The Supreme Court ruled that the City of Cagayan de Oro’s Ordinance No. 9503-2005, which imposed a 10% tax on the annual rental income derived from the lease of electric and telecommunication posts, poles, or towers, was excessive and violated Section 143(h) of the Local Government Code. The Court emphasized that while local government units have the power to create revenue sources, this power is subject to limitations prescribed by law. This decision protects businesses from excessive local taxes and clarifies the scope of local government taxing authority.

Pole Tax Power Play: When Local Revenue Measures Exceed Legal Limits

This case revolves around the validity of Cagayan de Oro City Ordinance No. 9503-2005 and whether Cagayan Electric Power and Light Co., Inc. (CEPALCO) was correct in challenging it. The central legal question is whether the city exceeded its authority by imposing a tax that conflicts with the limitations set by the Local Government Code, specifically regarding the allowable tax rate on businesses subject to value-added tax. CEPALCO argued that the ordinance effectively imposed an income tax, which is prohibited under Section 133(a) of the Local Government Code, and that the imposed tax rate was excessive.

The City of Cagayan de Oro, on the other hand, contended that the ordinance was a valid exercise of its power to tax businesses within its jurisdiction. They argued that the tax was not on income but on the privilege of engaging in the business of leasing poles. The city also claimed that the tax rate was within the allowable limits, considering its authority to exceed the rates imposed by provinces and municipalities. However, the Supreme Court sided with CEPALCO, albeit on different grounds than those initially presented by the company.

One crucial aspect of the case was CEPALCO’s failure to exhaust administrative remedies. Section 187 of the Local Government Code mandates that any question on the legality of a tax ordinance must first be raised on appeal to the Secretary of Justice within thirty days of the ordinance’s effectivity. CEPALCO bypassed this step, filing a petition for declaratory relief directly with the Regional Trial Court. The Court acknowledged this procedural lapse, citing Reyes v. Court of Appeals, which emphasized the mandatory nature of these statutory periods. Despite this procedural defect, the Court chose to address the substantive issues raised by CEPALCO, highlighting the significance of the legal questions at stake.

The Supreme Court addressed the scope of a local government’s power to create revenue sources. Section 5, Article X of the 1987 Constitution grants local government units the power to levy taxes, fees, and charges, subject to guidelines and limitations set by Congress. This constitutional grant is complemented by Sections 151 and 186 of the Local Government Code, which define the scope of taxing powers and the power to levy other taxes, fees, or charges. Although the Court agreed that the ordinance was a tax on CEPALCO’s business activity of leasing poles, the power to tax is not absolute, and must fall within the bounds of the law. The court referred to Section 131(d) of the Local Government Code which defines “Business” as “trade or commercial activity regularly engaged in as a means of livelihood or with a view to profit.”

CEPALCO’s claim for tax exemption under Republic Act No. 9284 was also scrutinized. The Court reiterated the hornbook doctrine that tax exemptions are strictly construed against the claimant. The Local Government Code explicitly withdrew tax exemption privileges previously granted, as stated in Section 193:

SEC. 193. Withdrawal of Tax Exemption Privileges. – Unless otherwise provided in this Code, tax exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or juridical, including government-owned or controlled corporations, except local water districts, cooperatives duly registered under R.A. No. 6938, non-stock and non-profit hospitals and educational institutions, are hereby withdrawn upon the effectivity of this Code.

Furthermore, the Court found that the 10% tax rate imposed by Ordinance No. 9503-2005 violated Section 143(h) of the Local Government Code. This section provides that for businesses subject to value-added tax, the tax rate should not exceed two percent of gross sales or receipts of the preceding calendar year. Since the leasing of poles is a business activity subject to value-added tax, the 10% tax rate was deemed excessive and contrary to law. As such, the Court held that the ordinance was invalid. The court said that since the leasing of poles is subject to VAT, “the imposable tax rate should not exceed two percent of gross receipts of the lease of poles of the preceding calendar year.”

The ruling has significant implications for local government taxation and business operations. It clarifies the limitations on local government units’ power to impose taxes, emphasizing that these powers are not unlimited and must comply with the Local Government Code. It also serves as a reminder to businesses to be vigilant in challenging tax ordinances that may exceed legal limits. The Supreme Court emphasized that Section 143 recognizes separate lines of business, and the imposition of taxes must align with the specific nature of each business activity. The fact that the City of Cagayan De Oro required CEPALCO to apply for a separate business permit also highlighted this point.

Finally, the absence of a separability clause in Ordinance No. 9503-2005 led the Court to declare the entire ordinance void. This means that any payments made under the ordinance should be refunded to CEPALCO. This part of the ruling serves as a reminder to local government units to include separability clauses in their ordinances to prevent the entire measure from being invalidated due to a single defective provision. However, the Court clarified that its ruling was without prejudice to the enactment by the City of Cagayan de Oro of a tax ordinance that complies with the limits set by the Local Government Code.

FAQs

What was the key issue in this case?	The key issue was whether the City of Cagayan de Oro’s Ordinance No. 9503-2005, imposing a tax on the lease of electric and telecommunication poles, violated the limitations set by the Local Government Code, particularly Section 143(h).
What is Section 143(h) of the Local Government Code?	Section 143(h) allows municipalities to tax businesses not specified in other paragraphs, but limits the tax rate to a maximum of two percent of gross sales or receipts for businesses subject to excise, value-added, or percentage tax under the National Internal Revenue Code.
Why did the Supreme Court invalidate Ordinance No. 9503-2005?	The Court invalidated the ordinance because its 10% tax rate on rental income from the lease of poles exceeded the 2% limit set by Section 143(h) of the Local Government Code for businesses subject to value-added tax.
What is a separability clause, and why was its absence significant in this case?	A separability clause states that if one provision of an ordinance is found invalid, the remaining provisions remain in effect; its absence led the Court to invalidate the entire ordinance because the defective tax provision could not be severed.
What did the Supreme Court say about CEPALCO’s failure to exhaust administrative remedies?	The Court acknowledged CEPALCO’s failure to appeal to the Secretary of Justice within the prescribed 30-day period, as required by Section 187 of the Local Government Code, but chose to address the substantive issues due to their importance.
Does this ruling prevent the City of Cagayan de Oro from enacting a similar tax ordinance in the future?	No, the ruling does not prevent the city from enacting a new tax ordinance, but it must comply with the limitations set by the Local Government Code, including the 2% tax rate limit for businesses subject to value-added tax.
What is the significance of classifying the lease of poles as a separate line of business?	Classifying the lease of poles as a separate line of business subjects it to the tax rates applicable to that specific activity, which, in this case, is limited to 2% of gross receipts under Section 143(h) of the Local Government Code.
How does this ruling affect other businesses operating in the Philippines?	This ruling clarifies the scope and limitations of local government units’ taxing powers, reminding them to comply with the Local Government Code and protecting businesses from excessive or illegal tax impositions.

In conclusion, the Supreme Court’s decision in Cagayan Electric Power and Light Co., Inc. v. City of Cagayan de Oro underscores the importance of adhering to the limitations prescribed by the Local Government Code when local government units exercise their power to tax. This ruling serves as a crucial reminder to both local governments and businesses to ensure compliance with the law.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

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: Cagayan Electric Power and Light Co., Inc. vs. City of Cagayan de Oro, G.R. No. 191761, November 14, 2012