Revocation of Ruling Exempting Planter-Members of Sugar Producers Cooperative Marketing Associations from the Payment of the 2% Tax Imposed by Section 189 of the Tax Code on their Shares in the Sugar Which their Associations Caused to be Milled

July 15, 1971 REVENUE MEMORANDUM CIRCULAR NO. 22-71 SUBJECT : Revocation of Ruling Exempting Planter-Members of Sugar Producers Cooperative Marketing Associations from the Payment of the 2% Tax Imposed by Section 189 of the Tax Code on their Shares in the Sugar Which their Associations Caused to be Milled TO : All Internal Revenue Officers and others concerned In rulings issued to sugar producers cooperative marketing associations, this Office exempted from the 2% tax prescribed in Section 189 of the Tax Code not only the associations themselves but also the planter-members thereof. The rulings were supposedly in accordance with the decision of the Court of Tax Appeals in the case of Calamba Sugar Planters' Cooperative Marketing Association, Inc. versus the Collector of Internal Revenue (C.T.A. Case No. 216, January 5, 1957). However, after a reexamination of the said decision, it was noted that the question of whether the exemption of a cooperative marketing association under Section 48 of Act No. 3425 shall extend to and include taxes for which planter-members thereof are directly liable was not an issue in the aforecited case; and that the only issue raised therein is whether or not the petitioner (the cooperative) can claim exemption from the payment of the 2% tax by virtue of the provisions of Section 48 of Act No. 3425, Respondent Collector of Internal Revenue taking the stand that since the tax prescribed in Section 189 of the Tax Code is a millers tax, it is a direct liability of the Central, a part of which was merely shifted to the petitioner. And with this for premise, respondent argued that petitioner could not claim exemption from the 2% tax, said tax not being directly due from it. In resolving said issue, the Court of Tax Appeals ruled thus: "To our mind, the law is clear and unambiguous. The words 'charged to the planter' as used in the law can only mean that the planter is subject to and directly liable for the payment of the 2% percentage tax on his share of the finished products. . . . In short, the proprietor or operator of the central is merely constituted as the withholding agent of the Collector of Internal Revenue and the planter is the person primarily and directly liable for the payment of the tax on his share of the sugar milled . "IN VIEW OF THE FOREGOING CONSIDERATIONS, the petitioner is hereby declared exempt from the payment of the 2% tax prescribed by Section 189 of the National Internal Revenue Code on its share of the sugar milled by the central of the Canlubang Sugar Estate." (Emphasis supplied) It is clear from the abovequoted dispositive part of the decision that what was resolved in that case is the issue of whether or not the 2% tax pertaining to the share of the planter or owner of the raw materials, which is withheld by the proprietor or operator of the Central, is a direct liability of said planter or owner. The Court did not consider the question of whether the exemption of the cooperative marketing association extended to and included the tax liability of planter-members under Section 189 of the Tax Code, the matter not having been raised as an issue in the said case. In the light of the foregoing facts, this Office has arrived at the conclusion that the ruling exempting planter-members of sugar producers cooperative marketing associations from the payment of the 2% tax on their shares in the sugar, which their respective association caused to be milled, is erroneous, the said ruling being based on a misconception of the decision in the case of Calamba Sugar Planters' Cooperative Marketing Association, Inc. versus the Collector of Internal Revenue. Moreover, a thorough study and analysis of Section 189 of the Tax Code and Section 48 of Act No. 3425, as amended, reveals that the said ruling is without legal basis. From the provisions of Section 189 of the Tax Code it is clear that the 2% tax is a liability of both (1) the proprietor or operator of the central or mill and (2) the planter or owner of the raw materials (sugar cane), each paying the 2% tax on his share of the sugar milled. And in accordance with the decision in the abovecited case, the planter or owner of the raw materials is directly and primarily liable for the 2% tax on his share in the milled sugar. Such being the case, the planter or owner of the sugar cane cannot escape liability from the tax due on his share in the sugar, even if the cooperative marketing association, of which he is a member, caused the milling of his sugar cane into sugar, pursuant to the so-called ''Marketing Agreement and Power of Attorney" entered into by and between him and the association. For while the association may be exempt from tax, its tax exemption does not extend to taxes due from its members, nor are its members authorized to enjoy its tax exemption, as can be gleaned from the following provisions of Section 48 of Act No. 3425, as amended by Republic Act No. 702: "SEC. 48. Exemption . Any association organized under this Act shall not be subject to the payment of merchant's sales tax, the income tax, and all other percentage taxes of whatever nature and description. "Any exemptions under any and all existing laws applying to agricultural products in the possession or under the control of the individual producer, shall apply similarly and completely to agricultural products delivered by the farmer members to the association, or which are in the possession or under the control of the association." It will be noted from the aforequoted provisions of law (1) that it is the association itself which is exempt from the merchant's sales tax, the income tax and all other percentage taxes, indicating that the law presumes that the association operates or undertakes an activity which is taxable and for which it would be directly liable were it not granted the tax exemption provided for in Section 48 of Act No. 3425; and (2) that although the law expressly provides that the exemption enjoyed by the individual producers with respect to agricultural products shall also be enjoyed by the association, if such products are delivered by the farmer-members to the association, however, there is no provision in the law extending the exemption of the association to its members. These provisions of the law clearly support the conclusion that the planter-members of the association remain liable for the 2% tax on their share in the sugar milled by the central even if their association causes the milling thereof pursuant to the so-called "Marketing Agreement and Power of Attorney" entered into by and between the association and the members thereof. In view thereof, the ruling of this Office dated September 9, 1970, revoking its ruling exempting planter-members of sugar producers cooperative marketing associations from the payment of the 2% tax on their shares in the sugar, which said associations caused to be milled, pursuant to agreements entitled "Marketing Agreement and Power of Attorney", is hereby confirmed and reiterated. Proprietors and operators of sugar mills and centrals shall withhold and pay to the Commissioner of Internal Revenue the 2% tax due on the shares of all the planters or owners of the sugar cane, without exception whatever and irrespective of whether or not their sugar canes are caused to be milled by their respective association in their names or in the name of their association. All internal revenue officers are hereby enjoined to enforce the provisions of this circular. cdt MISAEL P. VERA Commissioner of Internal Revenue APPROVED: CESAR VIRATA Secretary of Finance