The Implementing Rules and Regulations for the Philippine Charity Sweepstakes Office Loterya ng Bayan

April 7, 2011 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Honorable Fe Gaviola Edillo Municipal Mayor Macrohon, Southern Leyte Madam : This refers to your request for reconsideration to our 1st Indorsement dated September 1, 2008 addressed to the OIC-Regional Director for Local Government Finance, Region VIII, Tacloban City, regarding the application of the Rule on Situs of Taxation on 1st Le Marke Resources Incorporated (1st Le Marke for brevity), a business entity engaged in the operation of private cemetery, with principal office in Maasin City but its burial site is located in the Municipality of Macrohon. In the said Endorsement dated September 1, 2008, this Bureau expressed the following views: 1. "The burial site does not fall squarely in any of the corresponding definitions quoted above. It is not a factory as the company does not manufacture goods or products nor is it a plant as the company does not carry a mechanical or industrial business. Likewise, the burial site is not a project office as this is applicable to construction contractors. 2. ". . ., unless the Municipality could present proof that there is an office of 1st Le Marke Resources Incorporated located thereat where sales are recorded, the situs of taxation shall not apply for lack of basis in the LGC and the IRR." It must be noted that under a letter dated March 17, 2008, in reply to the letter dated January 25, 2008 of the Municipal Treasurer of Maasin Leyte and the letter dated February 19, 2008 of the Municipal Treasurer of Macrohon, Leyte, both requesting enlightenment on the extent of applicability of the provisions of situs on taxation relative to the business activity of 1st Le Marke, OIC-Regional Director George T. Roma opined as follows: 1. ". . . the imposition of business tax on the subject enterprise, memorial park, by the City of Maasin based on the generated sales recorded in its head office located in said city is proper. However, the business tax imposed by the Municipality of Macrohon on the guise of delivery service is without merit for want of sales transaction. ASaTCE 2. "The essence of the imposition of business tax is premised on the receipt of sales. In this particular situation, Maasin City, being the place where the head office is located and sales transactions are conducted, can impose and collect business tax on the entity. As for the Municipality of Macrohon, where the burial site is located, the most that the municipality can collect in such activity may come in the form of regulatory fee to protect its interest within its jurisdiction." However, it is claimed that due to various interpretations contributed by the legislative officials thereat regarding the application of the situs of tax, the request for further reconsideration of the above views is submitted, viz. : 1. "It can be considered that the site of the Private Cemetery can be called as project office your opinion/view of the project office shall mean the office or headquarters used in administering the project or construction. Please be informed that the construction of this private cemetery is still in process wherein there are still presence of engineers, foremen, heavy and light equipment operators, skilled and non-skilled laborers to administer in the continued construction/development of the said private cemetery. Above all, they constructed a temporary headquarter for their workers and also used as a stockroom for their construction equipment and for this purpose they hired a permanent private security guard to oversee the safety of all valuable properties of the said cemetery. 2. "It can also be considered as plant one of the definition of plant as defined in your indorsement is 'it is the total facilities available for production or service in a particular country or place .' The total facilities in a place like private cemetery produce good services, such as: provide descent ( sic ) burial and beautiful ground of your departed loved ones, ensure safety and everlasting care of the remains of the deceased and protect the right and privileges of the ownership and the assignment of the burial lot of all approved applicants. "Another definition of plant is a 'factory or workshop for the manufacturers of a particular product.' If plant is a factory for the manufacturer of a particular product, so therefore a private cemetery can be also called a factory which manufactures a product which is a good and quality services delivered to its customers. Webster dictionary defined services as useful result or product of labor which is not a tangible commodity. So it is right to interpret that services ( sic ) is a product of labor of a private cemetery which is intangible . 3. "Lastly, the business classification of a private cemetery is a services ( sic ) founded on contract so it is very clear that there is no other product that the private cemetery produces except services so it can be called plant or factory which produce services." Issue No. 1: Burial site is a project office. In resolving the issues, it necessary to consider the variety of services that memorial parks and private cemeteries like 1st Le Marke may offer such as: 1. Funeral and memorial services 2. Cemetery memorialization a. Traditional ground burial b. Mausoleum entombment c. Lawn crypts d. Cremation 3. Personalized services a. Tribute b. Gathering 4. Pre-planning services HEIcDT These considerations point out that memorial parks and private cemeteries provide services to customers depending on specific preferences for a fee founded on a contract, an activity that is generally within the purview of a contractor as contemplated under Section 131 (h) of the LGC, quoted hereunder, subject to the contractor's tax under Section 143 (e) thereof. "Section 131. Definition of Terms. When used in this Title, the term: "(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. "xxx xxx xxx." It is worth mentioning that Local Finance Circular No. 3-95, dated May 22, 1995 issued by the Department of Finance clarified the implementation of Section 143 (e) with regard to its application to construction contractors such as but not limited to, general engineering, general building and specialty contractors as defined under Republic Act 4566 (as amended), known as the contractors Licensing Law and other applicable laws, as follows: A "general engineering contractor" is a person whose principal contracting business is in connection with fixed works requiring specialized engineering knowledge and skill, including the following divisions or subjects: irrigation, drainage, water power, water supply, flood control, inland waterways, harbors, docks and wharves, shipyards and ports, dams, hydroelectric projects, levees, river control and reclamation works, railroads, highways, streets and roads, tunnels, airports and airways, waste reduction plants, bridges, overpasses, underpasses and other similar works, pipelines and other system for the transmission of petroleum and other liquid or gaseous substances, land leveling and earth moving projects, excavating, grading, trenching, paving and surfacing work. A "general building contractor" is a person whose principal contracting business is in connection with any structure built, being built, or to be built, for