Re: Clarification on the Correct Local Taxes and Tax Credit to Goldilocks Bakeshop, Inc.

November 28, 2016 BLGF OPINION NO. 038-2016-PPSD CO-LFPS-PPPSD Ms. Trinidad Villavicencio Tax Manager Goldilocks Bakeshop, Inc. 498 Shaw Boulevard 1550 Mandaluyong City SUBJECT : Re: Clarification on the Correct Local Taxes and Tax Credit to Goldilocks Bakeshop, Inc. Dear Ms. Villavicencio : This has reference to your letter dated 22 June 2016 requesting for clarification on the correct imposition of local taxes and for the issuance of a tax credit corresponding to Goldilocks Bakeshop, Inc.'s ("Goldilocks," for brevity), alleged excess payment. cSEDTC Representations were made that Goldilocks is a duly registered manufacturer of bakery products whose branches are situated in Metro Manila and in other provinces and cities being classified and imposed a tax pursuant to Section 143 (c) (2) of the Local Government Code (LGC) of 1991, which was affirmed by this Bureau in various instances. It is further represented that Goldilocks is being assessed and classified as manufacturer of non-essential commodity. However, Goldilocks contends that it should have been assessed and classified as manufacturer of essential commodities and retailer of non-essential products sold but manufactured by it, and not just a manufacturer of non-essential commodity. Upon perusal of the documents submitted, the City Legal Officer of Las Pias, Atty. Glenda C. Lucena, in her letter dated 27 June 2016, finds that the "the main business that you are assessed with, specifically within the taxing authority of the City of Las Pias, is being, as [sic] a retailer. This was likewise reiterated in her letter dated 10 October 2016, in reply to our 1st Indorsement, maintaining the earlier view on the issue. To address the issue, a discussion of the basic principles is necessary. Classification of Business In classifying a particular business by a local government unit (LGU) where such entity or operations is situated, ocular inspection of the same must be observed. The Inspection Division of the LGU is primarily tasked to conduct the necessary inspection or verification of the operations of business establishments and other occupational undertakings so as to ascertain the proper and exact category to which said business establishment should belong. It is for this reason that the classification made by the LGU is given more weight compared to the business entities' bare claim or allegation denying the LGU's classification made on them. But this has to be clearly anchored within the bounds of law. This Bureau, in several occasions, recognized that maintaining a branch or sales office for the purpose of selling one's own manufactured products is an activity incidental to manufacturing . In fine, a manufacturer who is engaged in such selling activity is not considered as engaged in another commercial activity as a wholesaler, retailer, or distributor. Such activity, notwithstanding, the business entity remains a "manufacturer" within the contemplation of the LGC , particularly under Section 131 (o) 1 thereof, wherein the definition of the term "manufacturer" includes various types of manufacturing activities and provides further that such activities are for the purpose of their [the products] sale or distribution to others and not for its own use or consumption. By the same token, a manufacturer is defined under Article 4 of Republic Act No. 7394, otherwise known as the Consumer Act of the Philippines, as " any person who manufactures, assembles or processes consumer products, except that if the goods are manufactured, assembled or processed for another person who attaches his own brand name to the consumer products, the latter shall be deemed the manufacturer. In case of imported products, the manufacturer's representative or, in his absence, the importer shall be deemed the manufacturer. " Moreover, maintaining a sales office, as in this instant case, does not make a manufacturer, like Goldilocks, a wholesaler, retailer or dealer, as the corresponding definitions of these terms prevent a contrary determination. The terms "wholesaler," "retailer" and "dealer" invariably contemplate a middleman or one who sells someone else's products, and this necessarily excludes one who sells what he manufactures . The practical import of these points is that where a business entity does not fall within the definition of a "wholesaler," "retailer" or "dealer," there would be no basis for imposing business tax on said entity as "wholesaler," "retailer" or "dealer." Apart from the foregoing limitation against classifying a manufacturer as a wholesaler, retailer or distribution, with respect to selling its own products, Article 232 (b) 2 of the Implementing Rules and Regulations (IRR) of the LGC also prohibit classifying and taxing a business entity as a wholesaler, distributor, or dealer where the business entity is properly classified as a