(No. 265) (Approved September 4, 1998) AN ACT

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1 (H.B. 1422) (No. 265) (Approved September 4, 1998) AN ACT To add a Subtitle D; amend subsection (a) of Section 6001; add a new Part III and renumber Part III as Part IV of Subchapter B of Chapter 1 of Subtitle F; add a subsection (d) to Section 6041; add a Subchapter D to Chapter 2 of Subtitle F; add a Subchapter C to Chapter 3 of Subtitle F; amend subsection (a) and paragraph (1) of subsection (b) of Section 6190; amend Sections 6192, 6193, 6210 and 6212; amend subsection (a) of Section 6213; and add a subsection (c) to Section 6222 of Act No. 120 of October 31, 1994, as amended, known as the Puerto Rico Internal Revenue Code of 1994 ; and repeal Act No. 143 of June 30, 1969, as amended, known as the Alcoholic Beverages Act of Puerto Rico, in order to temper the Alcoholic Beverages Act of Puerto Rico to the new changes that have taken place in the world markets; and to provide the Department of the Treasury with the flexibility necessary to attend to and expedite the supervision of the development of the alcoholic beverage business. STATEMENT OF MOTIVES The Tax Reform was initiated after undertaking a process to study and consider the fiscal laws of Puerto Rico. To bring said Reform to its culmination it is necessary to temper the existing provisions of the Alcoholic Beverages Act of Puerto Rico to the new changes that have taken place in the world markets by providing the Department of the Treasury with the flexibility necessary to attend to and expedite the supervision of the development of the alcoholic beverage business always guaranteeing the

2 interests of the people of Puerto Rico and of those engaged in the sale of alcoholic beverages and in the liquor industry. It is a well known fact that the Alcoholic Beverages Act of Puerto Rico was enacted in response to an original outline of a law amended in Ever since then, and up to the present, the liquor industry has undergone certain developments which merit that significant changes be made in order to foster improvements in the marketing of alcoholic beverages supervised by the Department of the Treasury. The changes proposed in this Act seek to keep pace with those trends regarding the consumption of alcoholic beverages within the Puerto Rican society, the unrestricted trade of said products and their proper supervision by the Department of the Treasury. In order to achieve these goals the following changes, among other, are hereby proposed: 1. to eliminate the seal identifying the payment of excise taxes so as to be at par with Federal Government trends, as well as the cost of said seals incurred by the Government; 2. to establish proper controls at the bonded warehouses to guarantee payment of the excise taxes when the payment identification seals are eliminated; 3. to harmonize the right to attach vehicles and properties used in violation of the Alcoholic Beverages Act of Puerto Rico with the provisions of Act No. 93 of July 13, 1988, as amended, known as the Uniform Seizure Act of Puerto Rico ; 4. to correct and amplify the guidelines governing alcoholic beverages licenses to improve the means of supervising the distribution and consumption of these products;

3 5. to adjust the penalties for violations of the Alcoholic Beverages Act of Puerto Rico so that they may respond to stricter supervisory standards set by the Government concerning the distribution of alcoholic beverages; 6. to amplify and amend the definitions of the various products so as to improve their unrestricted trade within and outside the jurisdiction of Puerto Rico; 7. to require identification from any person suspected by the alcoholic beverages seller to be under eighteen years of age; 8. to increase the distance between those places that intend to sell alcoholic beverages at retail. These provisions are essential tools for achieving legislation which would provide a means of generating public funds and at the same time guarantee the soundest administration regarding the sale and consumption of alcoholic beverages within the Puerto Rican community. The Department of the Treasury has focused its efforts in undertaking a thorough study of all those areas which require changes to foster the soundest administration of the Alcoholic Beverages Act. This measure sets forth all those provisions which in view of the experiences gathered during the more than 25 years this Act has been in effect, must be integrated under Subtitle D of Act No. 20 of October 31, 1994, as amended, known as the Puerto Rico Internal Revenue Code of In view of the above, the integration of Subtitle D to the Code essentially requires that the administrative and procedural provisions, as well as those provisions pertaining to the application of the interest, the penalties and other additional matters relative to the taxes imposed on alcoholic beverages set forth in Subtitle D, be tempered to the provisions of Subtitle F of the Code. This amendment puts a finishing touch to the Tax Reform and

4 provides for our economy to be strengthened through the payment of taxes in a fair and equitable manner. BE IT ENACTED BY THE LEGISLATURE OF PUERTO RICO: Section 1.- A Subtitle D is hereby added to Act No. 120 of October 31, 1994, as amended, to read as follows: SUBTITLE D TAXES ON ALCOHOLIC BEVERAGES CHAPTER 1 DEFINITIONS Section Definitions. For the purposes of this Subtitle the following terms shall have the general meaning expressed below and the same may be amended through regulations as the Secretary of the Treasury may determine from time to time in view of the changes in the liquor industry: (1) Gauging.- The measure taken of any spirits or alcoholic beverages by means of gauge tanks, steelyards, hydrometers, thermometers, ebulliometers, small distilleries or any other method prescribed by the Secretary to determine the volume, weight, proof, temperature and percentage of alcohol in alcoholic beverages on the basis of a wine gallon or proof gallon at one hundred (100) degrees proof at sixty (60) degrees Fahrenheit, for the purpose of determining the correct number of gallons of any container of alcoholic beverages. (2) Agent.- Any Internal Revenue Agent of the Department of the Treasury. (3) Distillery or Still.- Any apparatus which has been designed or which may be used for the purpose of separating alcoholic vapors or liquids from any alcoholic mixtures through the process of distillation.

