Taxability of a Credit Card Company

August 16, 1990 BIR RULING NO. 151-90 100-00 102-00 000-00 151-90 Gentlemen : This refers to your letters dated May 19, 1987, November 7, 1988 and December 11, 1989 requesting a ruling on the taxability of a credit card company. cdtech It is represented that a credit card company enters into an agreement with the merchants/establishments selling goods or services; that under said agreement the establishment agrees to honor the credit card issued by the credit card company (company) by providing goods or services on credit to the holder thereof subject to certain credit limitations; that upon receiving the goods or services the cardholder signs the corresponding invoice which the establishment later on and within a period of 15 to 30 days assigns and sends to the company for payment which is made within 48 hours. Subsequently, the cardholder pays for the price of the goods or services appearing on the invoice while the credit company pays the establishment at an agreed discount. The discount given by the establishment and the fee paid by the cardholder represent the company's compensation or profit. Documents submitted indicate that each card transaction must be covered by a charge sales slip accomplished properly as directed in the Merchant's (establishment) Card Acceptance Guide (MCAG);that the original copy of the establishment's sales or commercial invoices or receipts shall be given directly to the cardholder at the time of purchase/charge together with the quadruplicate copy of the company's charge sales slip; that the establishment represents and warrants to the credit card company that all charge slips submitted to and accepted by the latter; (a) represents a bonafide sale or merchandise and/or service in the ordinary course of business for the total sales price; (b) involves no advance of cash and no transaction other than the regular sale or goods/services for which establishment is primarily engaged; (c) will not be defective, illegal or otherwise as may impair enforce ability of collection thereof from the named cardholder: (1) pertains to sale of merchandise and/or service; that establishment assumes full responsibility on any such merchandise and/or service returned and/or questioned by the cardholder; that the establishment hereby agrees to indemnify and hold the company free and harmless from any claim relating to any charge sales slip paid to the company as may be made by way of defense, dispute, offset, counter claim or affirmative action of cardholder; that the establishment shall sell to the company the original and duplicate copy of all charge sales slip validly incurred by genuine charge availments at a discount rate. In reply, please be informed that based on the foregoing facts, the credit card company generates revenues principally from discount granted by the establishment and incidentally from fees paid by the cardholder; and that the credit card company finances the cardholder for the latter's purchases on credit, since said purchases are paid by the company prior to billing the cardholder. Accordingly, these activities fall within the purview of finance companies, or similar to it , as defined in Section 11 of P.D. No. 1739, which reads as follows: "(ee) The term "finance companies" refers to corporations or partnerships other than a bank, or insurance company, primarily organized for the purpose of extending credit facilities to consumers and to industrial, commercial or agricultural enterprises whether by granting direct loans or by discounting or factoring commercial papers or accounts receivables for profit, buying and selling contracts, leases, chattel mortgages and other evidences of indebtedness arising out of one or more of the steps in the distribution and sale of commodities." Pursuant to Section 120 (formerly 221) of the Tax Code, as renumbered by Executive Order No. 273, the tax rate applied on discounts, among others, is based on the remaining maturities of the instruments from which said discount is derived by the finance company, or person performing similar financing activities. In the instant case, it is the charge sales slip (issued by the establishment to the company evidencing sales to the cardholders) in relation to their agreement in the instrument that generates the revenues which are taxable at various rates pursuant to Section 120 of the Tax Code. As the establishments are required to send the charge slips to the companies for payment within 15 to 30 days from the date of the invoice, and from receipt thereof payment is made within 48 hours, it can be said that the same is a short-term maturity (less than 2 years) instrument; hence, subject to the gross receipts tax of 5% based on the adverted provision of the Tax Code. Very truly yours, (SGD.) JOSE U. ONG Commissioner