In Commissioner of Internal Revenue v. Michel J. Lhuillier Pawnshop, Inc., the Supreme Court ruled that pawnshops are not included in the term “lending investors” for the purpose of imposing a 5% percentage tax under Section 116 of the National Internal Revenue Code (NIRC) of 1977. This decision clarified the tax treatment of pawnshops and affirmed that administrative issuances imposing such tax were invalid, as pawnshops were historically treated differently from lending investors under the law. The ruling emphasized the importance of adhering to the legislative intent and the principle of expressio unius est exclusio alterius in tax law interpretation, thereby providing clarity and protection to pawnshops from unintended tax burdens.

Pawning for Profit: Are Pawnshops Lending Investors in the Eyes of the Taxman?

This case arose from an assessment issued by the Bureau of Internal Revenue (BIR) against Michel J. Lhuillier Pawnshop, Inc. for deficiency percentage tax in 1994, based on Revenue Memorandum Order (RMO) No. 15-91 and Revenue Memorandum Circular (RMC) No. 43-91. These issuances classified pawnshops as lending investors subject to the 5% percentage tax under then Section 116 of the NIRC. Lhuillier protested this assessment, arguing that neither the Tax Code nor the VAT Law expressly imposes this tax on pawnshops, and that RMO No. 15-91 constituted an invalid attempt to create a new tax measure.

The central legal question was whether pawnshops fall within the definition of “lending investors” for the purpose of imposing the 5% percentage tax. The Commissioner of Internal Revenue (CIR) argued that the definition of “lending investors” in Section 157(u) of the Tax Code is broad enough to include pawnshops, whose principal activity is lending money. In contrast, Lhuillier maintained that pawnshops and lending investors have historically been subject to different tax treatments and that RMO No. 15-91 and RMC No. 43-91 were invalid because they were not duly published and exceeded the CIR’s authority.

The Supreme Court sided with Lhuillier, emphasizing the importance of adhering to legislative intent and established legal principles. Building on the principle that tax laws must be interpreted strictly against the government and in favor of the taxpayer, the Court highlighted that pawnshops and lending investors had been treated differently under previous tax codes. For instance, prior to amendments, both the NIRC of 1977 and 1986 subjected them to different fixed tax treatments.

(3) Other Fixed Taxes. – The following fixed taxes shall be collected as follows, the amount stated being for the whole year, when not otherwise specified:

….
(dd) Lending investors –

1. In chartered cities and first class municipalities, one thousand pesos;
2. In second and third class municipalities, five hundred pesos;
3. In fourth and fifth class municipalities and municipal districts, two hundred fifty pesos: Provided, That lending investors who do business as such in more than one province shall pay a tax of one thousand pesos.

….
(ff) Pawnshops, one thousand pesos

This approach contrasts with the CIR’s argument that RMO No. 15-91 and RMC No. 43-91 were merely implementing rules that clarified the tax treatment of pawnshops. The Court determined that the BIR, through these issuances, attempted to expand the scope of Section 116 of the NIRC, which is beyond its authority. Only Congress possesses the power to create new taxes or amend existing tax laws.

Furthermore, the Court invoked the maxim expressio unius est exclusio alterius, noting that Section 116 of the NIRC explicitly mentions dealers in securities and lending investors but omits any reference to pawnshops. The enumeration of specific subjects implies the exclusion of others, supporting the interpretation that the legislature did not intend to include pawnshops within the scope of the percentage tax. Even the BIR itself had previously ruled that pawnshops were not subject to the 5% percentage tax, indicating a consistent interpretation that later rulings contradicted without justification.

Additionally, the Supreme Court found that the BIR’s issuances were invalid due to lack of proper publication. Administrative rules that implement existing law need only be bare issuance, however, these regulations increased burden of those being governed and therefore should’ve undergone requirements of notice, hearing, and publication which should not have been ignored.

FAQs

What was the key issue in this case?	The central issue was whether pawnshops should be classified as “lending investors” for the purpose of imposing the 5% percentage tax under Section 116 of the National Internal Revenue Code. The court ultimately decided they should not.
What did the Court decide?	The Supreme Court ruled in favor of Michel J. Lhuillier Pawnshop, Inc., holding that pawnshops are not subject to the 5% lending investor’s tax. The Court also invalidated Revenue Memorandum Order No. 15-91 and Revenue Memorandum Circular No. 43-91.
What is the principle of expressio unius est exclusio alterius?	This legal maxim means that the express mention of one thing excludes all others. In this case, because pawnshops were not explicitly mentioned in Section 116 of the NIRC, they were excluded from its scope.
Why were RMO No. 15-91 and RMC No. 43-91 invalidated?	These issuances were deemed invalid because they attempted to expand the scope of Section 116 of the NIRC, which is beyond the authority of the CIR. Additionally, they lacked proper publication.
What is the difference between a legislative rule and an interpretative rule?	A legislative rule implements a primary legislation by providing details, whereas an interpretative rule provides guidelines for the law the agency enforces. Legislative rules require public hearing and publication, unlike interpretative rules.
How were pawnshops taxed before this ruling?	Prior to this ruling and the invalidated issuances, pawnshops were subject to a fixed annual tax of P1,000, while lending investors were subject to a 5% percentage tax on their gross income in addition to fixed annual taxes. The law specifically treated the subjects different, but later on the revenue code implied them to be the same through RMC and RMO.
Did Congress intend to include pawnshops as lending investors?	The Court found no clear intention from Congress to treat pawnshops and lending investors the same way. Efforts to amend the NIRC to explicitly include pawnshops as subject to the 5% percentage tax ultimately failed.
What impact did Republic Act No. 7716 have on this issue?	Republic Act No. 7716 repealed Section 116 of the NIRC of 1977, which was the basis for RMO No. 15-91 and RMC No. 43-91. This repeal further undermined the validity of the BIR’s assessment against Lhuillier Pawnshop.

In conclusion, the Supreme Court’s decision in Commissioner of Internal Revenue v. Michel J. Lhuillier Pawnshop, Inc., affirms that pawnshops should not be classified as lending investors for tax purposes under the relevant provisions of the NIRC of 1977. This case underscores the significance of adhering to legislative intent and the importance of due process in tax law implementation. Administrative issuances that contradict the law or attempt to expand its scope without proper authority are deemed invalid and may be challenged by affected parties.

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Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Commissioner of Internal Revenue, vs. Michel J. Lhuillier Pawnshop, Inc., G.R. No. 150947, July 15, 2003