Bureau of Local Government Finance Opinion

February 16, 2015 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Mr. Jesus Lim Arranza Chairman Federation of Philippine Industries, Inc. The Voice of Industry Unit 701-702 Atlanta Centre Condominium 31 Annapolis St., Greenhills, San Juan City Sir : This refers to your letter dated February 9, 2015 addressed to Hon. DOMINIC VALERA, Municipal Mayor, Bangued, Abra, and to Mr. ROMIE L. TURQUEZA, Municipal Treasurer, same municipality, copy furnished the Department of Finance and this Bureau, regarding the collection of Wholesaler's Tax at the rate of 0.55% to several companies and enterprises selling their products to customers located in Bangued, Abra. It is represented that the Federation of Philippine Industries, Inc. (FPI) is the umbrella organization of manufacturers and producers in the Philippines. It is composed of thirty four (34) industry associations and one hundred sixteen (116) corporation members, who are local manufacturers and producers of various products such as agricultural and food products (rice, flour, sugar, ice cream, confectionery, beverages and wine, broilers, hogs, coconut and palm oil, oleo chemicals, seeds and feeds), petroleum and petrochemical products, construction materials (cement, steel products galvanized roofing, electrical wiring, pipes, nails, wires, ceramic tiles, sanitary wares, wood and flat glass, paint), packaging and paper products (tin plates, tin cans and paper), textile and garment products, firearms, cars trucks, buses, motorcycles, rubber, spare parts, medicine, lead acid batteries, chemicals, plastics, fertilizers, appliances, tobacco and cigarettes, animated signs, transformers, and power and energy, among others. FPI is aware that the Municipality of Bangued, Abra has started its collection of local business tax (LBT) specifically Wholesaler's Tax at the rate of 0.55% from several companies and enterprises pursuant to its existing tax ordinance. It immediately collects the said tax from the enterprises upon their every sale to customers. In summary, however, FPI believes that the Municipality's collection of the LBT/Wholesaler's Tax has no legal and factual basis. Such view is with reference to the Local Government Code of 1991 (LGC) and its Implementing Rules and Regulations, which provide that sales made within the locality with no branch, sales office or warehouse, such sales shall be recorded in the principal office or in this case, where the goods were drawn from, and the tax shall be paid thereat. FPI is of the position that the power of the local government units (LGUs) to levy taxes, fees and charges is subject to the guidelines and limitations provided under Sections 128 and 129 of the LGC, quoted hereunder, in conformity with the mandate of Section 5, Article X of the 1987 Constitution, thus: "Section 128. Scope . The provisions herein shall govern the exercise by provinces, cities, municipalities, and barangays of their taxing and other revenue-raising powers." "Section 129. Power to Create Sources of Revenue. Each local government unit shall exercise its power to create its own sources of revenue and to levy taxes, fees, and charges subject to the provision herein, consistent with the basic policy of local autonomy. Such taxes, fees, and charges, shall accrue exclusively to the local government units." Likewise, also quoted below are Sections 142 and 143 of the same Code, which provide: "Section 142. Scope of Taxing Powers . Except as otherwise provided in this Code, municipalities may levy taxes, fees, and charges not otherwise levied by the provinces." "Section 143. 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: . . . ." Relative to the above quoted provisions of the LGC, Article 243 of the Implementing Rules and Regulations (IRR), implementing Section 150 of the LGC, provides as follows: "Article 243. Situs of the Tax . (a) . . . (b) Sales Allocation (1) All sales made in a locality where there is a branch or sales office or warehouse shall be recorded in said branch or sales office or warehouse and the tax shall be payable to the city or municipality where the same is located. (2) In cases where there is no such branch, sales office or warehouse in the locality where the sale is made, the sale shall be recorded in the principal office along with the sales made by said principal office and the tax shall accrue to the city or municipality where the said principal office is located. xxx xxx xxx (d) Sales made by route trucks, vans or vehicles (1) For route sales made in a locality where a manufacturer, producer, wholesaler, retailer or dealer has a branch or sales office or warehouse, the sales are recorded in the branch, sales office or warehouse and the tax due thereon is paid to the LGU where such branch, sales office or warehouse is located. (2) For route sales made in a locality where a manufacturer, producer, wholesaler, retailer or dealer has no branch, sales office or warehouse, the sales are recorded in the branch, sales office or warehouse from where the route trucks withdraw their products for sale, and the tax due on such sales is paid to the LGU where such branch, sales office or warehouse is located. (3) Based on the foregoing, LGUs where route trucks deliver merchandise cannot impose any tax on said trucks except the annual fixed tax authorized to be imposed by the province under Article 230 of this Rule on every delivery truck or van or any vehicles used by manufacturers, producers, wholesalers, dealers or retailers in the delivery or distribution of distilled spirits, fermented liquors, soft drinks, cigars and cigarettes, and other products as may be determined by the sangguniang panlalawigan , and by the city, pursuant to Article 223 of this Rule. xxx xxx xxx." Underscoring supplied. Applying the above rules on situs of taxation, the Court of Tax Appeals