Bureau of Local Government Finance Opinion

January 18, 2012 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Salvador & Associates Attorneys-At-Law 815-816 Tower One & Exchange Plaza Ayala Triangle, Ayala Avenue 1226 Makati City Attention: Atty. Maria Rosario L. Bernardo Atty. Jerome Joseph B. Arnaldo Atty. Marvin B. Ibarra Gentlemen : This refers to your letter dated January 14, 2012, requesting in behalf of your client, Nestle Philippines, Inc. (NPI), confirmation of your opinion that it is not engaged in the business as wholesaler, distributor, or dealer of goods in the Municipality of San Francisco, Agusan del Sur. Representations are made that NPI is a domestic corporation with business operations throughout the country. It is engaged in the manufacture of various products, such as dairy products, confectionery, instant coffee and tea drinks. Its head office is located in Cabuyao, Laguna. Representations are made further that NPI owns and operates a coffee buying station in the said municipality to receive and quality-test coffee beans purchased from farmers from various towns in the province of Agusan del Sur prior to such coffee beans being transported to NPI's Cagayan de Oro factory. The coffee beans are then used in NPI's Cagayan de Oro factory as raw materials for the manufacture of NPI's Nescafe products. Furthermore, aside from the coffee buying station, NPI does not maintain any other office, station, or place of business in the municipality. NPI likewise does not conduct any sales activities in the said municipality. It is claimed that when NPI applied for a business permit from the municipality for its coffee buying station, said municipality sought to impose a local business tax on NPI based on Section 7 (b) of the Local Tax Revenue Code of San Francisco which imposes a local business tax on the gross sales/receipts of "wholesalers, distributors or dealers in any article of commerce of whatever kind or nature." cSITDa However, it likewise claimed that an analysis on how the terms "wholesaler," "distributor," "dealer," and "manufacturer" are defines under the law will readily show that Section 7 (b) of the Local Tax Revenue Code of San Francisco does not apply to NPI. To support its position Section 131 (k) of the Local Government Code 1 (LGC) is cited which defines a "dealer" as someone "whose business is to buy and sell merchandise, goods, and chattel as a merchant. He stands immediately between the producer or manufacturer and the consumer and depends for his profit not upon the labor he bestows upon his commodities but upon the skill and foresight with which he watches the market." On the other hand, jurisprudence defines a dealer as one who buys to sell again. 2 A dealer is a middleman between the producer and the consumer. 3 In addition, the definitions of wholesale and wholesaler under the LGC are cited. It defines "wholesale" as a sale where the purchaser buys or imports the commodities for resale to persons other than the end user regardless of the quantity of the transaction. 4 A "wholesaler" is merely a species of merchant, a dealer, or a trafficker. 5 He is one who buys in comparatively large quantities and who sells usually in smaller quantities, but never to the ultimate consumer or an individual unit. 6 The term "distributor" connotes a wholesaler or jobber of goods. 7 Hence, the term distributor is similar to wholesaler and involves the act of selling goods to persons other than the consumer. DHSACT Dealer, wholesaler and distributor are distinct from the term "manufacturer" since the latter connotes the act of producing or making a product, through the combination or application of process on raw materials. To support further its position, NPI cited the case in Manila Trading and Supply Co. vs. City of Manila, 8 wherein the Supreme Court, citing Central Azucarera De Don Pedro vs. City of Manila, 9 defines a "dealer" as "a person who makes a business of buying and selling goods, especially as distinguished from a manufacturer, without altering their condition. 10 A dealer, in the popular acceptation or sense of the word, is one who buys to sell again, he stands immediately between the producer and the consumer, and depends for his profits not on the labor he bestows on his commodities, but on the skill and foresight with which he watches the markets." 