The Importance of Proper Jurisdictional Appeals in Local Tax Disputes

Municipality of Villanueva, Misamis Oriental v. STEAG State Power, Inc. and Municipality of Tagoloan, Misamis Oriental, G.R. No. 214260, May 03, 2021

Imagine a power plant that spans two municipalities, each vying for a larger share of local business taxes. This real-life scenario unfolded in the Philippines, leading to a pivotal Supreme Court decision that not only clarified the allocation of local business taxes but also underscored the critical importance of jurisdictional appeals in tax disputes.

The case centered on STEAG State Power, Inc. (SPI), a company generating and selling electricity, with its operations straddling the Municipalities of Villanueva and Tagoloan in Misamis Oriental. The core issue was how to fairly allocate the 70% of SPI’s sales for local business tax purposes, as stipulated under Section 150 of the Local Government Code (LGC). The Municipalities disagreed on whether the tax should be divided equally or based on the location of SPI’s main facilities.

Legal Context: Understanding Local Business Tax Situs and Jurisdiction

The concept of situs of tax is crucial in determining where taxes should be paid. Section 150 of the LGC outlines the rules for tax allocation, particularly for businesses like manufacturers and producers. It states:

Section 150. Situs of the Tax. – (a) For purposes of collection of the taxes under Section 143 of this Code, manufacturers, assemblers, repackers, brewers, distillers, rectifiers and compounders of liquor, distilled spirits and wines, millers, producers, exporters, wholesalers, distributors, dealers, contractors, banks and other financial institutions, and other businesses, maintaining or operating branch or sales outlet elsewhere shall record the sale in the branch or sales outlet making the sale or transaction, and the tax thereon shall accrue and shall be paid to the municipality where such branch or sales outlet is located.

(b) The following sales allocation shall apply to manufacturers, assemblers, contractors, producers, and exporters with factories, project offices, plants, and plantations in the pursuit of their business:

(1) Thirty percent (30%) of all sales recorded in the principal office shall be taxable by the city or municipality where the principal office is located; and

(2) Seventy percent (70%) of all sales recorded in the principal office shall be taxable by the city or municipality where the factory, project office, plant, or plantation is located.

However, the case also brought to light the jurisdiction of the Court of Tax Appeals (CTA) under Republic Act No. 9282, which expanded the CTA’s authority to include:

Section 7. Jurisdiction. – The CTA shall exercise:

(a) Exclusive appellate jurisdiction to review by appeal, as herein provided:

(3) Decisions, orders or resolutions of the Regional Trial Courts in local tax cases originally decided or resolved by them in the exercise of their original or appellate jurisdiction;

This provision was pivotal in the Supreme Court’s ruling, emphasizing the need for businesses to understand and adhere to proper jurisdictional procedures when contesting local taxes.

Case Breakdown: A Journey Through the Courts

STEAG State Power, Inc. found itself at the center of a dispute when the Municipality of Villanueva assessed local business taxes on the entire 70% of SPI’s sales, while Tagoloan claimed a share due to the location of SPI’s water intake facility. SPI, under protest, paid the assessed taxes and filed a complaint for refund and consignation with the Regional Trial Court (RTC).

The RTC, in its decision dated October 8, 2010, ruled that the 70% sales allocation should be divided equally between the two municipalities, considering the integral role of both locations in electricity production. The RTC’s decision also mandated the refund of overpayments and the issuance of business permits upon payment of the proper taxes.

Unsatisfied, the Municipality of Villanueva appealed to the Court of Appeals (CA), which modified the RTC’s decision. The CA applied Section 150(c) of the LGC, allocating 60% of the 70% sales to Villanueva (where the power plant is located) and 40% to Tagoloan (where the water intake facility is situated).

The Supreme Court, however, declared the CA’s decision null and void due to lack of jurisdiction. The Court emphasized:

“It is elementary that a judgment rendered by a court without jurisdiction is null and void and may be attacked anytime. It creates no rights and produces no effect.”

The Supreme Court further clarified that:

“Since no proper appeal or petition for review is filed to question the correctness of the decision of the RTC, it has become final and executory.”

Practical Implications: Navigating Local Tax Disputes

This ruling serves as a reminder for businesses operating across multiple jurisdictions to meticulously follow the correct appeal procedures. The decision of the RTC, which divided the tax equally, became final due to the Municipality of Villanueva’s improper appeal to the CA instead of the CTA.

For businesses, this case underscores the importance of understanding local tax laws and the jurisdiction of appellate courts. It is crucial to:

• Identify the correct situs of tax as per the LGC.
• Ensure that any disputes are appealed to the appropriate court, such as the CTA for local tax cases.
• Consult with legal experts to navigate complex tax issues and avoid jurisdictional errors.

Key Lessons:

• Businesses must be aware of the situs of tax and how it applies to their operations.
• Proper jurisdictional procedures are essential in legal disputes, especially in tax matters.
• Seeking professional legal advice can prevent costly mistakes and ensure compliance with tax laws.

Frequently Asked Questions

What is the situs of tax?

The situs of tax refers to the location where a tax is imposed and collected. For businesses, this often relates to where their operations or sales are conducted.

How is local business tax allocated under the Local Government Code?

Under Section 150 of the LGC, 30% of sales are taxable where the principal office is located, and 70% where the factory or plant is located. Special rules apply for operations spanning multiple locations.

What should a business do if it disagrees with a local tax assessment?

A business should file a protest with the assessing municipality and, if necessary, file a case with the Regional Trial Court. Appeals should be directed to the Court of Tax Appeals.

Why is the Court of Tax Appeals important in local tax disputes?

The CTA has exclusive jurisdiction over appeals from RTC decisions in local tax cases, ensuring specialized and consistent rulings on tax matters.

What are the consequences of appealing to the wrong court?

Appealing to the wrong court can result in the decision being declared null and void, as seen in this case, potentially leading to the original decision becoming final and executory.

How can businesses ensure compliance with local tax laws?

Businesses should regularly review the LGC and consult with legal experts to ensure they are correctly allocating taxes and following proper appeal procedures.

ASG Law specializes in local taxation and jurisdictional issues. Contact us or email hello@asglawpartners.com to schedule a consultation.