commerce Clause, particularly on the prong forbidding discriminatory taxation. And the dissents in Wynneremind us that at least three of the current Justices -- possibly four -- would prefer to abandon the doctrine. But the doctrine is still there, and on the merits, the tax imposed by Article 72 certainly seems to violate it. 

Why, then, do I think Wal-Mart’s chances are only so-so? Because the lawsuit must also get around something called the Butler Act, also known as 48 U.S.C. 872: “No suit for the purpose of restraining the assessment or collection of any tax imposed by the laws of Puerto Rico shall be maintained in the United States District Court for the District of Puerto Rico.” The law was adopted in 1927, and its intention is simple. The way to challenge a tax in Puerto Rico is the same as the way to challenge it anywhere else. You pay the tax, then sue to get your money back. 

This Wal-Mart is unwilling to do. It wants a court order that the tax is uncollectible. This is precisely what the Butler Act exists to forbid. In Carrier Corp. v. Perez (1982), then-judge Stephen Breyer wrote for the First Circuit that the statute did not allow a plaintiff alleging discriminatory taxation to raise the claim except the old-fashioned way: paying the tax, then suing in Puerto Rico to get it back.

Wal-Mart’s arguments for getting around the Butler Act are clever. For example, the complaint points out that the Commonwealth isn’t even able to deliver tax refunds due to its own residents. And even in the event that Puerto Rico had the money, the review process for those who believe they have been taxed unfairly can take six years or more -- during which time it would of course continue to collect the tax.

Although I’m sympathetic to Wal-Mart’s argument, I’m skeptical that the court will agree that these allegations are sufficiently extraordinary to escape the statute. True, courts have occasionally fashioned exceptions from similar anti-injunction rules in other jurisdictions. The question is whether Puerto Rico’s financial crisis should lead to another.

Of course not everything that is permissible is also wise. Even if upheld, the tax is a terrible idea. As Tim Worstall wrote in Forbes, “If you keep doing things like that then the economy is going to go bankrupt anyway.”

  1. Technically, the plaintiff is Wal-Mart PR, a wholly owned Wal-Mart subsidiary that operates stores within Puerto Rico.

  2. I have omitted internal citations, corrections and quotation marks.

  3. As the dissent in the case correctly points out, multiple taxation of the same income -- essentially what Wynne was about -- would seem to be the weakest prong of the dormant Commerce Clause.

  4. It is well-established that Puerto Rico is to be treated like a state for the purposes of dormant Commerce Clause analysis.

  5. Again, I have omitted internal citations, corrections and quotation marks.

  6. The Butler Act is the Puerto-Rico-specific version of the Anti-Injunction Act, which generally forbids the courts to issue orders preventing the collection of taxes. A sovereign may waive this defense, but Puerto Rico is unlikely to do so.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Stephen L Carter at

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Jonathan Landman at