Bureau of Local Government Finance Opinion

May 17, 2013 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Atty. Jennifer Sobremonte Legal Counsel for Morning Bell Corp. Sobremonte Law Office S & U Bldg., 50 8th Ave. West Grace Park Caloocan City Madam : This refers to your letter dated February 12, 2013 in behalf of Morning Bell Corporation (MBC), requesting clarification and legal opinion as to the legal definition of the terms "wholesaler'' and a "retailer'' for purposes of classification of business establishment. Representations are made that MBC supplies department stores with their products in bulk and issues the corresponding invoice therefor. The department store such as SM is the one that sells the products directly to the customers and issues official receipts. It is claimed that Quezon City erroneously classified and assessed MBC as a "retailer'' since it employs sales ladies for the stand inside the malls as required by the department store for their concessionaires. It is claimed further that the Business Permits and Licensing Office (BPLO) completely disregarded the fact that MBC does not deal directly with the customers or end-users and it is the department stores that sell the products and issue receipts. Said letter was referred to the City Treasurer of Quezon City for comment and/or appropriate action under a first Indorsement dated February 22, 2013. aSIETH Under a letter dated April 24, 2013, the City Treasurer submitted its position on the matter, quoted in full as follows: "Section 131 of the Local Government Code defines the transaction rather the person involved in the transaction, thus, what is defined under said section is "Retail'' instead of "Retailer'' and "Wholesale'' instead of "Wholesaler''. Under said provision of law, a "Retail'' is defines as a sale where the purchaser buys the commodity for his own consumption, irrespective of the quantity of the commodity sold. On the other hand, "Wholesale" means a sale where the purchaser buys or import the commodities for resale to persons other than the end user regardless of the quantity of the transaction. Thus, the two transactions are distinguished by the purpose of the purchaser without regard to the quantity purchased. If the purchase is for the direct consumption of the purchaser, then the transaction is retail, and conversely, if the purchase or importation is for resale to persons other than the end user, the transaction is wholesale, in both instance, the quantity of goods subject of the transaction being irrelevant." "Thus, to answer the request for clarification as to what is a wholesaler and a retailer, we put forth this definition. A wholesaler is a person or entity who imports or sells commodities to another person other than the end user, regardless of the quantity of the commodities imported or sold, while a retailer is a person or entity who sells directly to the end user, regardless of the quantity of the commodities sold. "Based on the foregoing definition, the City classified Bell Corporation as a retailer based on its observation that Bell Corporation employs sales ladies to attend to its stands inside the mall as required by the department store for its concessionaires . Thus, it is Bell Corporation who sells directly to end users thru the sales ladies it employs and assigned to the mall. Assuming that the payment is received by the cashier of the department store, we believed that this arrangement does not change the fact Bell Corporation sells directly to the end users therefore it is a retailer." (Underscoring supplied) AcHEaS In connection with the above position, MBC under a letter dated May 10, 2013, reemphasized its previous position embodied in a letter dated November 28, 2012 stating that MBC is not a retailer but a wholesaler in nature and its clients are all department stores and malls. In the same letter it was claimed that MBC presented their sales booklets, schedules of sales duly submitted to the Bureau of Internal Revenue (BIR), Income Tax Return (ITR) Audited Financial Statements (AFs) and BIR Registration to the Examination Division as a proof that MBC do not sell directly to end consumers or customers but to the department stalls and malls. However, it was claimed that the City Treasurer failed to take note of some vital facts that led to erroneous interpretation or classification of MBC as a retailer. To support the above claim MBC submitted a copy of the Award Notice Provisions for Store Consignors of SM Department Stores which provides as follows: Section I. The "Corporation" shall refer to the Operator of SM Department store. The "Consignor" shall refer to the store consignor. Section VI. Consignor shall assign a sufficient number of qualified and competent personnel to sell, promote, and monitor the consignor's merchandise . The number shall be agreed upon by the consignor and the CORPORATION. (Underscoring for emphasis) Section VII. Sales transactions shall be entered in the Corporation's Cash Registers by the Corporation's Cashier following the CORPORATION's counter procedure. ScHADI It is contended that although the sales ladies being referred to in the letter reply of the City Treasurer are indeed a requirement by the Department Stores ( i.e. , SM Department Stores), the goods consigned to the department stores were actually recorded as the sales transactions of the department store which the latter directly sold to end consumers. MBC issues sales invoices to the department stores for the consigned goods and the department stores are the ones that issues official receipts to the end consumers. It is further contended that MBC is not a retailer but a wholesaler to the department store that are the ones who sells the goods directly to the end consumers as specified under Section VII of the Award Notice. Hence, from the very definition provided by the Quezon City Treasurer, it is very clear that MBC cannot be classified or considered as a retailer. In this connection and in order to determine whether an establishment is a wholesaler/dealer or retailer the City Treasurer should be guided by the following: a. Invoices of wholesalers/dealers are issued to companies or business establishments; b. Whereas retail sales receipts are issued to individual consumers. In addition, it may be mentioned that a business entity shall be considered as a retailer when it sells directly to end-users. However, if it sells to retailers or other businesses for re-sale to end-users, then it shall be considered as a wholesaler. In the determination of taxes due on business entities, it is the nature of the sales transactions that they engage in that should be taken into account by the taxing authority. TcIAHS To simplify the issue, the flow of sales transaction is from MBC to SM Department Store to end-users which only shows that the customer of MBC is SM Department Stores and the customers of SM Department Stores are the end-users. Needless to say, the sales ladies deploy by MBC to man the outlets or shelves inside SM Department Stores is but in compliance with the terms of the Award Notice Provisions for Store Consignor of SM Department Stores. Accordingly and on the basis of the representations made by that Office, MBC should be classified and taxed as a "wholesaler" pursuant to Section 143 (b) of the LGC as implemented under a duly-enacted tax ordinance of the city. We hope that this will help clarify matters. Very truly yours, (SGD.) SALVADOR M. DEL CASTILLO OIC-Executive Director