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In Puerto Rico a Pack of Gum Could Be Worth $1,000

4 min readBy: Alicia Hansen

Puerto Rico’s Treasury Department has found an unusual way to deal with the island’s sales taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. compliance problem: turn sales receipts into lottery tickets with contest numbers printed on each receipt and weekly cash prize drawings ($100 to $1,000) as well as a monthly drawing for a car.

Many small food markets, roadside food stands, and mom-and-pop stores don’t remit sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. , and shoppers don’t seem concerned about receipts. Treasury officials reasoned that shoppers would be more likely to demand receipts if they stood to gain a prize, and the increase in receipts would discourage businesses from making unrecorded cash sales and evading the 7 percent sales tax. A pilot program began in the city of Ponce in December and will expand to the entire island on July 1. A $20,000 fine will be levied on businesses that refuse to use the state-issued receipts, and a $100 fine will be imposed on merchants who refuse to give receipts to customers.

The state-run lottery is already a popular activity in Puerto Rico, with residents spending $421 million in FY 2009 on the lottery. Despite questionable tax policy implications, this plan sounds at first glance like a potentially effective way to address the compliance problem, but it’s not working, and consumers don’t seem to care about the new lottery. The few who do care sometimes try to increase their odds of winning by making more purchases but buying fewer items at a time to obtain more receipts. But not one of the eight winning tickets so far has been turned in for a prize.

From the Kansas City Star:

The government plans a media blitz to promote the program, adding to heavy coverage by local newspapers, TV and radio. So far, though, it’s been to little avail in Ponce, Puerto Rico’s second largest city with nearly 200,000 people.

Wanda Colon, manager of a Church’s Chicken restaurant in the city, said she’s had customers ask where they can check to see if they have a winning number, but said many people don’t seem aware of the program. She has had to remind them to take their receipt and why.

The government says it is spending about $16 million on the effort, including equipment to print receipts with lottery numbers. But it is seeking a big payoff: The Treasury Department hopes to collect $400 million in additional sales tax revenue in two years as a result of the program.

Puerto Rico, a U.S. territory, has a formal economy that looks much like the mainland, with many of the same chain restaurants and stores. But it also has a large and varied underground economy—one where people deal in cash, keep few records and don’t pay all the taxes the government thinks it should collect.

Puerto Rico took in $1 billion in sales tax last year, but authorities estimate the government is only collecting about 52 percent of what it’s owed under the law. It hopes the lottery will drive that number to 72 percent within three years.

Some think the goal is optimistic. Sergio Marxuach, public policy director with the Center for the New Economy think tank in San Juan, predicted the take will fall short of the $400 million the government seeks. “I am a little bit skeptical of using technological silver bullets to help solve compliance problems,” he added.

Puerto Rican officials credit Argentina with this unusual approach to sales tax compliance. In Argentina, a similar program improved tax collection:

That country aimed to crack down on tax evaders and black-market sales, and officials ran the program for about two years, said Oscar Murcia, an adviser to the president of the National Lottery agency.

It ended successfully after people became accustomed to demanding receipts, leading to increased revenues as tax evasion dropped, he said by phone from Buenos Aires.

(Although not mentioned in the above article, Taiwan has the same type of program.)

Although certainly creative, what this program amounts to is the government increasing the complexity of the tax system and bribing citizens to pay taxes. It’s hard to say what the best way to increase sales tax compliance is, but it certainly can’t be a program that turns grocery shopping into a form of government-run gambling (state-run gambling is poor tax policy regardless of whether it’s done to increase compliance) and indirectly encourages people to buy more than they can afford—and to divide large purchases into small bundles to obtain more receipts, which increases complexity for business owners. How many owners of small grocery stores would be happy to ring up a gallon of milk by itself, followed by a loaf of bread by itself, followed by a single candy bar, just for one customer?

Puerto Ricans often pay income tax to both the Commonwealth of Puerto Rico and the IRS. Perhaps if Puerto Rico enacted a large income tax deductionA tax deduction is a provision that reduces taxable income. A standard deduction is a single deduction at a fixed amount. Itemized deductions are popular among higher-income taxpayers who often have significant deductible expenses, such as state and local taxes paid, mortgage interest, and charitable contributions. —or better yet, a refundable credit—for all purchases of all goods, sales tax compliance would rise. (Knowing that many merchants do collect the required sales tax, customers might want to reap the income tax benefits of any sales tax they ended up paying and would want receipts as a record.) But that idea would be even more ridiculous than the current receipt-lottery strategy.