Bureau of Local Government Finance Opinion

January 14, 2013 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Mr. Roberto R. Roxas President/General Manager Delta Distribution Corporation W2A 48 A. Rodriguez Avenue Manggahan, Pasig City Sir : This refers to your letter dated December 10, 2012 seeking enlightenment on the following issues: STADIH 1) Proper classification of DELTA DISTRIBUTION CORPORATION (DDC) for business tax purposes; and 2) Confirmation that the business tax levied on DELTA DISTRIBUTION CORPORATION should be based on the net commission received by the company from its distributorship agreement with TRIDHARMA MARKETING CORPORATION (TMC). Representations are made that the Company have received assessments for tax deficiency for the past two (2) years from the City Government of Pasig in the total amount of P5,569,363.88. The company have submitted letters and supporting documents to the Business Permits and Licensing Office (BPLO) and the City Treasurer's Office to prove that the Company is paying just taxes and regulatory fees on time for the last twelve (12) years. It is submitted that the assessment, if paid, will render DDC bankrupt as it only earn less than 9.5% margin on products being distributed based on the exclusive distributor contract, copy attached. At the outset, it is informed that inasmuch as you have filed your protest on assessments made the City Treasurer of Pasig, we will confine our discussion on the specific provisions of law applicable to your case more particularly the business classification and tax base in the computation of local business tax (LBT). Proper classification of DELTA DISTRIBUTION CORPORATION (DDC) for business tax purposes In the attached AREA DISTRIBUTION PARTNERSHIP AGREEMENT ("Agreement"), TMC specifically appointed DDC as its " Distributor " to the wholesale and retail outlet universe which provides the designated areas of operation of the latter. To begin with, the Local Government Code (LGC) of 1991 does not provide the definition of the term " distributor ". However, the term may be defined as ". . . an independent agent who's entered into an agreement to offer and sell the product of another company but isn't entitled to use the manufacturer's name as part of its business name. Depending on the agreement, the distributor may be limited to selling only that company's goods or it may have the freedom to market several different product lines or services from various firms ." 1 CDaTAI Applying the specific provisions of the Agreement entered into between TMC and DDC, it may be considered that DDC falls within the purview of the definition of the term " distributor ". In this regard, whether DDC is classified as a " wholesaler ", " dealer " or " distributor " for business tax purposes does not matter considering that they all belong to the same cluster under Sec. 143 (b) of the Local Government Code (LGC) of 1991 and therefore subject to the same rate of tax. Basis in the computation of LBT liability of DELTA DISTRIBUTOR CORPORATION In resolving the particular issue, Section 131 (n) of the Local Government Code (LGC) of 1991, which defines gross receipts, is quoted as follows: " SEC. 131. Definition of Terms . When used in this Title, the term: xxx xxx xxx (n) Gross Sales or Receipts include the total amount of money or its equivalent representing the contract price, compensation or service fee, including the amount charged or materials supplied with the services and deposits or advance payments actually or constructively received during the taxable quarter for the services performed or to be performed for another person excluding discounts if determinable at the time of sale, sales return, excise tax, and value-added tax (VAT) ;" (Emphasis ours) Clearly, the above-quoted provision of the LGC is explicit that the gross sales or receipts shall be the total amount of money or its equivalent representing the contract price, compensation or service fee, including the amount charged or materials supplied with the services and deposits or advance payments actually or constructively received during the taxable quarter for the services performed or to be performed for another person excluding discounts if determinable at the time of sales, sales return, excise tax, and value-added tax (VAT). SHADEC It may be worth noting that one of the terms in the Agreement is that the DISTRIBUTOR shall purchase TMC's Product 2 which will be the subject of resale of the distributor to its clients. In this case, the total amount of sales generated from selling the products of TMC shall constitute the gross sales or receipts of the DDC as contemplated under the aforequoted Section 13 (n) of the LGC, to the exclusion of discounts , if determinable at the time of sale, sale return, excise tax, and value-added tax (VAT). There was no showing however, in the Agreement that DDC is selling TMC's products on consignment or commission basis in which case the DDC shall pay the manufacturer (TMC) only when the goods are sold and retain certain amount as commission. Under the Agreement, the DDC is under obligation to pay TMC for the products it purchased as provided in the pertinent provisions of the Agreement. 3 This situation contemplates that the DISTRIBUTORS has acquired the right over the products and assumed ownership of the same upon payment and delivery thereof 4 and the only remaining influence of the manufacturer (TMC) in the transaction is the pricing of the products based on the stipulation in the Agreement (Sec. 1.6). Having assumed ownership of the products, it may be assumed also that sales reported by DDC in the books of accounts shall form part of the gross sales or receipts referred to in Section 13 (n), supra , and may only be lowered by the allowable deductions enumerated thereof. In this regard, and unless DDC is able to prove that indeed, their only source of income is the commission gained from distributor's "discount" , then computing the LBT is based on the gross sales or receipts accounted on the basis of officials receipts and/or invoices issued by the distributors to its clienteles, is deemed proper. Stated otherwise, the claim that only the " commission " (total amount of discount) should be considered in the computation of LBT, DDC will have to show that the amount in excess of the amount of commission are remitted to TMC otherwise there is no other recourse but to include said amount and be considered as part of the gross sales or receipts of the distributor. Conversely, if DDC is able to substantiate that its only income is the " commission ", then the only option left is to compute the LBT based on said amount of " commission ". HScaCT Another issue that may have to be addressed is the situs of tax. As stated in your letter dated December 18, 2012 addressed to the City Treasurer of Pasig, it appears that the sales transacted by your warehouses in Quezon City and Taytay, Rizal were included in the computation of gross sales for business tax as well as Mayor's Permit purposes. In this connection, Article 243 of the Implementing Rules and Regulations (IRR) implementing Section 150 of the LGC, is quoted as follows: "Article 243. Situs of the Tax . (a) Definition of terms: xxx xxx xxx (b) Sales Allocation (1) All sales 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. (emphasis ours) xxx xxx xxx." It may be clarified that this Bureau has been consistent with its view that a warehouse may be considered a branch/sales office under the following conditions, viz. : (1) if the warehouse accepts orders only but does not issue sales invoices; (2) if the warehouse does not accept orders but issues sales invoices; or (3) if the warehouse accepts orders and issues sales invoices. The foregoing premises considered, the herein issues may be summarized as follows: 1) DDC shall be classified as " dealer/distributor " and is liable for the payment of LBT in Pasig City pursuant to Section 143 (b) of the LGC; and EICSTa 2) DDC shall be liable for the payment of LBT for its warehouses in Quezon City and Taytay, Rizal to said LGUs. However, in case that the sales generated from said warehouses are recorded in Pasig City office, said City shall be entitled to the 30% allocation and the remaining 70% shall be apportioned between Quezon City and Taytay, Rizal proportionate to their respective sales volume. We hope that this will help clarify matters. Very truly yours, (SGD.) SALVADOR M. DEL CASTILLO OIC-Executive Director Footnotes 1. (www.entrepreneur.com). 2. Sec. 2.2 of the Agreement. 3. Sec. 3.5 to 3.6 of the Agreement. 4. Note from the Publisher: Missing footnote text.