Assessment of "Broker's Tax" against Cirilo D. Constantino

June 2, 1959 BIR RULING NO. 294-59 The Regional Director BIR Regional District No. 5 San Pablo City S i r : This refers to the proposed assessment for "Broker's Tax" against Mr. Cirilo D. Constantino. The facts are as follows: Mr. Cirilo D. Constantino has entered into a "Dealers Sales and Service Agreement" with the International Harvester Company, to sell the latter's trucks and spare parts in San Pablo City. By this agreement, the taxpayer undertook to sell the same on a "Trade discount plan". Under this plan, the taxpayer received a discount on every article purchased, ranging from 16% to 30%, as shown in the "Schedule of Discounts and Terms to Dealers." In addition to this "Trade discount", the taxpayer received other discounts such as "cash discounts, Service parts volume-quota discount plan, Volume discount plan," in accordance with the terms and conditions specified in the abovementioned "schedule". For the year 1956, the taxpayer received discounts amounting to P38,390.40, as shown in the Profit and Loss statement and on which that office now seeks to impose the 6% broker's tax including surcharge and compromise. The question presented is whether under the arrangement mentioned, Mr. Cirilo D. Constantino is a broker or a mere dealer. The pertinent provisions of section 194 of the Tax Code are quoted hereunder: "Section 194(t) Commercial broker includes all persons, other than importers, manufacturers, producers, or bona-fide employees, who for compensation or profit sell or bring about sales or purchase of merchandise for other persons, or bring proposed buyers and sellers together or negotiate . . .. This term includes commission merchants. By definition, a commission merchant is one who buys or sells goods or merchandise, consigned or delivered to him by his principal for a compensation, commonly called "Commissions" (Words and Phrases, Vol. 5, p. 834). On the other hand, a dealer is one whose business is to buy and sell merchandise, goods and chattels, as a merchant and the term is synonymous with trader. He is not one who buys to keep or makes to sell, but one who buys and sells again. He stands immediately between the producer or manufacturer and the consumer and depends for his profit, not upon the labor he bestows upon his commodities, but upon the skill and foresight with which he watches the market. (Words and Phrases, Vol. 8, pp. 159-160). Note, that although a commission merchant and a dealer are similar in the sense that both may buy and sell in their own names and that the goods are in their possession, a commission merchant however, differs from a dealer in some very important factors. The former depends for his profit not upon services rendered, but upon his ability to overprice a merchandise over and above the manufacturer's price. A commission merchant shares in the profit of the principal by way of commissions while a dealer absorbs all the profit to his account. Lastly, a commission merchant is merely entrusted with the possession of the goods and its disposition is subject to the control of the principal, while a dealer enjoys a possession of an owner and has absolute control in its disposition. Considering the above facts and law involved, it is clear that the taxpayer is a commission merchant subject to the 6% broker's tax prescribed in section 195 of the Tax Code, because the discounts received by the taxpayer are in fact his commissions. Even by his own admission he stated that the discounts referred to were the difference between the buying and selling price which he earned to cover the overhead expenses. (Page 70 of this docket) In other words, it is admitted that the taxpayer sold the trucks and spare parts at a price which the company itself would have sold without benefit of the discount. Accordingly, the profit here was not realized by overpricing the cost of the trucks and spare parts as a dealer would. Furthermore, by the terms of the agreement he was bound to sell the trucks and spare parts at the price established by the Company, (Dealers sale and service agreement, page 4) which only lends proof to the fact that the discounts in this case were therefore his commission for services rendered. Moreover, although the word "commission" as used in a mercantile sense is said to be without technical meaning, in business as well as the legal acceptation of the term, it has a well known and definite signification. It may refer to the compensation allowed an agent, factor, or other person who manages the affairs of another, in recompense for his services; the percentage, brokerage, or allowance made to a factor or other person for transacting business of another, a percentage on the price or value. It may be given a broader meaning than merely that of a per centum valuation of the services as to include any advantages or profit resulting from the transaction. (Cal. Jenkins v. Locks-Paddon Co., 157 p. 537 30 Cal. App. 52). It was held to be equivalent to or synonymous with "deduction" and "Discount". (U.S. Swift & Coutney & Seecher Co. vs. U.S., Ct Cl., 4 s. Ct. 244, 111 U.S. 22, 25, 28, L. Ed. 341). He is, therefore, advised to enforce the collection of the amount recommended. cdta Very truly yours, (SGD.) JOSE ARAAS Commissioner of Internal Revenue