5 (4) Absolute alcohol.- Includes all distilled spirits whose alcoholic content is not less than one hundred ninety-eight (198) degrees proof at sixty (60) degrees Fahrenheit; whose content of esters is not more than five (5) milligrams in the form of ethyl acetate for each one hundred (100) milliliters; whose total content of acids is not more than two (2) milligrams in the form of acetic acid for each one hundred (100) milliliters and whose permanganate time for reducing substances is such that the change in the color characteristic of this test will not occur before the first five (5) minutes after the reaction has begun. (5) Industrial alcohol.- Includes all distilled spirits whose alcoholic content is not less than one hundred ninety (190) degrees proof; whose content of esters is not more than eight (8) milligrams in the form of ethyl acetate for each one hundred (100) milliliters; whose total content of acids is not more than three (3) milligrams for each one hundred (100) milliliters and whose permanganate time for reducing substances is such that the change in the color characteristic of this test will not occur before the first five (5) minutes after the reaction has begun. (6) Neutral alcohol.- Every distilled spirit whose content of esters is not more than eight (8) milligrams in the form of ethyl acetate for each one hundred (100) milliliters of absolute alcohol; whose total content of acids is not more than three (3) milligrams in the form of acetic acid for each one hundred (100) milliliters of absolute alcohol and whose permanganate time for reducing substances is such that the change in the color characteristic of this test will not occur before the first five minutes after the reaction has begun. (7) Bonded warehouses.- Those buildings or quarters exclusively used or devoted to house, store and keep those products subject to the payment of

6 taxes according to this Subtitle, and whose taxes have not been paid. Bonded warehouses shall be of two kinds: (i) private and (ii) public. Private bonded warehouses shall be those belonging to distillers, rectifiers, manufacturers or wholesale dealers importing alcoholic beverages who use them solely and exclusively to store their own products. Public bonded warehouses shall be those in which products belonging to persons other that their proprietors or operators can be deposited. (8) Bonded warehouses ad-hoc.- These are bonded warehouses built with the materials and in the manner provided by the Secretary used to store alcoholic beverages bottled under the control of the Government and on which the internal revenue taxes have not been paid. (9) Alcoholic beverages.- All spirits which have been reduced to a proof suitable for human consumption and liquors and beverages that contain alcohol, whether produced by fermentation or distillation, and whose alcohol content is more than half of one percent (½ of 1%) of alcohol per volume. (10) Special alcoholic beverages.- Distilled spirits to which have been added fruit flavors such as, but not limited to, lemon, grapefruit, orange, pineapple or spices and bottled at not less than forty (40) degrees proof. (11) Beverages derived from wine.- Alcoholic beverages manufactured by mixing wines, distilled spirits, fruit juices, aromas or flavors and sugar cane, including sangría, wine coolers and any product by any other name used to label these, whose alcohol content does not exceed twenty-four percent (24%) of alcohol per volume. The tax corresponding to these beverages shall be the same as that which applies to the wine category which prevails in the mixture.

7 (12) Brandy.- A spirit produced exclusively by the distillation at less than one hundred ninety (190) degrees proof of fermented grape juices or fruit wines or their residual products and bottled at not less than eighty (80) degrees proof. Should fruit wines or their residual products be used, the fruit must be specified. (13) Beer and other malt products.- Any beverage with an alcohol content manufactured by the fermentation in potable water of an infusion of malt or barley, or their derived products, or of rice or any other substitute, with or without the addition of other cereals, prepared or not, of other carbohydrates or products derived therefrom, of carbonic acid or of other substances suitable for human consumption. (14) Restored beer.- The product resulting from the addition of any proportion of water or carbonic gas or other substances, or from the addition of all of those to the beer concentrate so as to increase its physical volume, by decreasing or increasing the alcohol content of the beer concentrate and thus making it suitable for human consumption. (15) Champagne and sparkling or carbonated wines.- Champagne is the wine made effervescent by the carbonic gas produced by a later fermentation of wine inside a closed tank, cask or bottle. Sparkling wines are those wines which are made effervescent by adding carbonic gas so that such an addition shall produce a total content of said gas of zero point three hundred and ninety-two (0.392) grams or more in one hundred (100) cubic centimeters of wine. (16) Champagne and sparkling or carbonated wines from concentrated must.- Those wines made effervescent by the carbonic gas produced by a later fermentation of the wine from concentrated must inside a closed tank, cask or bottle, or those wines from concentrated must made effervescent by

8 the addition of carbonic gas so that such an addition shall produce a total content greater than zero point three hundred and ninety-two (0.392) grams in one hundred (100) cubic centimeters of wine. (17) Champagne and sub-standard sparkling or carbonated wines.- Those wines made effervescent by the carbonic gas produced by a later fermentation of the sub-standard wine inside a closed tank, cask or bottle, or those sub-standard wines made effervescent by the addition of carbonic gas so that such an addition shall produce a total content greater than zero point three hundred and ninety-two (0.392) grams in one hundred (100) cubic centimeters of wine. (18) Cocktail.- Alcoholic beverage concocted by mixing distilled spirits such as rum and wines, fruit juices, soda pop, spices and other flavors whose alcohol content is less than twenty percent (20%) of alcohol per volume. (19) Beer concentrate.- The product, whether in liquid form or emulsion, paste, flakes, grains or powder, obtained from any industrial process employed during any stage in the manufacture of beer to extract a portion of or all the water which beer normally contains. (20) Congenerics.- Includes all chemical components in distilled spirits which may be classified as acid, ester, aldehyde or alcohol, except for ethyl alcohol, as well as any other component which is the natural product of the process of fermentation, distillation or aging of distilled spirits. (21) Cordials.- Alcoholic beverages prepared by mixing or distilling spirits with fruit, essences or aromatic preparations whose sugar content is not less than two and one half percent (2½%) per weight of the final product. (22) Distillers.- Those persons who produce distilled spirits or who, through any process of distillation or evaporation, separate spirits, whether

