Bureau of Local Government Finance Opinion

June 14, 2000 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Ms. M. F. A. Balili Tax Division SGV and Co. 6760 Ayala Avenue 1226 Makati City Sir : This refers to your letter dated October 15, 1999 requesting in behalf of your client, Metro Drug, Inc. (MDI) confirmation of your opinion that said company is required to pay local business tax only to the local government unit (LGU) where its principal office is located pursuant to Section 150 of the Local Government Code of 1991 (LGC) and Art. 243 of its implementing rules and regulations (IRR). Representations are made that MDI is a corporation duly organized and existing under Philippine laws, and is engaged in the distribution of pharmaceutical and consumer products. Prior to October 1998, MDI conducted part of its business through its branch offices nationwide. Sale and collection transactions, as well as maintenance of stocks were made in the different branch offices. Proper business taxes were therefore, paid to each of the LGUs where the branches were located. However, in October 1998, in an effort to streamline operations, MDI closed its branches nationwide; and instead opened sales service centers (SSCs); and therefore the delivery of stocks takes place at the SSCs. The SSCs are mere liaison offices where orders for goods are submitted. When an SSC receives an order, it relays the information to the principal office in Taguig. The principal office then checks the availability of the items subject of the order. If stocks are available, the sales invoice is generated by the principal office, and the sales invoice together with the goods are dispatched directly from the central warehouse located in Taguig to the customers. Thus, all invoicing and recording requirements are done at the principal office of MDI in Taguig. TEHIaA MDI allegedly claimed that the City Treasurers of Butuan and Davao have proposed to tax 70% and 100%, respectively, of the sales generated thereat. Under letters both dated December 6, 1999, addressed to the City Treasurers of Butuan and Davao, the said request has been referred for their comments. In addition, information has been requested as to the basis for the collection of tax from MDI. In his letter-reply dated December 16, 1999, the City Treasurer of Butuan argues that the language of the IRR is erroneous and that the intent of the law is that the local tax should be paid to the municipality or city where the sale or transaction is made, rather than to the city or municipality where the principal office is located, in the case of sales made in a city or municipality where such principal office has no branch or sales outlet. The City Treasurer of Butuan further argues that in Section 150 (a) last paragraph of RA 7160, in relation to the words "shall accrue and shall be paid to such city or municipality", the term "city or municipality" should necessarily refer to the "city or municipality where the sale or transaction is made." "The word SUCH cannot refer to the principal office (which cannot be a city or municipality), it can refer only to the 'city or municipality' preceding, otherwise there is absurdity and the law does not delve on absurdities. There is no doubt about this and perhaps the oversight Committee who drafted the implementing rules under Art. 243 par. b, might have committed an 'oversight', a grave error by interpreting that the taxes shall accrue to the city or municipality where the principal office is located, instead of the city or municipality where the sale or transaction was made. " On the other hand, the City Treasurer of Davao in her letter dated March 6, 2000 claims that although invoices or official receipts are being prepared and issued at its principal office in Taguig, the transactions were perfected and consummated upon the delivery of the goods to their customers in the City of Davao, which is consistent to the ruling that the "situs of sales" has reference to consummated sales which include the element of delivery. The City Treasurer claims further that inasmuch as the goods were physically delivered therein, it follows that the sales transactions were perfected and consummated in said place. Thus, since MDI sells its products in the City of Davao through its sales service centers, it cannot escape the tax liability imposed under Ordinance No. 519 of the said City. Under a letter dated May 5, 2000, MDI submitted that the arguments of the City Treasurers of Butuan and Davao are devoid of factual and legal basis for the following reasons: ISaTCD 1. The City Treasurers of Butuan and Davao rely on a fanciful extrapolation of the law. It was pointed out in a letter dated April 12, 2000 of MDI that "in cases where there is no branch or sales outlet in the city or municipality where the transaction is made, Section 150 of the LGC clearly states that 'the sale shall be duly recorded in the principal office and the taxes due shall accrue and shall be paid to such city or municipality.' Under the doctrine of the last antecedent, the phrase 'such city or municipality' should be construed as referring to the place where the principal office is located, rather than to the place where the sale is made. "The IRR followed said doctrine so that Article 243 (b) (2) clearly sets forth that '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 such principal office, and the tax shall accrue to the city or municipality where said principal office is located.'" 