11 The word dealer "does not comprehend a person who merely buys a commodity in one form and converts it by his skill and labor into an entirely different commodity, and then sells it, such as for example, as one who buys lumber, with which he manufactures furniture or any other useful commodity that he sells, cannot be treated a dealer in lumber." Moreover, in Laoag Producers' Cooperative Marketing Association, Inc. vs. The Municipality of Laoag, Ilocos Norte , 12 the Court observed that "a dealer is not one who buys to keep or makes to sell, but one who buys to sell again". Based on the foregoing, it is contended that NPI is not subject to local business tax as a wholesaler, distributor, or dealer under Section 7 (b) of the Local Tax Code of San Francisco. NPI cannot be classified as a wholesaler, dealer, or distributor since these terms necessitate the act of purchasing goods or commodities and then re-selling the same without altering their condition, as mentioned earlier, NPI buys but does not sell coffee beans in its coffee buying station; it merely stores the coffee beans bought from local farmers for subsequent transportation to its factory in Cagayan de Oro where the coffee beans are used as raw material for the manufacture of its Nescafe products. It was also pointed out that taxes under Section 7 (b) of the Local Tax Revenue Code of San Francisco are based on the taxpayer's gross sales/receipts for the preceding calendar year. Hence, since the sole activity of the coffee buying station is to buy coffee beans, there are actually no gross sales/receipts to declare. In this connection and on the basis of the representations laid-out above there is no doubt that NPI is a manufacturer since its primary activity is the manufacture of various products, such as dairy products, confectionery, instant coffee and tea drinks. It may be stated however that maintaining a coffee buying station which is to receive and quality-test coffee beans to be used as raw materials for the manufacture of Nescafe products is merely incidental to its primary activity. Thus, the activity of its coffee buying station should not be considered as another commercial activity as a wholesaler, distributor or dealer. Moreover, NPI's coffee buying station does not fall squarely in any of the corresponding definitions discussed above thus, there would be no basis for imposing business tax on said station as a wholesaler, distributor or dealer. And as aptly stated in your letter, taxes under Section 7 (b) of the Local Tax Revenue Code of San Francisco are based on the taxpayer's gross sales receipts for the preceding calendar year which is in conformity with the LGC which specifically provides that a local government unit may impose a business based on the gross sales and/or receipts of a business entity for the preceding year. SaIACT Considering that the sole activity of NPI's coffee buying station is to buy coffee beans, there is no gross sales/receipts realized which to base the computation of tax. Accordingly, NPI's coffee buying station will not be subject to or be liable to pay any business tax to said municipality. The municipality may only collect Mayor's permit and other regulatory fees and charges imposed under its duly-enacted Local Tax Revenue Code. The above views are expressed based on the facts presented. However, any fact or representation that may be discovered to the contrary, after verification and investigation by the local government unit concerned, shall automatically render the views expressed herein as null and void. It is hoped that this will help clarify matters. Very truly yours, (SGD.) SALVADOR M. DEL CASTILLO OIC-Executive Director Footnotes 1. Republic Act No. 7160. 2. Manila Trading and Supply Co. vs. City of Manila , G.R. No. L-12156, April 29, 1959 citing Central Azucarera De Don Pedro vs. City of Manila , G.R. No. L-7679, September 29, 1955. 3. Ibid. 4. Section 131 (z). 5. Page 159, 45 Words and Phrases, Permanent Ed. citing Fischbach Brewing Co. vs. City of St. Louis , 95 S.W. 2d 335, 340, 231 Mo. App. 793. 6. Ibid. 7. Page 37, 13 Words and Phrases, Permanent Ed. citing Port Chester Wine & Liquor Shop vs. Miller Bros. Fruiterers , 1 N.Y.S. 2d 802, 805, 253 App. Div. 188. 8. Supra note 2. 9. Ibid. 10. Citing Webster's International Dictionary. 11. Citing Taylor vs. Vincent , 80 Tenn. (12 Lea) 282, 285, 47 Am. Rep. 338 (11 Words and Phrases, pp. 158-159). 12. G.R. No. L-27498, February 24, 1971 citing Ah Nam vs. City of Manila, et al. , 109 Phil. 808, citing Norries vs. Com. , 27 Pa. 494, Com. vs. Campbel , 33 Pa. 385, Bouvier's Law Dictionary.