Directing all NGAs and Enjoining LGUs to Participate in the Celebration of the National Indigenous Peoples Month in October 2011

June 3, 2011 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION 1st Indorsement Respectfully returned to the OIC-City Treasurer, Quezon City, his letter dated May 13, 2011 relative to the letter dated March 17, 2011 of Ms. Geraldine Yamson, General Manager, WENSHA SPA CENTER COMPANY, INC. (WENSHA for brevity) requesting clarification on the change of their business assessment from Contractors and Other Independent Contractors to Amusement Places. cECaHA Representations are made that WENSHA is a domestic corporation organized and existing under and by virtue of the laws of the Republic of the Philippines with principal office address at Room 509 No. 77 Pasda Mansion, Panay Avenue corner Timog Avenue, Quezon City. It is engaged exclusively in the SPA Business with two (2) branches at Pasay City and Quezon City. For the last 10 years WENSHA has been paying its business tax under Section 19 (e) as a Contractor-Health Club, of the Quezon City Revenue Code. Under a 1st Indorsement dated April 18, 2011, the said letter was referred to that Office requesting information as to the basis for the change of assessment of said company. In reply that Office under a letter dated May 13, 2011 submitted to this Bureau its Position Paper as to whether WENSHA is a "contractor" or an "amusement place" for purposes of local taxation. It is claimed that upon renewal of their business permit this January 2011, the establishment was taxed a higher rate as an "amusement place". Opposing such action and apparently invoking the principle of estoppels, WENSHA averred that they have, since the start of their business in February 2002, been classified as a Contractor-Health Club subject only to a lower rate based on Chapter 3, Art. 8, Sec. 19 (e), thus: "ON CONTRACTORS AND OTHER INDEPENDENT CONTRACTORS This will include persons, natural or juridical, not subject to Professional Tax whose activity consists essentially of the sale of all kinds of services for a fee, regardless of whether or not the performance of the services calls for the exercise or use of the physical or mental faculties of such contractor or his employees. Such, as but not limited, to the following: "xxx xxx xxx. 20) Massage clinics, sauna, Turkish and Swedish baths, salons other similar establishments; IcaEDC In their letter to that Office, WENSHA further argued that they are "exclusively" operating a "spa" business. However, that Office maintains that the subject Health Club is not purely a massage or spa clinic but more appropriately a place of amusement. That Office contends that incompatible with the general definition of a "spa" which is "a commercial establishment with facilities for exercising and bathing" (Webster's Ninth New Collegiate Dictionary), WENSHA's array of products and services which include, among others, facial and skin treatments, hair waxing, skin care, firm eyelashes, nail art designs with a regular serving of buffet meals and beverages reveal an exercise of trade not distinctively typical of a regular spa. It is claimed further that other than basic massage and spa facilities, a customer upon gaining admission, readily enjoys a variety of amenities other than "facilities for exercising and bathing." That Office likewise noted that vanity and beauty treatments like facial and skin treatments, may only be performed by professional medical or clinical practitioners. Aside from the fact that estoppels may not operate against the government, it is the considered view of that Office that this establishment should indeed be re-classified and taxed as an "amusement place" considering that its products are not wholly reminiscent of a business contracting out only spa or massage services, but in reality a place where one seeks admission for diversion, entertainment and relaxation, among other pleasurable diversions in consonance with Sec. 131 of the Local Government Code, quoted as follows: "(b) Amusement is a pleasurable diversion and entertainment. It is synonymous to relaxation, avocation, pastime, or fun. "(c) Amusement Places include theaters, cinemas, concert halls, circuses and other places of amusement where one seeks admission to entertain oneself by seeing or viewing the show or performance;" It was noted that the enumeration is not inclusive purposely to provide a wider latitude to admit any establishment which offers "relaxation, avocation, pastime or fun". With the use of word "include" in illustrating these places of amusement, the law was not only providing examples of this kind of businesses with no intention of limiting the same to only those specifically mentioned. Thus, that Office submits that it is only proper and more appropriate to tax the subject business establishment according to a 3% tax rate on gross receipts imposable on "Amusement Places". TaDIHc That Office explained further that businesses expand and evolve which in this case it may have, at the beginning, been into exclusive spa dealings but as it eventually diversified, the City with all the attributes of its local autonomy is not precluded from correspondingly adjusting a taxpayer's scope