2. A sales service center is not a sales outlet. The City Treasurer of Davao claims that MDI's sales service centers (SSCs) are actually sales outlets. On the other hand, MDI claims that: (a) no sales are made at the SSCs; (b) no stocks are maintained at the SSCs; and (c) no delivery of stocks takes place at the SSCs. Thus, MDI contends that the SSCs are mere liaison offices where orders for goods are submitted and that all invoicing and recording requirements are accomplished at the principal office of MDI in Taguig. DacTEH 3. No sale or transaction was made in Butuan or Davao City. MDI claims that the SSCs in Butuan City and Davao City merely receives sales orders for transmittal to the head office in Taguig and have no authority to accept those sales orders, which are merely offers to purchase MDI products. MDI claims further that customers may transmit their sales orders directly to the head office and when customers in Butuan City and Davao City submitted their sales orders either to the SSCs or directly to the Head Office, there is yet no perfection of the contract. Acceptance is made by the Head Office in the following manners: i. Head Office ITD runs a single IBM Astro unit which serves as the host of the orders processing and delivering system. ii. The system is programmed to allocate available inventory to orders, etc. iii. Orders which did not pass the credit checking process are held and "flagged" to the attention and disposition of the Credit Manager. aHcDEC iv. Orders with sufficient inventory and approved credit terms are printed in the main warehouse located in Bicutan, Metro Manila. In view of the above, MDI contends that the meeting of the minds could only take place in Taguig, after the computer system has: i. allocated the available inventory to the sales order; ii. validated the correctness of price and deals; and iii. checked whether or not the sales order complies with MDI's credit policy. Thereafter, the pick list for approved orders are printed in the warehouse and used to pick/pack inventory for delivery. Packed orders are confirmed by the warehouse using the warehouse work station. This triggers the printing of the invoices. The printed invoices are then matched with the packed inventory, and released to third party forwarders for delivery to customers nationwide. ISSUE NO. 1: On the claim of the City Treasurer of Butuan that the language of the IRR is erroneous, MDI, invoked the doctrine of the last antecedent. Under the so-called doctrine, relative and qualifying words, phrases and clauses are to be applied to the word or phrase immediately preceding and not intended to others more remote. Applying the said doctrine, MDI contends that the phrase "such city or municipality" should be construed as referring to the place where the principal office is located rather than the place where the sale is made. This Bureau finds the above contention in order and concurs therein. Consequently, the contention of MDI that it is required to pay local business tax only to the local government unit where its principal office is located where there is no such branch, sales office or warehouse in the locality where the sale is made is in full accord of the law. CacEIS In addition, it must be pointed out that this Bureau is not in a position to declare the provision of existing laws as erroneous. In the interpretation of the provisions of existing laws, where interpretation is proper, the opinion of the Department of Justice is usually given more persuasive force than that of any agency of the government. Thus, unless declared by competent authority as erroneous, this Bureau has no alternative but to implement the provisions of the LGC and its IRR. ISSUE NO. 2: The City Treasurers of Davao and Butuan failed to establish whether or not MDI has a sales office thereat for the cities to be entitled to a share in the business tax. It must be stressed that Article 243 (2) of the IRR implementing Section 150 of the LGC defines Branch or Sales Office as "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. . . ." In this connection, this Bureau has consistently ruled that liaison offices shall not share in the business tax considering that the same are not included among those mentioned in the law and the IRR as entitled to a share of the tax. On the basis of the representations laid-out above by MDI, it appears that the SSCs are not sales offices in the real sense of the word but merely as monitoring bases of orders placed by prospective buyers. Said orders are not considered sales. They are mere offers to buy and are not perfected sales until such offers are accepted by MDI. Accordingly, MDI may only be required to pay Mayor's permit and other regulatory fees for maintaining said offices in Davao City and Butuan City. The City Treasurers of Davao and Butuan are being furnished with a copy each hereof, for their information and guidance. Very truly yours, (SGD.) ANGELINA M. MAGSINO Deputy Executive Director Officer-in-Charge <http://www.blgf.gov.ph/downloads/opinion/localtax/2000/a2000-0327.pdf> last visited on October 2, 2013.