9 pure or impure, from any substance, whether fermented or not, or who being in possession of, or using a still, make, prepare or are in possession of any substance suitable for distillation. (23) Age of the spirits.- The age of the spirits manufactured under Government control shall be the time these have remained kept in good quality wooden casks of the type traditionally employed by the industry for aging strong alcoholic beverages. (24) Bottlers or canners.- Those persons who, habitually engaged in business, have in their possession distilled spirits, alcohol, alcoholic spirits, wines, beer, cider or any other alcoholic beverages in large containers and who, without needing to rectify these, transfer them from their original containers to other smaller ones, such as demijohns, bottles, cans or any other container, for the purpose of marketing them. (25) Container.- This term includes any receptacle or vessel that may be used to deposit or keep alcoholic beverages. (26) School.- Includes all public or private schools, including kindergarten; but does not include schools of dance, painting, music, art, languages, business, cooking, decoration and beauty or any university level educational center. (27) Distilled spirits.- Distilled spirits, spirits, alcohol and alcoholic spirits are those substances known as ethyl alcohol, hydrated ethyl oxide or wine spirits, which are commonly produced by the fermentation of grain, starch, molasses, sugar, sugarcane juice, beet juice or any other substance obtained by distillation, including all dilutions and mixtures of said substances. (28) Proof spirits.- All alcoholic liquor containing half its volume of alcohol of a specific weight in air of seven thousand nine hundred and

10 thirty-six ten thousandths and a half ( ) at sixty (60) degrees Fahrenheit. (29) Rectified spirits.- All alcoholic beverages manufactured by a rectifier, as such a term is defined in this Subtitle. This term also includes distilled spirits that have been subjected to a partial process of manufacture or elaboration subsequent to distillation. (30) Commercial establishment.- Premises or place where alcoholic beverages are sold, at wholesale or retail, including any division or branch that has direct communication with the same. (31) Exportation.- The act of sending taxable products in accordance with this Subtitle from Puerto Rico to a territory other than the United States. (32) Manufacturer.- Any person who, not being a distiller or rectifier, is engaged in the manufacture of products subject to taxation under this Subtitle. (33) Formula.- The description of the processes and ingredients used in the manufacture of alcoholic beverages. (34) Wine gallon.- The standard liquid measure, recognized in the United Sates, containing two hundred thirty-one (231) cubic inches. (35) Proof gallon.- A wine gallon of proof spirits as defined in this Subtitle. (36) Gin.- Alcoholic beverage prepared by mixing or distilling spirits with aromatic substances, mainly with juniper, and bottled at not less than eighty (80) degrees proof. (37) Church.- Includes, but is not limited to, seminars, monasteries, chapels and other similar places used mainly for religious purposes.

11 (38) Importation.- The act of bringing into Puerto Rico taxable products in accordance with this Subtitle, from a territory other than the United States. (39) License.- The official documents issued by the Secretary as evidence of payment of the duties prescribed in this Subtitle to engage in any of the occupations or industries authorized in this Subtitle. (40) Liter.- The metric unit with a capacity equal to one thousand (1,000) cubic centimeters measured at a temperature of four degrees Centigrade (4 C) for wines or at a temperature of fifteen point fifty-six degrees Centigrade (15.56 C) for distilled spirits. For the purposes of this Subtitle, a wine liter equals zero point twenty-six thousand four hundred seventeen ( ) wine gallons and one liter of spirits distilled at zero point two hundred seventy-four thousand one hundred seventy-two ( ) wine gallons. (41) Sticker or label.- Shall be understood to mean the combination of words or phrases which describe the contents of a container, be it as printed or painted on paper, lithographed or engraved information which appears on the stopper, cap or body of the container or a combination of these. (42) Bureau.- The Alcoholic Beverages Licensing Bureau of the Department of the Treasury. (43) Foreign country.- Any territory, place or region which is outside the sovereignty of the United States. (44) Permit.- The written authorization of the Secretary which shall specifically indicate the business, industry or activity which is authorized or allowed.

12 (45) Person.- Any natural or juridical person, including partnerships, companies, societies, associations and corporations, whatever the name by which it may be known. (46) Denaturing plants.- Includes those buildings or premises used for denaturing distilled spirits in accordance with the formulas approved by the Secretary and following the procedure established by the latter. (47) Industrial plants.- Includes distilleries, rectifying plants, wineries, breweries and alcoholic beverage bottling plants. (48) Products derived from sugarcane.- Includes molasses, sugar, juices, honey, syrups, sugarcane solutions and any other products derived from sugarcane. (49) Rectifier.- Any person who uses distilled spirits to manufacture alcoholic beverages by methods other than the original distillation of fermented batters, excepting the operations in the manufacturing of wine or beer. (50) Rum.- Includes all distilled spirits below one hundred ninety (190) degrees proof any mixture of said spirits derived from the fermentation of juices, molasses, syrups and solutions of sugarcane and other similar derivatives of sugarcane, whether or not such proof is later reduced to not less than eighty (80) degrees proof, and which through the manufacturing process have come to acquire the maturity, bouquet, flavor and the other characteristics attributed to what the market and the consumers recognize as rum. The rum to be exported may have an alcoholic strength of less than eighty (80) degrees proof according to the limitations required by the country to where the rum is to be exported. (51) Secretary.- The Secretary of the Treasury of Puerto Rico.

