Rum Tax Cap Removed for Puerto Rico and Virgin Islands, But Puerto Rico Must Fund Conservation Trust

This legislation modifies how the federal government handles excise taxes collected on distilled spirits—think rum—shipped from Puerto Rico and the U.S. Virgin Islands to the mainland. Essentially, the bill removes the existing federal cap on how much of that tax money is ‘covered over,’ or transferred back, to the territories’ treasuries. This change applies retroactively to spirits brought in after December 31, 2021, potentially injecting more revenue into the territories.

The Cap Is Off: More Money for the Islands

For years, there was a limit on how much of the federal excise tax collected on that rum could be sent back to Puerto Rico and the Virgin Islands. This bill strikes subsection (f) of Section 7652 of the Internal Revenue Code, effectively uncapping the transfer amount. For the territories, this is significant because it means more stable, and potentially higher, revenue streams derived from their local exports. If you think of the taxes collected on imported rum as a shared pot, the federal government is now promising to send a larger, uncapped share back to where the rum originated.

The Catch: A New Conservation Mandate for Puerto Rico

While the cap removal is a financial win for Puerto Rico, the bill introduces a new requirement that comes with a specific price tag. If the covered-over tax rate received by Puerto Rico hits $10.50 per proof gallon or higher, the territory must divert a portion of that money to the Puerto Rico Conservation Trust Fund. This isn't a suggestion; it's a mandatory transfer. The amount is calculated based on a formula tied to the difference between $10.50 and the actual rate received, capped at $13.25 per proof gallon.

What does this mean in practice? It means that while Puerto Rico’s treasury benefits from the uncapped revenue, a new financial obligation is immediately placed on those funds. It’s a classic give-and-take: the federal government is increasing the revenue transfer, but it’s earmarking a specific chunk of that increase for environmental protection, habitat restoration, and sustainable farming efforts managed by the Conservation Trust Fund. For the average person in Puerto Rico, this means a guaranteed funding stream for local conservation efforts, but it also means the local government has less flexibility in spending that portion of the rum tax revenue.

Retroactive Application and Real-World Impact

One detail that often gets overlooked in these tax bills is the effective date. This legislation applies the tax transfer changes retroactively to spirits brought into the U.S. after December 31, 2021. Furthermore, the bill makes several previous technical amendments to how these tax amounts are calculated effective as if they had been included in earlier laws (Public Laws 116-260, 115-97, and 115-123). This retroactive cleanup is intended to ensure that the calculation methods for the tax transfers have been consistent, which is important for the government of Puerto Rico to accurately budget and account for the funds they receive.