in the case of Honest Service Providers, Inc. vs. City of Makati (CTA AC No. 40, May 29, 2008) ruled that a taxpayer, whose principal place of business is in Makati City and who does not have any sales outlet or branch in any city or municipality, shall still pay to Makati City the taxes due on its transactions with clients outside Makati City. Another point is this Bureau's opinion dated September 14, 1998 wherein Nestle Philippines, Inc. is maintaining a branch/sales office in San Nicolas, Ilocos Norte and also distributing in Laoag City and other municipalities within the Province of Ilocos Norte, the pertinent portions of said opinion is quoted hereunder: "In this connection and considering the representations made by that Office, the law applicable is Article 243(b)(1) d(2) of the Implementing Rules and Regulations (IRR) implementing Section 150 of the LGC, quoted as follows: 'Article 243. Situs of the Tax . (a) . . . (b) Sales Allocation (1) All sales made in a locality where there is a branch or sales office or warehouse shall be recorded in said branch or sales office or warehouse and the tax shall be payable to the city or municipality where the same is located. xxx xxx xxx (d) Sale made by route truck, vans or vehicles. xxx xxx xxx (2) For route sales made in a locality where a manufacturer, producer, wholesaler, retailer or dealer has no branch, sales office or warehouse, the sales are recorded in the branch, sales office or warehouse from where the route trucks withdraw their products for sale, and the tax due on such sales is paid to the LGU where such branch, sales office or warehouse is located.' "Accordingly, this Bureau expresses the following views: '1. All sales made in its sales office in San Nicolas shall be recorded thereat where such sales office is located and shall be 100% taxable by San Nicolas. 2. The foods sourced from the said sales office and delivered to buyers outside said municipality, where there is no branch, sales office or warehouse, should be considered as sales made by route trucks and should be recorded and the tax thereon paid in San Nicolas where said sales office is located . . . . .' (Underlining supplied) Likewise, the Department of the Interior and Local Government (DILG) Legal Opinion No. 021-12 dated February 28, 2012 cited Article 243 (d) of the Implementing Rules and Regulations, implementing Section 150 of the LGC which states that " the tax on sales made by haulers on truckers unloading goods within the Municipality of San Simon, Province of Pampanga, but whose branch or sales office is located outside the said Municipality, does not accrue in said Municipality ." (Emphasis ours) In view of the foregoing rules, FPI believes that the companies and businesses who conduct selling activities in Bangued will be liable to pay LBT to the Municipality on its sales to customers within the Municipality only if it maintains a branch or sales office or warehouse within its territorial jurisdiction. In this connection and on the basis of the situation laid out above, the law applicable is Article 243 (a) (2) (3) of the IRR implementing Section 150 of the LGC, quoted as follows: "Article 243. Situs of the Tax . (a) For purposes of collection of the taxes under Article 232 of this Rule, the following definition of terms and guidelines shall be strictly observed: xxx xxx xxx. (2) Branch or Sales Office . A fixed place in a locality which conducts operations of the business as an extension of the principal office. However, 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 sales office shall be considered as a sales office. (3) Warehouse a building utilized for the storage of products for sale and from which goods or merchandise are withdrawn for delivery to customers or dealers, or by persons acting in behalf of the business. A warehouse that does not accept orders and/or issue sales invoices as aforementioned, shall not be considered a branch or sales office. xxx xxx xxx." By way of comment, and on the basis of the abovequoted provisions of the IRR and the situation described above, it is the view of this Bureau that a business selling it products in a locality where it maintains a branch, sales office or warehouse shall record the sales made therein and that tax due shall be 100% taxable by the said locality where such branch, sales office or warehouse is located. However, if such business sells its products in a locality but does not maintain any branch, sale office or warehouse therein, the sales shall be recorded in the principal office together with the sales made by the principal office and shall be 100% taxable by the local government unit where the said principal office is located. Further, for route sales made in a locality where a business has a branch, sales office or warehouse, the sales shall be recorded in the said branch, sales office or warehouse from where the route trucks withdrew the products sold, and the tax due on such sales shall be paid to the LGU where such branch, sales office or warehouse is located. However, if such route sales are made in a locality where the business has no branch, sales office or warehouse from where the route trucks withdrew the products sold, the tax due thereon shall be paid to LGU where such branch, sales office or warehouse is located. The above views are expressed in line with Article 287 of the IRR of the LGC for the purpose of clarifying the proper application of the Situs rule in local taxation and does not operate as a pronouncement as to the declaration of nullity or illegality of the provisions of the existing Revenue Code or Tax Ordinance of Bangued, Abra, for reason that such authority falls exclusively within the Department of Justice and the Court of competent jurisdiction. We hope that this will help clarify matters. Very truly yours, (SGD.) SALVADOR M. DEL CASTILLO OIC-Executive Director