13 (52) Cider.- The product of the fermentation of apple juice or of any substitute thereof. (53) Dealer.- Any person who, on his/her own, or through his/her employees sells, exchanges, changes, offers or displays for sale, or has for sale in his/her commercial establishment or in any other location, any product subject to taxation under this Subtitle. All products subject to taxation under this Subtitle exposed to public view in a commercial establishment shall be deemed as being there to be sold. The distillers, manufacturers and rectifiers who sell or dispose of their products in their respective factories shall not be deemed as dealers. (54) Retail dealer.- Includes all merchants, commission merchants and other persons who sell to others who are not merchants or dealers any product subject to taxation under this Subtitle in quantities that are generally sold for individual use and consumption. (55) Wholesale dealer.- Includes all merchants, commission merchants and other persons who sell to other dealers or who are engaged in Puerto Rico in the sale, delivery or distribution to other dealers of any product subject to taxation under this Subtitle. (56) Wholesale importer.- Includes all merchants engaged in importing, distributing and selling distilled spirits and alcoholic beverages within the geographical boundaries of Puerto Rico. (57) Wine.- The product of the normal alcoholic fermentation of the juice of fresh grapes or raisins, or of the juices and products derived from other fruit (with the exception of tropical fruit) and other agricultural products, including champagne and sparkling, carbonated or fortified wines. (58) Tropical fruit wine.- The product of the normal alcoholic fermentation of citrus fruit, pineapple, azarole, tomato, gooseberry and

14 passion fruit and the pulp of the guava, mango, banana, papaya, soursop and other fruit commonly produced in tropical zones and whose alcoholic content does not exceed twenty-four percent (24%) of alcohol per volume. This product may be offered either in its pure state or carbonated. (59) Concentrated must wine.- The product of the normal alcoholic fermentation of pure grape must concentrated to a minimum density of twenty-eight (28) degrees Baumé and a maximum density of forty-two point five (42.5) degrees Baumé and diluted by adding water to the original and exact concentration of fresh juice. The product may have a carbonation level of carbonic gas of up to zero point three hundred ninety-two (0.392) grams in one hundred (100) cubic centimeters of wine. (60) Substandard wine.- Any wine manufactured in its country of origin using sugar, water, alcohol or any other substance in excess of what is needed to correct the natural deficiencies of the fruit. The product may have a carbonation level of carbonic gas of up to zero point three hundred ninety-two (0.392) grams in one hundred cubic centimeters of wine. To convert wines manufactured under other categories into substandard wines by merely adding sugar, water or alcohol shall not be permitted. (61) Vodka.- A beverage manufactured from neutral spirits distilled or treated with charcoal and other matters lacking distinctive characteristics, bouquet, flavor or odor. (62) Whiskey.- An alcoholic liquid obtained by distilling, at less than one hundred ninety (190) degrees proof, the fermented dough of partially or totally malted cereal grains, taken from the cistern of a distillery at not more than one hundred ten (110) degrees proof and at not less than eighty (80) degrees proof and subsequently reduced within the margin of these two (2) proofs to be bottled.

15 (63) Free foreign trade zone.- An isolated, restricted and regulated area to operate as public service, in or adjacent to a port, with facilities for loading, unloading, handling, manufacturing, manipulating, storing, displaying and reshipping products, established pursuant to Public Law No. 397, 73 rd Congress, approved June 18, 1934, 48 Stat. 998, as amended, known as the Foreign Trade Zone Act. CHAPTER 2 TAXES AND LICENSE FEES SUBCHAPTER A TAXATION Section Tax Rate.- An internal revenue tax shall be levied, collected and paid, once only, on the following products now stored or that have been or may subsequently be distilled, rectified, produced, manufactured, imported or introduced into Puerto Rico, at the following rates: (a) Distilled Spirits.- (1) All distilled spirits obtained through the fermentation and distillation of any products other than those derived from sugarcane shall pay a tax of twenty-two dollars and seventy-five cents ($22.75) on each wine gallon, should said spirits have an alcoholic strength of less than one hundred (100) degrees proof and on each proof gallon, should they have an alcoholic strength of one hundred (100) degrees proof or more, plus a proportional tax at a like rate on every fraction of wine gallon or proof gallon. (2) All distilled spirits obtained through the fermentation and distillation of any products derived from sugarcane shall pay a tax of eleven dollars ($11.00) on each wine gallon, should said spirits have an alcoholic strength of less than one hundred (100) degrees proof and on each proof gallon, should they have an alcoholic strength of one hundred

16 (100) degrees proof or more, plus a proportional tax at a like rate on every fraction of wine gallon or proof gallon. Provided, that the taxes established in this Subtitle for spirits obtained from products derived from sugarcane shall be applied only when said spirits are pure or when mixed with spirits obtained from the fermentation and distillation of products not derived from sugarcane which have an alcoholic strength of not more than one hundred twenty (120) degrees proof, used as ingredients in a proportion which does not exceed two and one half percent (2½%) for the manufacture of rum, and in a proportion of five percent (5%) for the manufacture of other liquors. (b) Wines.- (1) On all wines of substandard quality whose alcoholic content through fermentation has been complemented by the exclusive fortification with distilled spirits obtained from the fermentation and distillation of products derived from sugarcane (excluding champagne and sparkling and carbonated wines or imitations thereof) or any substitutes thereof, whose alcoholic content does not exceed twenty-four percent (24%) by volume, a tax of one dollar and twenty cents ($1.20) shall be paid for each wine gallon plus a proportional tax at a like rate on every fraction of a wine gallon. For wines manufactured outside of the United States or Puerto Rico and obtained from concentrated must or from tropical fruit to qualify as substandard wines for the purposes of this Act, it shall be an indispensable requirement that their manufacturer or importer file with the Bureau of Alcoholic Beverages and Licenses of the Department of the Treasury a certification of the formula of said wines issued by a government agency or entity with a rank or standing similar to that of

