Propriety of Imposing Business Taxes Based on the Gross Sales or Revenue of the Business

September 30, 2015 DILG LEGAL OPINION NO. 038 S. 2015 Ms. Ana Maria F. Cervania #163 J.P. Rizal Street, Dulong Bayan, Poblacion Santa Maria, Bulacan Dear Ms. Cervania : This refers to your 04 August 2015 letter concerning the propriety of imposing business taxes based on the gross sales or revenue of the business. In your letter you allege that there are LGUs that impose business tax based on gross revenue instead of gross sales or receipts of the business subject to tax, which to her view is opposed to the ruling of the Supreme Court in Ericsson Telecommunications vs. City of Pasig, represented by its City Mayor, Hon. Vicente P. Eusebio, et al. (G.R. No. 176667, November 22, 2007). EDATSI Hence, it is your position that the tax imposed should be based on the gross income of the dealer due to the small margin of profit that is being earned per motorcycle unit. Please find below this Department's discussion relative to your query: LGU Tax on Business Cities and Municipalities, subject to their enactment of an ordinance, are authorized to impose business taxes pursuant to Sections 151 and 143 of Republic Act No. 7160 (hereinafter, the "Code"). The imposition of business tax on wholesalers, distributors, or dealers in any article of commerce of whatever kind or nature is particularly authorized under Section 143 (b) 1 of the Code that shall be based on the gross sales or receipts for the preceding year, in accordance with the schedule prescribed therein. "Gross sales or receipts," as defined under Section 131 (n) of the Code, include the total amount of money or its equivalent that is actually or constructively received, which represents the contract price, compensation or service fee, including the amount charged or materials supplied with the services and deposits or advance payments during the taxable quarter, excluding discounts (if determinable at the time of sales), sales return, excise tax, and value-added tax (VAT), viz. : "Section 131. Definition of Terms . When used in this Title, the term: xxx xxx xxx (n) "Gross Sales 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 sales, sales returns, excise tax, and value-added tax (VAT);" TaDSCA In Ericsson Telecommunications vs. City of Pasig, represented by its City Mayor, Hon. Vicente P. Eusebio, et al. (G.R. No. 176667, November 22, 2007) the Court affirmed the clarity of the above definition of "gross sales or receipts" under the Code and provided a discussion on constructive receipt, which is an unrelated or irrelevant to the issue raised herein. In Mobil Philippines, Inc. vs. The City Treasurer of Makati, et al. (G.R. No. 154092, July 14, 2005), the Court made the following distinction between business tax and income tax, as to nature/subject as follows: "Business taxes imposed in the exercise of police power for regulatory purposes are paid for the privilege of carrying on a business in the year the tax was paid. It is paid at the beginning of the year as a fee to allow the business to operate for the rest of the year. It is deemed a prerequisite to the conduct of business. Income tax, on the other hand, is a tax on all yearly profits arising from property, professions, trades or offices, or as a tax on a persons income, emoluments, profits and the like. It is tax on income, whether net or gross realized in one taxable year. It is due on or before the 15th day of the 4th month following the close of the taxpayers taxable year and is generally regarded as an excise tax, levied upon the right of a person or entity to receive income or profits." In addition to the foregoing, the taxing authority and tax base of business tax and income tax differs as business tax is imposed by the local government based on gross sales or receipts of the person subject to tax, while income tax is imposed by the national government based on the taxable income 2 of the person subject to tax pursuant to the Tax Reform Act of 1997. Note that the exclusions/deductions from business tax and income tax differs. Relative thereto, local government units (LGUs) are preempted from imposing a tax on income, which is imposed under the Tax Reform Act of 1997, pursuant to Section 133 (a) of the Code, which enumerates the common limitations on the taxing power of LGUs, viz. : "Section 133. Common Limitation on the Taxing Power of Local Government Units. Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities, and barangays shall not extend to the levy of the following: (a) Income tax , except when levied on banks and other financial institutions; . . ." [Emphasis and underscoring supplied] EADSIa Lastly, the proposition that gross income is similar or equivalent to gross receipts would be erroneous as the "gross income" of person subject to tax includes all income derived from whatever source pursuant to Section 32 3 of the Tax Reform Act of 1997. We hope to have enlightened you on the foregoing. Very truly yours, (SGD.) AUSTERE A. PANADERO Undersecretary Footnotes 1. Section 143. Tax on Business. The municipality may impose taxes on the following businesses: xxx xxx xxx (b) On wholesalers, distributors, or dealers in any article of commerce of whatever kind or nature in accordance with the following schedule: With gross sales or receipts for the preceding Amount of Tax per Annum calendar year in the amount of: Less than 1,000.00 18.00 P1,000.00 or more but less than 2,000.00 33.00 2,000.00 or more but less than 3,000.00 50.00 3,000.00 or more but less than 4,000.00 72.00 4,000.00 or more but less than 5,000.00 100.00 5,000.00 or more but less than 6,000.00 121.00 6,000.00 or more but less than 7,000.00 143.00 7,000.00 or more but less than 8,000.00 165.00 8,000.00 or more but less than 10,000.00 187.00 10,000.00 or more but less than 15,000.00 220.00 15,000.00 or more but less than 20,000.00 275.00 20,000.00 or more but less than 30,000.00 330.00 30,000.00 or more but less than 40,000.00 440.00 40,000.00 or more but less than 50,000.00 660.00 50,000.00 or more but less than 75,000.00 990.00 75,000.00 or more but less than 100,000.00 1,320.00 100,000.00 or more but less than 150,000.00 1,870.00 150,000.00 or more but less than 200,000.00 2,420.00 200,000.00 or more but less than 300,000.00 3,300.00 300,000.00 or more but less than 500,000.00 4,400.00 500,000.00 or more but less than 750,000.00 6,600.00 750,000.00 or more but less than 1,000,000.00 8,800.00 1,000,000.00 or more but less than 2,000,000.00 10,000.00 2,000,000.00 or more at a rate not exceeding fifty percent (50%) of one percent (1%). 2. SEC. 31. Taxable Income Defined. The term taxable income means the pertinent items of gross income specified in this Code, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income by this Code or other special laws. (Tax Reform Act of 1997) 3. SEC. 32. Gross Income . (A) General Definition. Except when otherwise provided in this Title, gross income means all income derived from whatever source, including (but not limited to) the following items: (1) Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions, and similar items; (2) Gross income derived from the conduct of trade or business or the exercise of a profession; (3) Gains derived from dealings in property; (4) Interests; (5) Rents; (6) Royalties; (7) Dividends; (8) Annuities, (9) Prizes and winnings; (10) Pensions; and (11) Partner's distributive share from the net income of the general professional partnership.