the support, shelter and enclosure of persons, animals, chattels or movable property of any kind, requiring in its construction the use of more than two unrelated building trades or crafts, or to do or superintend the whole or any part thereof. Such structure includes sewers and sewerage disposal plants and systems, parks, playgrounds and other recreational works, refineries, chemical plants, and similar industrial plants requiring specialized engineering knowledge and skill, powerhouse, power plants and other utility plants and installations, mines and metallurgical plants, cement and concrete works in connection with the abovementioned fixed works. A "specialty contractor" is a person whose operations pertain to the performance of construction work requiring special skill and whose principal contracting business involves the use of specialized building trades or crafts. On the basis of the above definitions and considering the types of services that memorial parks and private cemeteries are offering, 1st Le Marke cannot be classified as a construction contractor. Hence the rules on situs of tax for construction contractor shall not apply as there is no project office to speak of. The construction of burial chamber or mausoleum being done by 1st Le Marke itself is merely a part of or incident to its main business as a service contractor. In fact, the taxation of activities which are merely incidental to the principal business activity but do not constitute a separate and distinct activity has been expressly prohibited by the Supreme Court in several instances since these are not considered or intended to be separately or additionally taxed. In the case of Standard Vacuum Oil Co. vs. Antigua , 96 Phil. 909, the Supreme Court held that: CSTHca "when a person or company is already taxed on its main business, it may not be further taxed for doing something or engaging in an activity or work which is merely a part of, incidental to and is necessary to its main business." As cited in the case of Municipality of Opon vs. Caltex (Philippines), Inc. the Standard Vacuum Oil Co. case does not stand alone, In City of Manila vs. Fortune Enterprises, Inc. the Court ruled that the business of auto supplies, battery charging and upholstery is part of the main business of automobile repairing and is, therefore, not taxable separately. Mr. Justice Jose B. L. Reyes, speaking for the Court, wrote down the following guidelines: ". . . The foregoing ruling brings out the point that where something is done as a mere incident to, or as a necessary consequence of the principal business it is not ordinarily taxed as an independent business in itself; and that what is usually taken as essential is the main activity in which the taxpayer is engaged. All the various transactions tending to better accomplish the principal end in view must be treated as merely incidental to the principal purpose of the business, in the absence of circumstances evidencing a different intent." Accordingly, this Bureau finds the claim of that office that the burial site of 1st Le Marke is considered as a project office to be untenable. In case however 1st Le Marke engages the services of an independent construction contractor solely for the construction of a burial chamber and mausoleum, said independent construction contractor shall be subject to the payment of the contractor's tax if it maintains a project office at the burial site. Issue No. 2: The burial site is a plant or factory As mentioned in our 1st Indorsement dated September 1, 2008, neither the LGC nor its Implementing Rules and Regulations (IRR) define the terms "factory" or "plant". However, in customary usage, the term "factory" or "plant" generally refers to the place where products sold by a manufacturer, assembler or producer are manufactured, assembled or produced. In addition, Section 131 (o) of the LGC defines manufacturer as follows: "Section 131. Definition of Terms. When used in this Title, the term: "xxx xxx xxx." "(o) Manufacturer includes every person who, by physical or chemical process, alters the exterior texture or form or inner substance of any raw material or manufactured or partially manufactured product in such manner as to prepare it for special use or uses to which it could not have been put in its original condition, or who by any such process, alters the quality of any such raw material or manufactured or partially manufactured products so as to reduce it to marketable shape or prepare it for any of the use of industry, or who by any such process, combines any such raw material or manufactured or partially manufactured products with other materials or products of the same or of different kinds and in such manner that the finished products of such process or manufacture can be put to a special use or uses to which such raw material or manufactured or partially manufactured products in their original condition could not have been put, and who in addition, alters such raw materials or manufactured or partially manufactured products, or combines the same to produce such finished products for the purpose of their sale or distribution to others and not for his own use or consumption; Considering the nature of business of 1st Le Marke, it does not fall squarely within the aforequoted definition. 1st Le Marke does not manufacture services but essentially renders services. Therefore, it is submitted that 1st Le Marke is not a manufacturer but a service contractor. Again, there is no plant or factory to speak of in this case, as these are facilities of manufacturers. Hence, the argument that the burial site can be considered as a plant or a factory is without merit. cAECST Issue No. 3: Service is a product We agree with your claim that service is an intangible product, however, we would like to invite your attention to Section 143 (a) of the LGC, quoted as follows: "Section 143. Tax on Business. The municipality may impose taxes on the following businesses: "(a) On manufacturers, assemblers, repackers, processors, brewers, distillers, rectifiers, and compounders of liquors, distilled spirits, and wines or manufacturers of any article of commerce of whatever kind or nature, in accordance with the following schedule: (Emphasis supplied) The word "article" refers to "such material or corporeal things as goods or physical property." Commerce "consists of the various agreements which have for their object to facilitate the exchange of the products of the earth or industry of man, with intent to realize profit." Taken together, article of commerce refers to the exchange of goods or physical property with a view to earning a profit as distinguished from service, which is an intangible product. It must be pointed out that what is being taxed under Section 143 (a) of the LGC are manufacturers of any article of commerce. Considering that service is an intangible product as defined in the Webster dictionary, 1st Le Marke does not classify as a manufacturer of any article of commerce. Finally, this Bureau would like to reiterate its previous stand that unless the Municipality can present proof that there is an office of 1st Le Marke Resources Incorporated located thereat where sales are recorded, the situs of taxation shall not apply for lack of basis in the LGC and the IRR. Very truly yours, (SGD.) MA. PRESENTACION R. MONTESA, CESO III Executive Director