17 the Bureau of Alcohol, Tobacco and Firearms (BATF) or the Bureau of Alcoholic Beverages and Licenses of the Department of the Treasury. The manufacturer or importer must furthermore file with the Bureau of Alcoholic Beverages and Licenses a certification from BATF approving the label of the product. The Secretary of the Treasury or the official by him/her designated, shall be authorized to order chemical tests or analyses or tests or analyses of any other nature to verify the correctness of any information regarding a formula registered with the Bureau of Alcoholic Beverages. (2) On wines (excluding champagne and sparkling and carbonated wines) and ciders, both imported, whose alcoholic content does not exceed twenty-four percent (24%) by volume, a tax of eight dollars and twenty-five cents ($8.25) shall be paid for each wine gallon and a proportional tax at a like rate on every fraction of a wine gallon. (3) On all tropical fruit wines, plain or carbonated, whose alcoholic content through fermentation has been complemented by the exclusive fortification with distilled spirits obtained from the fermentation and distillation of products derived from sugarcane, and whose alcoholic content does not exceed twenty-four percent (24%) by volume, a tax of forty-five (45) cents shall be paid for each wine gallon and a proportional tax at a like rate on every fraction of a wine gallon. (4) On concentrated must wines (excluding champagne and sparkling and carbonated wines) whose alcoholic content through fermentation does not exceed twenty-four percent (24%) by volume, a tax of three dollars ($3.00) shall be paid for each wine gallon and a proportional tax at a like rate on every fraction of a wine gallon.

18 (5) Champagne and sparkling wines. (A) On champagne and sparkling or carbonated wines whose alcoholic content does not exceed twenty-four percent (24%) by volume, a tax of ten dollars ($10.00) shall be paid for each wine gallon and a proportional tax at a like rate on every fraction of a wine gallon. (B) On champagne and sparkling or carbonated wines from concentrated musts whose alcoholic content does not exceed twenty-four percent (24%) by volume, a tax of four dollars ($4.00) shall be paid for each wine gallon and a proportional tax at a like rate on every fraction of a wine gallon. (C) On substandard champagne and sparkling or carbonated wines whose alcoholic content does not exceed twenty-four percent (24%) by volume, a tax of one dollar and sixty cents ($1.60) shall be paid for each wine gallon and a proportional tax at a like rate on every fraction of a wine gallon. (c) Beer.- (1) On all beer, malt extract and other similar fermented or unfermented products whose alcoholic content is half of one (½ of 1) percent by volume and does not exceed one and one half percent (1½%) by volume, a tax of forty (40) cents shall be collected for each wine gallon and a proportional tax at a like rate on every fraction of a wine gallon. (2) On all beer, malt extract and other similar fermented or unfermented products whose alcoholic content exceeds one and one half percent (1½%) by volume, a tax of two dollars and seventy cents ($2.70) shall be collected for each wine gallon and a proportional tax at a like

19 rate on every fraction of a wine gallon, except as provided in Section 4023 of this Subtitle. (3) On all beer, malt extract and other similar fermented or unfermented products whose alcoholic content exceeds one and one half percent (1½%) by volume and which is sold in containers holding five (5) or more wine gallons, a tax of two dollars and seventy-five cents ($2.75) shall be collected for each wine gallon and a proportional tax at a like rate on every fraction of a wine gallon, except as provided in Section 4023 of this Subtitle. Section Uniformity of Taxes.- Taxes shall be uniform and general for the products manufactured or produced abroad and introduced or imported into Puerto Rico as well as for those manufactured or produced in Puerto Rico and said taxes shall be assessed and collected by the Secretary according to the provisions of Subtitle F. Section Time of Taxation.- (a) Distilled Spirits.- The tax shall be imposed on distilled spirits, spirits and alcohols as soon as they are separated in either a pure or impure state, by distillation or other process of evaporation, from any substance, whether fermented or not, even though at any time they may be transformed into any other substance, either during the original distillation or evaporation process or by using any other process. (b) Wines and Beer Manufactured in Puerto Rico.- The tax shall be imposed on wines and beer manufactured in Puerto Rico once these products, in the process of their fermentation, have generated measurable amounts of alcohol. The tax shall be imposed on beer

20 and unfermented malt products once alcohol has been added to said products. (c) Distilled Spirits and Alcoholic Beverages Introduced or Imported into Puerto Rico.- The tax shall be imposed on distilled spirits and alcoholic beverages brought from abroad at the time of the arrival at a port in Puerto Rico of the sea or air vessel which transports them. Section Time for Producers and Importer-Dealers to Pay Taxes.- (a) Distillers.- The taxes established under this Subtitle shall be paid by the distiller of spirits before their removal from the distillery, except in those cases whereby the removal therefrom without the payment of the taxes on said spirits is authorized by this Subtitle or through regulations to that effect. (b) Rectifiers.- Those rectifiers who obtain spirits from a distillery without the corresponding taxes having been previously paid shall be compelled to pay said taxes before the products rectified or bottled by them are definitely removed from the bonded warehouse where they were deposited. (c) Manufacturers, Bottlers and Canners.- Manufacturers, bottlers and canners whose products are subject to the provisions of this Subtitle shall declare and pay the corresponding taxes before the products manufactured, bottled or canned by them leave or are removed from the bonded facilities in their respective factories. (d) Importer-Dealers.- The taxes established in this Subtitle shall be paid on distilled spirits and alcoholic beverages imported or introduced into Puerto Rico, whether for commercial purposes or for personal or domestic consumption, before they are taken or removed from the custody of the

