Powerball winnings in Puerto Rico, exempt from federal tax? Nobody knows

For the first time ever, Puerto Rico has a Powerball winner – with a whopping $188 million jackpot. And the island is celebrating.

The winning ticket holder will get one-third of the $564 million jackpot, the third-largest in Powerball history and the fifth-largest U.S. lottery prize.

But one mystery remains – will the winner pay federal taxes on the prize, or will he or she be exempt, as has always been the case there? Lottery officials in Puerto Rico said they still have no answer to that question.

Powerball only started operating on the U.S. territory in October of last year and the near miraculous win has surprised everyone – including the Puerto Rican Lottery (Loteria de Puerto Rico).

“We asked the IRS that same question in October, but we haven’t received an answer yet,” Antonio Perez Lopez, Assistant Secretary of the Lottery in Puerto Rico, told Fox News Latino. “We are still waiting, so we don’t know.”

IRS officials did not immediately respond to calls seeking comment.

Puerto Rico’s tax code exempts Puerto Ricans from paying federal taxes on local income. The island has the discretion to set the local tax.

This peculiarity has been a magnet for U.S. millionaires, who increasingly are finding ways to spend at least 183 days a year on the island in order to become a “bona fide resident” and benefit from Section 933 of the U.S. tax code, which exempts residents of Puerto Rico from paying U.S. income tax on their Puerto Rico-sourced income.

The winner will definitely have to pay a 20 percent state taxes to comply with a 1989 lottery law that requires them to pay taxes based on how much they win. But if they have to pay federal taxes on top of the state tax, they would pay at least an additional 25 percent of their earnings to the IRS.

What is unclear is whether Powerball lottery winnings would qualify as “income received from sources outside Puerto Rico” and would be subject to paying local taxes or whether it would be considered a “local source” because the ticket was purchased in Puerto Rico.

According to the FAQ section on Powerball’s website, “federal tax is deducted from your lottery winnings before you receive your payment.” There is no disclaimer for Puerto Rico or exceptions for Puerto Rico in this explanation.

Gabriel Hernandez, a tax partner with the San Juan office of BDO Puerto Rico, said the “source” is where the ticket was purchased and the rules that apply are the ones of the state.

“Therefore, here it applies the maximum rate of 20 percent in Puerto Rico and tax-free for federal purposes,” he told Fox News Latino.

As of midday Thursday, nobody had yet claimed the prize at the Shell gas station, in Ponce, where the Powerball ticket was sold. There is always the chance, of course, that the ticket holder is a tourist or non-resident and therefore would not luck out on the tax exempt.

According to Perez, the lottery official, the highest lottery ever won in the island was $32 million, three years ago.

Yomari Rentas, one of the clerks at the Shell gas station in Ponce, told Fox News Latino nobody in the business, including the owner, is aware if the store will receive any money for selling the winning ticket.

Puerto Rico lottery officials say the winner can choose between a lump sum payment of $101.6 million or 30 payments over 29 years.

The other winners of Wednesday night Powerball are in North Carolina and Texas.

Includes reporting by John Escherich.