Bureau of Local Government Finance Opinion

July 7, 2015 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Atty. Anna Michelle T. Llovido Corporate Legal Counsel EMPERADOR DISTILLERS, INC. 7/F 1880 Eastwood Avenue Eastwood Cyber Park E. Rodriguez Jr. Avenue (C5) Bagumbayan, Quezon City Madam : This refers to your letter dated May 29, 2015 requesting confirmation of your opinion that Emperador Distillers, Inc. (EDI) is classified as a manufacturer for purposes of paying local business taxes. It is represented that EDI is a corporation duly organized and existing under the laws of the Republic of the Philippines, with principal office in Quezon City. EDI is primarily engaged in the business of manufacturing liquors or alcoholic beverages such as Emperador Brandy, Emperador Light, The Bar Margarita, The Bar Apple Vodka, The Bar Silver, The Bar Lemon & Lime, The Bar Orange Flavored Vodka, The Bar Strawberry Vodka, The Bar Citrus Tequila and Smirnoff Mule. IAETDc EDI has two manufacturing plants located in Santa Rosa City and Bian City, all in Laguna. It also maintains twenty one (21) sales branches and warehouses in order to service retailers, wholesalers and distributors in the following localities nationwide: 1. La Union 2. Pangasinan 3. Pampanga 4. Pasig City 5. Quezon City 6. Cavite 7. Batangas 8. Roxas City 9. Iloilo City 10. Bacolod City 11. Ozamis City 12. General Santos City 13. Isabela 14. Quezon 15. Bicol 16. Tacloban City 17. Cebu 18. CDO 19. Davao 20. Butuan City 21. Dumaguete City It is your opinion that maintaining these branches and sales offices is only incidental to the primary purpose which is manufacturing of alcoholic drinks. Hence, the proper classification of these sales branches should also be as manufacturer under Section 143 (a) of the Local Government Code (LGC) of 1991 and not as dealer of fermented liquor. Further, you cited the definition of the term "Manufacturer" under Section 131 (o) of the Local Government Code (LGC) of 1991, which provide as follows: "(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 products in such manner as to prepare it for special use or uses to which it could not have been put in its original conditions, 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 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 not for his own use or consumption." On the other hand, "Dealer" is defined under Section 131 (k) of the same Code as follows: DcHSEa "(k) 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 bestow upon his commodities but upon the skill and foresight with which he watches the market." Based from the above definitions, it is your opinion that the maintenance of sales offices or branches does not make the "manufacturer" of the products a "dealer" of the same products it manufactures. This intent is confirmed in Article 243 (a) (2) of the Implementing Rules and Regulations (IRR), implementing Section 150 of the LGC, quoted hereunder: "Article 243. Situs of the Tax. (a) . . . "(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 with sales office shall be considered as a sales office. " ( Emphasis ours ) In view of the foregoing, this Bureau concurs with your stand that EDI, consistent with its primary activity, should be classified as a manufacturer for purposes of paying local business taxes considering that maintaining of sales branches is incidental to its primary purpose which is manufacturing of alcoholic drinks. This view is in accordance with the previous opinions issued by this Bureau on issues similarly situated that maintaining sales offices for the purpose of selling one's own manufactured products is an activity incidental to manufacturing operation. In fine, this means that a manufacturer who is engaged in such activity is not considered as engaged in another commercial activity as a wholesaler, retailer, distributor or dealer . Such activity notwithstanding, the business entity remains a "manufacturer" within the contemplation of the LGC, particularly Section 131 (o) thereof where the definition of the term "manufacturer" includes various types of manufacturing activities and provides further that such activities are for the purpose of their sale or distribution [the products] to others and not for his own use or consumption. SCaITA Moreover, maintaining a sales office as in this case does not make a manufacturer like EDI a wholesaler or retailer or dealer . The corresponding definitions of these terms which provide hereunder prevent a contrary determination: "A wholesaler is defined as 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 [1896]); one who buys in comparatively large quantities, and then, resells usually in smaller 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 Third New International Dictionary [1896]); 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 bestow upon his commodities but upon the skill and foresight with which he watches the market." (Section 131 [k] of the LGC) The term "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. Apart from the foregoing limitation against classifying a manufacturer as a wholesaler, retailer or dealer 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: 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: "xxx xxx xxx. "(b) On wholesalers, distributors, or dealers in any article of commerce of whatever kind or nature in accordance with the following schedule: aTHCSE "xxx xxx xxx. " The business enumerated in paragraph (a) above shall no longer be subject to the tax on wholesalers, distributors, or dealers herein provided for. " (Underscoring supplied) It may be pointed out, as you stated, 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) 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 for selling products it manufactured. Hence, sales offices selling products manufactured by its subsidiaries shall likewise be classified as manufacturers. We hope that this will help clarify matters. Very truly yours, (SGD.) SALVADOR M. DEL CASTILLO OIC-Executive Director