21 customhouse, post office, express carrier, dock, pier, transportation company or any public or private carrier that brought them to Puerto Rico, or in the manner established by the Secretary through regulations, except as provided in Section 4022 of this Subtitle. The person who imports such distilled spirits or alcoholic beverages shall declare the importation of said products and dispose of the same according to and in the manner prescribed by the Secretary. (e) Exceptions.- The Secretary may authorize the removal of distilled spirits or alcoholic beverages from: (1) Distilleries, factories or bonded warehouses to be rectified or bottled or canned under the control of the Government and stored in bonded warehouses; (2) Industrial plants and bonded warehouses without payment of taxes, to be deposited in bonded warehouses; (3) Industrial plants and importer bonded warehouses without payment of the taxes established in this Subtitle if the distiller, rectifier, manufacturer or dealer has posted bond to guarantee the taxes which encumber said products at the time of their removal, under the conditions and in the amount prescribed by the Secretary. In those cases the Secretary is hereby authorized to establish the time and manner in which to pay the taxes on said products, determined and computed at the time of their removal from industrial plants; or (4) Bonded warehouses without the payment of taxes, for the purposes exempted in this Subtitle. Section Taxes as First Lien. Every proprietor, possessor or exploiter of any still, distillery or distilling apparatus, rectifying plant or factory, or who in any way is

22 interested in the use and operation thereof shall be individually or severally responsible, as the case may be, for the taxes imposed by this Subtitle on the distilled spirits and alcoholic beverages produced in said plants. The taxes on distilled spirits and alcoholic beverages shall be deemed to be and shall constitute a first lien on the distillery, factory or rectifying plant which has produced them; on stills, distilling apparatus, containers, vessels, fixtures and tools used in their manufacture. They shall also constitute a first lien on the lot or parcel of land where the distillery, rectifying plant or factory is located, as well as on any building located thereon. Said first lien shall be effective and valid from the exact instant said spirits or alcoholic beverages exist as such and shall cease to be effective only when said taxes have been paid in full pursuant to this Subtitle. Section Obligation of Taxpayer; Liquidation of Taxes and Refunds.- Those persons who in accordance with the provisions of this Subtitle must pay the taxes therein specified, shall do so without waiting for the Secretary to require that they do so. The payment of the taxes specified in this subtitle shall not be deemed final and definitive until approved by the Secretary. As to the claims filed by taxpayers concerning the taxes and license fees illegally or unduly charged or in excess of the amount due, the Secretary is hereby authorized to refund said taxes and license fees pursuant to the provisions of Acts Nos. 231 and 232 of May 10, 1949, as amended. SUBCHAPTER B LICENSE FEES Section Occupations Bound to Pay License Fees. (a) TABLE OF ANNUAL LICENSE FEES Distillers

23 1 st 2 nd 3 rd 4 th 5 th 6 th 7 th 8 th 9 th 10 th Class Class Class Class Class Class Class Class Class Class $ $ $ $ $ $ $ $ $ $ 7,200 4,700 3,300 Beer Manufacturers 1 st 2 nd 3 rd 4 th 5 th 6 th 7 th 8 th 9 th 10 th Class Class Class Class Class Class Class Class Class Class $ $ $ $ $ $ $ $ $ $ 2,700 1, Wine Manufacturers 1 st 2 nd 3 rd 4 th 5 th 6 th 7 th 8 th 9 th 10 th Class Class Class Class Class Class Class Class Class Class $ $ $ $ $ $ $ $ $ $ 2,000 1, Rectifiers 1 st 2 nd 3 rd 4 th 5 th 6 th 7 th 8 th 9 th 10 th Class Class Class Class Class Class Class Class Class Class $ $ $ $ $ $ $ $ $ $ 3,700 2,700 1, Denatured Alcohol Manufacturers 1 st 2 nd 3 rd 4 th 5 th 6 th 7 th 8 th 9 th 10 th Class Class Class Class Class Class Class Class Class Class $ $ $ $ $ $ $ $ $ $ 2,200 1, Alcoholic Beverage Bottlers and Canners 1 st 2 nd 3 rd 4 th 5 th 6 th 7 th 8 th 9 th 10 th Class Class Class Class Class Class Class Class Class Class $ $ $ $ $ $ $ $ $ $ 2,200 1, Public Bonded Warehouses 1 st 2 nd 3 rd 4 th 5 th 6 th 7 th 8 th 9 th 10 th Class Class Class Class Class Class Class Class Class Class $ $ $ $ $ $ $ $ $ $ 2,200 1, Wholesale Distilled or Rectified Spirit Dealers 1 st 2 nd 3 rd 4 th 5 th 6 th 7 th 8 th 9 th 10 th Class Class Class Class Class Class Class Class Class Class $ $ $ $ $ $ $ $ $ $