of taxability to conform with the changes in the nature and coverage of its business. Thus, is the propriety of fine-tuning WENSHA's tax rate. Finally, it is contended that as a Municipal Corporation, Quezon City is legally empowered to exercise this discretion, hence: ". . . (M)unicipal corporations are allowed more discretion in determining the rates of imposable license fees, even in cases of purely police power measures." (Northern Phil. Tobacco Corp. vs. Mun. of Agoo, G.R. No. L-26447, January 30, 1970 as cited in Ursal's Phili. Law on Local Government Taxation Annotated 2000Ed.) In resolving the issue, it is necessary to consider the variety of services that WENSHA offers such as: 1. Sanjoyce Facial Treatment 2. Body Treatment (Body Massage) 3. Body Care (Body Scrub) 4. Hand and Foot Care 5. Hair Waxing 6. Additional Services Perm eyelashes Body wash Paraffin wax Manicure Pedicure These considerations point out that WENSHA provides services to customers depending on specific preferences for a fee, an activity that is generally within the purview of a contractor as contemplated under Section 131 (h) of the Local Government Code (LGC) of 1991, quoted as follows: "Section 131. Definition of Terms . When used in this Title, the term: "(a) . . . "(h) Contractor includes persons, natural or juridical, not subject to professional tax under Section 139 of this Code, whose activity consists essentially of the sale of all kinds of services for a fee, regardless of whether or not the performance of the service calls for the exercise or use of the physical or mental faculties of such contractor or his employees. cTEICD "xxx xxx xxx." It must be pointed out that under its Articles of Incorporations, the primary purpose of WENSHA is "to engage in the business of providing services relating to massage service, hairdressing and other beauty treatment. Considering the above primary purpose of said company, there is no doubt that said activities fall within the purview of contractor as contemplated under Section 131 (h) of the LGC. It is worth mentioning that in one case the Supreme Court stated: "What is determinative of whether or not the [corporation] is engaged in such business is its object or purpose, as stated in its articles and by-laws. It is a familiar rule that the actual purpose is not controlled by the corporate form or by the commercial aspect of the business prosecuted, but may be shown by extrinsic evidence, including the by-laws and the method of operation." [(Collec tor of Internal Revenue v. Club Fili pino, Inc. De Cebu, G.R. No. L-12719 (May 31, 1962)] Thus, unless its Articles of Incorporation are amended, WENSHA's activities fall within the purview of contractor as contemplated under Section 131 (h) of the LGC subject to the payment of business tax on contractors under Section 143 (e) of the said Code in relation to Section 151 thereof and as implemented under Chapter 3, Art. 8, Sec. 19 (e) of the Quezon Revenue Code. It is worth mentioning that its major services include the following: 1. 6 hours accommodation (overstaying charge 100/hour) 2. Free use of spa facilities (shower, hot and cold Jacuzzi, steam, dry sauna, kiddie pool) 3. Free use of lockers, towels, robes, toiletries 4. Scheduled eat all you can buffet and shabu-shabu 5. Bottomless drinks (orange juice) The above variety of amenities and the serving of buffet meals and beverages are adjuncts of the spa to foster its primary purpose. In Webster's Third New International Dictionary, "adjunct" means "something joined or added to another thing but not essentially a part of it." Hence, said amenities will not make WENSHA an amusement place as contemplated in the abovedquoted definition. Customers seek admission at WENSHA for the main purpose of availing of massage service, hairdressing and other beauty treatment. EHACcT With respect to the serving of buffet meals and beverages, again, in the above case of Collector of Internal Revenue v. Club Filipino, Inc. De Cebu , G.R. No. L-12719, May 31, 1962, "it has been held that the liability for fixed and percentage taxes, as provided by these sections, does not ipso facto attach by mere reason of the operation of a bar and restaurant. For the liability to attach, the operator thereof must be engaged in the business of a barkeeper and restaurateur. The plain and ordinary meaning of business is restricted to activities or fairs where profit is the purpose or livelihood is the motive, and the term business when used without qualification, should be construed in its plain and ordinary meaning, restricted to activities for profit or livelihood." ( The Coll. of Int. Rev. v. Manila Lodge No. 761 of the BPOE [Manila Elks Club] & Court of Tax Appeals , G.R. No. L-11176, June 29, 1959) Considering the complimentary food being offered, there is no profit to speak of to be considered that WENSHA is engaged in the business of restaurants and the like. Accordingly, it is the view of this Bureau that WENSHA shall be classified as a Contractor-Health Club for purposes of local taxation. Advice of action taken on the matter within five (5) days from receipt hereof is requested. Be guided accordingly. (SGD.) MA. PRESENTACION R. MONTESA, CESO III Executive Director