manufacturer. SDAaTC Sales Office of a Manufacturer It should be pointed out that the legislative intent of the LGC and its IRR appear to consider the activity of a sales office, as in the present case, merely as an extension of the principal office of a manufacturer and not as a separate business endeavor. This can be gleaned from Article 243 (a) (2) 3 of the IRR of the LGC in defining a "branch or sales office." In view of the foregoing legal grounds, it is hard to assert that a sales office of a manufacturer, which is a mere extension of the principal office, is deemed engaged in a business activity other than manufacturing for selling the products it manufactured. This Bureau hastens to emphasize, however, that the above discussion should not be taken to mean that municipalities or cities could impose business tax on a business entity for one type of commercial activity only, although the business entity is engaged in more than one type of commercial activity. This may be done, for example, in the case of a business entity that is engaged in the business of distributing someone else's products, while also engaged in the business of manufacturing. In that case, Article 242 of the IRR of the LGC states that a separate permit or license for business is required. Issuance of Tax Credit On the issue of tax credit or refund for excess payment of local business tax, this is governed by Section 196 4 of the LGC, as already expressed by this Bureau in a letter dated 21 June 2000 addressed to Mr. Richard L. Yee, Finance Director of Goldilocks, a copy already enclosed as attachment to your letter dated 22 June 2016 addressed to this Bureau. This Opinion is issued based on the information provided. If upon subsequent verification or submission of information proves the contrary, this Opinion will be deemed null and void, and without effect. acEHCD It is hoped that we have provided clarity on the matter. Very truly yours, (SGD.) NIO RAYMOND B. ALVINA OIC Executive Director Footnotes 1. Section 131. Definition of Terms . When used in this Title, the term: (o) "Manufacturer" includes every person who, by physical or chemical process, alters the exterior texture or form or inner substance of any raw material or manufactured or partially manufactured product in such manner as to have been put in its original condition, or who by any such process alters the quality of any such raw material or manufactured or partially manufactured products so as to reduce it to marketable shape or prepare it for any of the use of industry, or who by any such process combines any such raw material or manufactured or partially manufactured products with other materials or products of the same or of different kinds and in such manner that the finished products of such process or manufacture can be put to a special use or uses to which such raw material or manufactured or partially manufactured products in their original condition could not have been put, and who in addition alters such raw material or manufactured or partially manufactured products, or combines the same to produce such finished products for the purpose of their sale or distribution to others and not for his own use or consumption ; (emphasis supplied) 2. Article 232. Tax on Business . The municipality may impose taxes on the following businesses: (a) On manufacturers, assemblers, repackers, processors, brewers, distillers, rectifiers, and compounders of liquors, distilled spirits, and wines or manufacturers of any article of commerce of whatever kind or nature, in accordance with the following schedule: (b) On wholesalers, distributors, or dealers in any article of commerce of whatever kind or nature in accordance with the following schedule: The business enumerated in paragraph (a) above shall no longer be subject to the tax on wholesalers, distributors, or dealers provided in this Article. (emphasis supplied) 3. Article 243. Situs of the Tax . (a) Definitions of Terms x x x "(2) Branch or sales office a fixed place in a locality which conducts operations of the business as an extension of the principal office. Offices used only as display areas of the products where no stocks or items are stored for sale, although orders for the products may be received thereat, are not branch or sales offices as herein contemplated. A warehouse which accepts orders and/or issues sales invoices independent of a branch with sales office shall be considered as a sales office. (emphasis supplied) 4. Section 196. Claim for Refund of Tax Credit . No case or proceeding shall be maintained in any court for the recovery of any tax, fee, or charge erroneously or illegally collected until a written claim for refund or credit has been filed with the local treasurer. No case or proceeding shall be entertained in any court after the expiration of two (2) years from the date of the payment of such tax, fee, or charge, or from the date the taxpayer is entitled to a refund or credit.