24 Wholesale Wine Dealers 1 st 2 nd 3 rd 4 th 5 th 6 th 7 th 8 th 9 th 10 th Class Class Class Class Class Class Class Class Class Class $ $ $ $ $ $ $ $ $ $ Wholesale Beer Dealers 1 st 2 nd 3 rd 4 th 5 th 6 th 7 th 8 th 9 th 10 th Class Class Class Class Class Class Class Class Class Class $ $ $ $ $ $ $ $ $ $ Wholesale Alcoholic Beverage Importer-Dealers 1 st 2 nd 3 rd 4 th 5 th 6 th 7 th 8 th 9 th 10 th Class Class Class Class Class Class Class Class Class Class $ $ $ $ $ $ $ $ $ $ 7,500 5,000 3,300 2,500 Wholesale Industrial Alcohol Dealers 1 st 2 nd 3 rd 4 th 5 th 6 th 7 th 8 th 9 th 10 th Class Class Class Class Class Class Class Class Class Class $ $ $ $ $ $ $ $ $ $ Wholesale Alcoholic Beverage Dealers 1 st 2 nd 3 rd 4 th 5 th 6 th 7 th 8 th 9 th 10 th Class Class Class Class Class Class Class Class Class Class $ $ $ $ $ $ $ $ $ $ 2,500 2,000 1, Wholesale Made From Motor Vehicles 1 st 2 nd 3 rd 4 th 5 th 6 th 7 th 8 th 9 th 10 th Class Class Class Class Class Class Class Class Class Class $ $ $ $ $ $ $ $ $ $ 200 Category A Retail Alcoholic Beverage Dealers 1 st 2 nd 3 rd 4 th 5 th 6 th 7 th 8 th 9 th 10 th Class Class Class Class Class Class Class Class Class Class $ $ $ $ $ $ $ $ $ $ 1,800 1, Category B Retail Alcoholic Beverage Dealers

25 1 st 2 nd 3 rd 4 th 5 th 6 th 7 th 8 th 9 th 10 th Class Class Class Class Class Class Class Class Class Class $ $ $ $ $ $ $ $ $ $ 1,800 1, Category C Retail Alcoholic Beverage Dealers 1 st 2 nd 3 rd 4 th 5 th 6 th 7 th 8 th 9 th 10 th Class Class Class Class Class Class Class Class Class Class $ $ $ $ $ $ $ $ $ $ 1,300 Retail Alcoholic Beverage Dealers 1 st 2 nd 3 rd 4 th 5 th 6 th 7 th 8 th 9 th 10 th Class Class Class Class Class Class Class Class Class Class $ $ $ $ $ $ $ $ $ $ Time-Constricted Retail Alcoholic Beverage Dealers (per day) 1 st 2 nd 3 rd 4 th 5 th 6 th 7 th 8 th 9 th 10 th Class Class Class Class Class Class Class Class Class Class $ $ $ $ $ $ $ $ $ $ 15 (b) Time for Payment of the License Fees. The license fees shall be paid for the whole year at the time each license is obtained or renewed. Any person who after the first (1 st ) of October of any years is engaged in any of the businesses or occupations subject to the payment of license fees under the provisions of this Subtitle, shall on or before the date on which he/she begins to be engaged in such a business or occupation, pay said fees at the rate fixed by this Section, but only for those months for which the license is to be issued, including the month in which he/she undertakes such activities. Should the Secretary be notified by the taxpayer that he/she is no longer engaged in the occupation subject to license, and is so confirmed by the Secretary, the corresponding adjustments shall be made for the outstanding full months of the year.

26 (c) Time of Payment in Cases of License Renewal.- In the case of license renewal the fee shall be paid not later than the thirty-first (31 st ) of October of the corresponding year. (d) Deduction.- The Secretary shall grant a deduction equal to ten percent (10%) of the license fee when payment of said fee is made not later than the fifteenth (15 th ) of October of the corresponding year. Section Payment of Taxes, License Fees and Penalties. Those persons required to pay said taxes, license fees or penalties or make other payments prescribed by this Code shall pay said taxes, fees or penalties and other items by check or legal tender against receipts pre-numbered correlatively or alphabetically. Section Classification of Licenses for Industrial Plants and Commercial Establishments.- When the Secretary imposes the license fees, he/she shall classify all industrial plants and commercial establishments in accordance with their production and volume of business and according to their storage capacity in the case of public bonded warehouses, in the manner hereinafter specified in this Subtitle. SUBCHAPTER C EXEMPTIONS AND REFUNDS Section Exempted Persons, Organizations and Agencies. Distilled spirits and alcoholic beverages shall be exempted from the payment of the taxes prescribed in this Subtitle when they are sold or transferred to the following persons, agencies and organizations: (1) United States Armed Forces, including the National Guard of Puerto Rico (land and air):

27 (A) the United States Armed Forces when the same are for the use and consumption only within duly authorized military establishments. The exemption shall be extensive for the use and consumption of active military personnel in their homes outside military bases; (B) the Puerto Rico Armed Forces when the same are for the use and consumption only within duly authorized military establishments. (2) International Organizations entitled to the privileges, exemptions and immunities, such as International Organizations under Public Law No. 291, 79 th Congress, 59 Stat. 669, their foreign officials and employees. Provided, that the exemption established in this Section shall not apply to the persons included in paragraphs (4), (5), (6) and (7) of Section 6 of Act No. 23 of July 23, 1991, as amended, known as the National Guard of Puerto Rico Institutional Trust Act. (3) Career consuls credited by the Department of State of Puerto Rico when reciprocity treaties exist between the Government these represent and the Government of the United States. Section Distilled Spirits and Alcoholic Beverages used in the Manufacturing, Research, Development and Experimentation in Laboratories or for Medicinal Purposes.- (a) The taxes prescribed in this Subtitle shall not be imposed on those alcoholic beverages dispatched by or withdrawn from a rectifying, bottling or canning plant or factory to be used in laboratories for analytical or experimental purposes. Neither shall the taxes prescribed by this Subtitle be imposed on such distilled spirits or alcoholic beverages dispatched by a factory or distillery to be used in: (1) Laboratories for analytical or experimental purposes.

