Bureau of Local Government Finance Opinion

June 16, 2011 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Ms. Bernardita S. Unidad Accounting Manager Peaksun Enterprises & Export Corporation 2/F Peaksun Bdg., 1505 Princeton St. Mandaluyong City Madam : This refers to your letter dated June 11, 2011 in behalf of PEAKSUN ENTERPRISES & EXPORT CORPORATION (PEAKSUN for brevity) requesting interpretation of the situs of the tax provision of the Local Government Code (LGC) of 1991. Representations are made that PEAKSUN is a domestic corporation engaged in the distribution and hauling of locally manufactured cement. Its main office is located in Mandaluyong City with three (3) garages maintained as dispatching offices in the following areas: 1. Manila East Road, Taytay, Rizal 2. Quirino Highway, Kaypian, San Jose del Monte, Bulacan 3. Pallocan East, Batangas City It is claimed that since all sales are perfected in its main office, with no sales office elsewhere, PEAKSUN has been consistently and faithfully declaring its gross sales and paying the corresponding local taxes in the City of Mandaluyong. The operation of garages in Taytay, Rizal, Batangas City and San Jose Del Monte City is necessary due to their proximity to the Cement Manufacturing Plants where PEAKSUN hauls cement for delivery to its numerous clients in Metro Manila and other parts of Luzon. In Barangay Dolores, Taytay, Rizal where PEAKSUN's Taytay garage is located, the Punong Barangay confirmed that PEAKSUN's establishment only exists as a garage. PEAKSUN claims further that it neither perfects nor performs any sale in the Taytay garage. Neither does PEAKSUN operate a warehouse facility therein. However, PEAKSUN received a notice from the Business Permit and Licensing Section of the Municipality of Taytay, Rizal which assessed a business tax equivalent to P1,842,853.60 computed from 30% of PEAKSUN's gross sales and 100% of its gross receipts for its hauling activity. PEAKSUN informed, however, that it has paid the entire taxes to the City Government of Mandaluyong on a quarterly. In this connection, this Bureau expresses the following views on the matter: 1. An office with no sales transaction is not taxable. cAHDES This Bureau has consistently expressed the view that a Local Government Unit (LGU) where an office is located but where no transactions are made, may only collect a Mayor's permit fee and other regulatory fees provided for under the existing local tax ordinance of the said LGU. In order that a local government unit can validly impose a business tax on an office, reference is made on the provision of Section 150 of the LGC as implemented by Article 243 (b) (1) of the IRR, as follows: "Article 243. Situs of the Tax. (a) Definitions of Terms "xxx xxx xxx. "(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." For a clearer understanding of the aforesaid provision, quoted hereunder is the definition of the term "branch or sales office." "Article 243. Situs of the Tax. (a) Definitions of Terms "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. 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. "xxx xxx xxx." On the basis of the above provisions of law, PEAKSUN's garages may not be considered branches or sales offices because said garages do not engage in any kind of business transaction, but merely being maintained in the subject locations due to their proximity to the Cement Manufacturing Plants. 2. The 70%-30% allocation of sales does not apply Reference is made to the provision of Article 234 (b) (3) of the same IRR, quoted as follows: "Article 243. Situs of the Tax. (a) Definitions of Terms "xxx xxx xxx. (b) Sales Allocation (1) . . . "(3) In cases where there is a factory, project office, plant or plantation in pursuit of business, thirty percent (30%) of all sales recorded in the principal office shall be taxable by the city or municipality where the principal office is located and seventy percent (70%) of all sales recorded in the principal office shall be taxable by the city or municipality where the factory, project office, plant or plantation is located. LGUs where only experimental farms are located shall not be entitled to the sales allocation herein provided for. "xxx xxx xxx." Based on the foregoing provisions, the sales allocation shall apply when businesses have certain facilities in locations other than where the principal office is situated. These facilities are limited to: factories, project offices, plant or plantation. Nowhere in the enumeration is a garage mentioned. Therefore, since only a garage is situated in Taytay, Rizal, said municipality cannot validly claim the 30% sales allocation recorded in the main office. In summary, PEAKSUN ENTERPRISES & EXPORT CORPORATION is subject to the payment of business taxes and fees as follows: AHcCDI 1. All sales/receipts made at its main office in Mandaluyong City shall be recorded thereat and be 100% taxable by said city. 2. The Cities of Mandaluyong, Batangas and San Jose del Monte and the Municipality of Taytay, Rizal may collect Mayor's permit fees and other regulatory fees which may be imposed under their respective duly enacted tax ordinances. We hope that this will help clarify matters. Very truly yours, (SGD.) MA. PRESENTACION R. MONTESA, CESO III Executive Director