BIR Ruling

November 4, 1969 Messrs. Sycip, Gorres, Velayo & Co. Certified Public Accountants P.O. Box 589, Manila Attention: Mr . B. V. Abella Tax Division Gentlemen : This refers to your letter of September 28, 1969, requesting reconsideration of our ruling dated August 12, 1969, subjecting the articles imported by your client, Gift House (Philippines) Inc. to the advance sales tax. In support of your stand to have the same imported items subjected to the compensating tax instead of the advance sales tax, and as a basis for your request for reconsideration, you gave an illustration of the use of the trading stamps and gift items as a promotional device introduced by a merchant to increase his sales and we quote : "Assume that a merchant's sales are not to his liking. He, therefore, decides that he must introduce a promotional scheme to increase sales. He decides on a promotion in which he will give away gifts (example, imported clocks) to attain any or all of the following benefits : Retain present customers (they will be more loyal) Bring in new customers Show his appreciation for customer patronage (goodwill) Increase his sales volume "The merchant implements this promotion by telling his customers that if they trade at his store they will receive points for their purchases. When a customer has saved a certain number of points, the merchant will award to him a gift upon his surrender of the ascertained number of points. The result would be that customers will shop at the merchants store, save the specified number of points and then surrender the points to the merchant who turn gives them to corresponding gift items. "Based on the foregoing, it is clear that the imported gift items are not held for resale. They in fact constitute an expense on the part of the merchant. The points or stamps are used merely for the purpose of determining whether or not a customer is already entitled to a gift. "Assume further that the program was successful for the merchant, but he encountered certain disadvantages, among which are the following : When implementing the program more labor was required. Valuable stock space was taken by storing the gifts. Time was spent implementing the program, and that time could be utilized for something more important. The merchant therefore thinks of having an agent sponsor the program not only for him but also for others for the following benefits : The agent would provide the additional labor. The agent would set up a storage facility in which he would store the gifts that the merchant used to store in his premises. The agent would take charge of giving away the gifts to customers upon surrender of proper points, thereby relieving the merchant of this function. The agent would spend time implementing the program (education, purchasing, handling, etc.) that the merchant previously had been forced to do. The expense of the merchant would be less because there would be more merchants now sharing the expenses. "To accomplish the foregoing objectives, trading stamps are used, and they perform the following function: They provide a method for distributing expenses to subscribing merchants. They are used in determining the value of gifts that a customer is entitled to receive from the merchant, since the gifts given are based on purchases made from the merchant's store." In reply, please be advised that the compensating tax is a tax on the privilege of using imported articles and not a tax on the articles. In the illustration given, the ownership and possession of the imported items do not remain with your client, Gift House (Philippines) Inc. for its use but are ultimately bartered or exchanged with the gift stamps surrendered by the customers of the retail establishments subscribing to the Gift House Plan. Even granting for the sake of argument that it is the merchant or owner of the same retail establishment who imports these items and gives them away in exchange for gift stamps surrendered, still such imported articles will, nevertheless be subject to the advance sales tax. As we pointed out in our previous letter among the main distinctions between the advance sales tax and the compensating tax is that the former is imposed on original sales, barter or exchange or similar transactions intended to transfer ownership or title to imported articles enumerated in Sections 184, 185 and 186; while the compensating tax is imposed on articles purchased or receive from without the Philippines which are intended for use or consumption of the purchaser or recipient and not for sale, barter or exchange. llcd In view hereof, your request for reconsideration is hereby denied. Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue