Tax Rate on Sale of Corrugated Boxes by SMC to Its Customers Engaged in the Manufacture of Essential Articles

September 11, 1986 BIR RULING NO. 165-86 163 (2) 101-86 165-86 Gentlemen : This refers to your letter dated June 23, 1986 stating that your client, Steniel Manufacturing Corporation (SMC) is engaged in the manufacture of corrugated boxes; that those corrugated boxes are manufactured by your client only upon prior order of and in accordance with the specification fixed by its customers which may vary in size, shape, kind of material to be used and the print to be made on the boxes; that each customer has different specification for the type of boxes that would fit or hold his product for packaging purposes for which reason, SMC cannot indiscriminately mass-produce them, and that SMC passes on to its customers the 20% sales tax which it bills as a separate item in the invoice even if the latter (customers) are engaged in the manufacture of articles taxable at 10%. Based on the foregoing, you now request opinion on the following: (1) whether the sale of corrugated boxes by SMC to its customers engaged in the manufacture of essential articles is subject only to 10% sales tax; and (2) in the negative, whether your client can pass on the 20% sales tax to its customers regardless of whether the latter enjoys preferential tax treatment. In reply, please be informed that any article subject to the original sales tax, when used as a raw material in the manufacture or preparation of essential articles, shall, subject to certain conditions, be taxed at the same rate as the finished products, except when such material is taxed at a lower rate [(Sec. 163(2). Tax Code, as amended by Executive Order No. 36 effective August 1, 1986)]. This Office has ruled that containers are considered raw materials of the manufactured articles. (BIR Ruling No. 66-027 dated June 29, 1966). Accordingly, since the finished articles are classified as essential articles subject to 10% sales tax, the corrugated boxes which SMC manufactures are subject to the same rate of 10% sales tax, provided that the customers shall certify to SMC that such corrugated boxes shall be used exclusively as containers for the said finished articles. On the other hand, if the buyer fails to issue a certification the corrugated boxes shall be subject to the 20% sales tax. SMC has the discretion to include the tax as part of the selling price or shift the entire amount as a separate item in the sales invoice. aisadc Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner