Bureau of Local Government Finance Opinion

August 5, 2002 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Mr. Rodante F. Ramos AVP and Assistant Controller Pepsi-Cola Products Philippines, Inc. Km. 29, National Road Tunasan, Muntinlupa City Dear Mr. Ramos : This refers to your letter dated January 15, 2002 requesting confirmation of your opinion that Pepsi-Cola Products Philippines, Inc. ("PCPPI") should be classified as a manufacturer for purposes of paying local business taxes. You represented that PCPPI is primarily engaged in the manufacture of softdrink products such as Pepsi, 7-Up, Mountain Dew and Mirinda. PCCPI maintains several manufacturing plants all over the country. Apart from these manufacturing plants, PCPPI also maintains depots and sales offices in various locations where the products are stored prior to delivery. TAaCED You claim that some local government units where its sales offices are located have classified PCPPI as a wholesaler/retailer/distributor/contractor for purposes of collecting local business taxes. You contend that PCPPI should be classified as a manufacturer since its primary activity is the manufacture of softdrink products. You stress further that PCPPI's act of maintaining sales offices is merely incidental to its primary activity, which is manufacturing. PCPPI needs to have sales offices in order that it can service the requirements of retailers, wholesalers and distributors in many areas. Based on the foregoing premises, it is this Bureau's considered opinion that where PCPPI is engaged in the business of manufacturing softdrink products in the country and PCPPI maintains sales offices and warehouses in certain municipalities or cities for purposes of selling to retailers, wholesalers and distributors these softdrink products, such municipalities or cities should classify PCPPI for business tax purposes as a manufacturer (not as a wholesaler, distributor, dealer, or contractor) under Section 143 (a) of the Local Government Code (LGC) of 1991. This Bureau had, on several occasions, recognized that maintaining sales offices for the purpose of selling one's own manufactured products is an activity incidental to manufacturing. This means, in fine, that a manufacturer who is engaged in such activity is not considered as engaged in another commercial activity as a wholesaler, retailer, distributor or contractor. Such activity notwithstanding, the business entity remains a "manufacturer" within the contemplation of the LGC, particularly where the LGC's 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 his own use or consumption. Article 131 (o) of the LGC defines a manufacturer as: SDHITE "(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 prepare it for special use or uses to which it could not have been put in its original condition, or who by any such process, alters the quality of any 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 " ( Underscoring supplied ) Moreover, maintaining a sales office as in this case does not make a manufacturer like PCPPI a wholesaler or retailer or dealer or contractor. 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. On the other hand, the term "contractor" refers to one who is essentially a service provider, not one who manufactures goods for sale. The practical import of these points is that where a business entity does not fall within the definition of a "wholesaler", "retailer", "dealer" or "contractor", there would be no basis for imposing business tax on said business entity as a wholesaler, retailer, dealer or contractor. TEDaAc A wholesaler is defined as "a merchant middleman who sells chiefly to retailers, other merchants, or industrial, institutional and commercial users mainly for resale or business use" (Webster's Third New International Dictionary [1986]); " one who buys in comparatively large quantities, and then, resells usually in smaller quantities but never to the ultimate consumer" (Black's Law Dictionary, 6th edition, [1990]). A retailer is defined as a merchant middleman who sells goods mainly to ultimate consumers (Webster's Third New International Dictionary [1986]); a person engaged in making sales to ultimate consumers (Black's Law Dictionary, 6th edition, [1990]). A dealer "means one whose business is to buy and sell merchandise, goods and chattels as a merchant . He stands immediately between the producer or manufacturer and the consumers 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." (Section 131 [k]) of the LGC). On the other hand, a contractor "includes persons, natural or juridical, not subject to professional tax under Article 229 of this Rule, whose activity consists essentially of the sale of all kind of services for a fee , regardless of whether or not the performance of the service calls for the exercise or use of the physical or mental faculties of such contractor or his employees." (Section 131 [h] of the LGC) HAIDcE Apart from the foregoing limitation against classifying a manufacturer as a wholesaler, retailer or distributor with respect to selling its own products, the relevant provisions of the IRR of the LGC appear to also prohibit classifying and taxing a business entity as a wholesaler, distributor, or dealer where the business entity is properly classified as a manufacturer. Article 232 of the implementing rules and regulations of the LGC, particularly paragraph (b) thereof, provides that: "ART. 232. Tax on Business . The municipality may impose taxes on the following businesses: (c) 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: xxx xxx xxx (d) On wholesalers, distributors, or dealers in any article of commerce of whatever kind or nature in accordance with the following schedules: cCTIaS xxx xxx xxx The businesses enumerated in paragraph (a) above shall no longer be subject to the tax on wholesalers, distributors, or dealers provided in this Article ." ( Underscoring supplied ) It may be also be pointed out that the LGC and its implementing rules and regulations indicate what appears to be a legislative intent to consider the activities of a sales office in the present case merely as an extension of the principal office of a manufacturer and not as a separate business endeavor. This may be seen in Article 242 [2] of the IRR of the LGC's definition of a "branch or sales office" as: "(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 ) CSaITD Thus, it may be difficult 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 or selling products it manufactured. It is further noted that this Bureau has previously issued an opinion dated December 22, 1995 classifying PCPPI as a manufacturer for purposes of collecting local business taxes. The relevant portion of the opinion states: "It is worth mentioning, in this connection, that this Bureau has previously ruled that PCPPI (or PPPI) is a manufacturer, and the local business taxes due thereon should be computed in accordance with the tax schedule for manufacturers prescribed under the city's tax ordinance in conformity with Section 19(a) of the Local Tax Code, as amended, and Section 143(a) of the Local Government Code of 1991 (LGC). xxx xxx xxx Under said definition, PCCPI is, clearly, a manufacturer of soft drinks and other related products. Although it distributes its products of its customers, such activity is a necessary consequence of its main business, which is 'manufacturing'." ( Underscoring supplied ) aTEHIC This Bureau also issued a similar opinion dealing with almost the same case but involving another softdrinks manufacturer. There we opined that: "Considering that CCBPI is engaged in the manufacture of softdrinks, the distribution thereof is incidental to its line of business. Accordingly, it is the considered view of this Bureau that the sales office in Ipil, Zamboanga del Sur should be classified as manufacturer and therefore, taxable in accordance with Art. 23 2(a) of the Implementing Rules and Regulations (IRR) implementing Sec. 143 of the LGC, as imposed under the duly enacted local revenue ordinances of that municipality." ( Underscoring supplied ) We hasten to emphasize, however, that the foregoing 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 business as a distributor of someone else's products while also engaged in business as a manufacturer. In that case, Article 242 of the implementing rules and regulations of the LGC states that a separate permit or license for each business is required. CAIaHS Please be guided accordingly. Very truly yours, SGD. JUANITA D. AMATONG Undersecretary of Finance and Officer-in-Charge Bureau of Local Government Finance <www.blgf.gov.ph/downloads/opinion/localtax/2002/a2002-0109.pdf> last visited January 14, 2014.