Amicus Curiae

The significance of the consummation of ‘sale’ vis-à-vis liability to pay local business tax

John Frederick E. Derije

February 22, 2017

There’s a trend with businesses engaged in the sale of articles of commerce, where aside from a head office, they establish, in other local government units (LGU), branches/sales outlets, factories, project offices, plants, plantations or administrative/liaison office.

Noticeably, the Local Government Code (LGC) made available, as a general guideline, provisions for the accrual, allocation, collection and payment of local business taxes (LBT) for this commercial trend (Article 150, LGC in relation to Article 143 thereof).

Under the LGC, the imposition of LBT for a branch/sales outlet is based on gross sales/receipts of that outlet. The allocation and imposition of LBT for factories, project offices, plants, or plantations, shall be applied irrespective of whether or not sales are made in the locality where these establishments are located, but the same is still based on gross sales/receipts presented by the head office. Where there is no branch/sales outlet in the LGU where the sale or transaction is made, the sale shall be recorded in the principal office and the taxes due shall accrue and be paid to such city or municipality (Article 150 (a), LGC).

Accordingly, the basis in the imposition of LBT is“making a sale.” For that reason, the concept of “sale” is an important element in determining a company’s liability for LBT and where to pay the same.

Verily, in occasions where a company merely establishes an administrative/liaison office to streamline operations and for customer’s easy access to the company in various localities, where no sale transaction is consummated, a question arises as to whether or not the company may be assessed with LBT by the locality where said office is located.

To answer this, a discussion on the significance of the consummation of sale in relation to the situs of taxation, is imperative.

When is sale consummated?

Sale is a contract whereby one of the parties (seller/vendor) obligates himself to transfer the ownership of and deliver a determinate thing to the other (buyer/vendee) who, on his part, binds himself to pay therefor a price certain in money or its equivalent. (Article 1458, Civil Code of the Philippines) Sale is, thus, consummated upon concurrence of these elements:

(a) Consent to transfer ownership in exchange for the price;

(b) Determinate or determinable object or subject matter; and

(c) Price certain in money or its equivalent.

A misconception however commonly arises in considering the“delivery” of the object of sale as that which consummates the transaction, and the misconception causes erroneous assessment and collection of LBT where the delivery, not the sale,took place. The assessment of LBT on delivery, which equates delivery to “making a sale,” leads to multiple taxation e.g. taxing the sale and taxing the delivery.

Really, the “agreement” to transfer title for a price actually paid or promise, not physical transfer of the property, is the essence of sale. Neither the delivery of the thing bought nor the payment of the price is necessary for the consummation of the sale. Being a “consensual”and NOT a “real” contract, sale is perfected by mere consent “without any further act (Article 1475, Civil Code of the Philippines).”

Where, therefore, is the situs of tax in the sale of articles of commerce for purposes of LBT?

In Allied Thread Co., Inc. and Ker & Company, Ltd. v. Hon. City Mayor of Manila, et al., (G.R. No. L-40296, 21 November 1984, 133 SCRA 339,343) it was established that the situs is the place of the consummation of the sale:

“The gauge for taxability does not depend on the location of the office, but attaches upon the place where the respective sale transaction(s) is perfected and consummated (See Koppel (Phil.) vs. Yatco, 77 Phil. 496 [1946]).”

The Koppel case (supra.) underscores that “the merchants’ sales tax attached upon the happening of the respective sales of the ‘commodities, goods, wares, and merchandise’ involved, and that such ‘sales’ took place upon the perfection of the corresponding contracts.”

In Philippine Match Co., Ltd. v. City of Cebu (G.R. No. L-30745, 18 January 1978, 81 SCRA 99) the Supreme Court explained and clarified that the delivery of the sold article of commerce to a locality outside of the place of the consummation of sale would not place those sales beyond the taxing power of the place of consummation of sale, because it is the same consummated sale from the locality of origin, thus:

“Applying that jurisdictional test to the instant case, it is at once obvious that the sales of matches to customers outside of Cebu City, which sales were booked and paid for in the company’s branch office in the city, are subject to the city’s taxing power.

The sales in the instant case were in the city and the matches were stored in the city. The fact that the matches were delivered to customers, whose places of business were outside of the city, would not place those sales beyond the city’s taxing power. Those sales formed part of the merchandising business being assigned on by the company in the city. In essence, they are the same as sales of matches fully consummated in the city.

The same Philippine Match Co. case concludes that “because the sellers’ place of business is in Cebu City, it cannot be sensibly argued that such sales should be considered as transactions subject to the taxing power of the political subdivisions where customers resided and accepted delivery of the matches sold.”

Thus, the situs for purposes of assessment, allocation and collection of LBT rests in the determination of where the sale of an article of commerce is consummated not where it may be later on delivered.

In resolve, when there is no sale consummated in an LGU, there is no liability to pay LBT thereat.