28 (2) The manufacture of articles in whose elaboration the distilled spirits are changed to another chemical substance or do not appear in the final product. (3) The manufacture of rubbing alcohol. (4) Manufacture of medicinal products. (5) Official service of hospitals, clinics and laboratories; (6) Fortification of wines. (7) Production of concentrates or essences for the manufacture of soft drinks, provided that the finished product does not have more than one percent (2 of 1%)[sic] of alcohol per volume. (8) Preparation, canning or packaging fruits in syrup and other food products, provided that the product that is prepared, canned or packaged does not contain a volume of distilled spirits in excess of that which is established by the Secretary for such use, in each case. (9) Research and development. (b) Absolute alcohol produced, introduced or imported to Puerto Rico shall also be exempted from the taxes established by this Subtitle, when said absolute alcohol is used in the preparation of medicinal products, or in laboratories for analytical purposes or experimentation. (c) The taxes established in this Subtitle shall not be collected on distilled spirits contained in products imported, introduced, or manufactured in Puerto Rico, when said products are not alcoholic beverages, provided they do not contain a volume of distilled spirits in excess of what is established by the Secretary in each case. Any person who wishes to obtain alcohol or distilled spirits under the provisions of this Section shall first submit conclusive evidence to the

29 Secretary of his right to such tax-free products and provide the bonds and warehousing facilities that are required by the Secretary. Section Conditioned Exemptions.- The tax on distilled spirits or alcoholic beverages shall not be collected in the following cases: (a) Distilled Spirits and Alcoholic Beverages in Transit.- When the distilled spirits or alcoholic beverages pass through Puerto Rico in transit, consigned to persons abroad, while they remain in custody of Customs or deposited in a bonded warehouse authorized by the Secretary, if they are shipped put of Puerto Rico within one hundred and twenty (120) days from the date they are introduced or imported. (b) Distilled Spirits or Alcoholic Beverages Introduced or Imported for Re-exporting.- When the spirits and alcoholic beverages introduced or imported to Puerto Rico, consigned to dealers with the intention of being re-exported, while they remain in custody of the customs authorities deposited in a free foreign trade zone, or deposited in a bonded warehouse authorized by the Secretary, if they are re-exported within three hundred and sixty (360) days from the date they are introduced or imported. (c) Distilled Spirits and Alcoholic Beverages Imported or Introduced to be Sold in Puerto Rico.- When the spirits or alcoholic beverages are imported or introduced to be used or consumed in Puerto Rico, while they remain in custody of the customs authorities deposited in a free foreign trade zone or deposited in a bonded warehouse authorized by the Secretary, for a term of not more than three hundred and sixty (360) days from the date they are introduced or imported.

30 In all cases, the alcoholic beverages and distilled spirits can be removed for consumption and use in Puerto Rico, pursuant to the provisions of this Subtitle. The term of three hundred and sixty (360) days provided in subsections (b) and (c) of this Section to pay the taxes, may be extended at the discretion of the Secretary for an additional period of up to one hundred and eighty (180) days. Spirits and alcoholic beverages that are imported or introduced to Puerto Rico, or a free foreign trade zone in Puerto Rico shall be subject to the provisions of Section 4071 on the limitation of the size of the containers. Section Special Exemption.- (a) In place of the tax provided in paragraphs (2) and (3) of subsection (c) of Section 4002 of this Subtitle on all beer, malt extract, and other similar fermented or non-fermented products, whose alcohol content exceeds one and one-half percent (2%)[sic] per volume, referred to in paragraphs (2) and (3) of subsection (c) of said Section, that are produced or manufactured by persons whose total production of said products, if any, during their latest taxable year has not exceeded thirty-one million (31,000,000) wine gallons, a tax of two dollars and fifteen cents ($2.15) shall be collected for each wine gallon, and a proportional tax, at the same rate, on each fraction of a wine gallon. Subject to the provisions of Sections 4024 to 4028, the benefits of this Section shall apply to any person for any taxable year following that in which a person s total production of the products described herein, if any, has not exceeded thirty-one million (31,000,000) wine gallons. Section Rules of Availability to Tax Exemption.-

31 (a) Any person who wishes to avail him/herself of the benefits of Section 4023, shall file an application for exemption with the Director of the Industrial Tax Exemption Office. (1) The Director may require through regulations, all information he deems necessary and shall, likewise include upon granting the exemption, those terms and conditions that, in his/her judgment, promote the economic welfare of all sectors of the industry. (2) The exemption shall be effective from the moment the application is filed, and shall continue in effect unless it is rescinded by the Director. The concessionaire shall maintain the level of employment established in the exemption, taking as a basis the level of employment prevailing as of May 31, 1978, in applicable cases, otherwise it shall be subject to the following options: (A) In the event the concessionaire is forced to maintain a level of employment that is less than the level required in the exemption, but not less than ninety percent (90%) thereof, he shall have the obligation to advise the Director of the Industrial Tax Exemption Office of the fact, stating the reasons that justify the reduction. (B) In the event that the concessionaire is forced to reduce the level of employment to a figure that is less than ninety percent (90%) of the level required in the exemption, he shall file a sworn application justifying the reduction, before the Director of the Office of Industrial Tax Exemption, with a copy to the Secretary of the Treasury and to the Secretary of Labor and Human Resources. (3) The Director shall take into consideration the grounds adduced by the concessionaire to justify the need to reduce employment,