ILOCOS NORTE ELECTRIC COMPANY, INC., PLAINTIFF-APPELLEE, VS. MUNICIPALITY OF LAOAG AND MUNICIPAL TREASURER OF LAOAG, DEFENDANTS-APPELLANTS.

Ilocos Norte Electric Company versus Municipality of Laoag

The Case

This is a suit by the Ilocos Norte Electric Company against the Municipality of Laoag and its Municipal Treasurer, asking that a municipal tax ordinance be declared null and void and that the taxes paid under it be refunded. The electric company holds a municipal franchise to operate an electric plant, and it claims that a later ordinance imposing an annual rate tax on persons engaged in the business of supplying electricity is void because the company already pays a franchise tax in lieu of all taxes. The case matters because it fixes the boundary between municipal taxing power under the Local Autonomy Act and the exemption enjoyed by franchise holders, and it settles that boundary in favor of the franchise holder.

Procedural History

The electric company filed suit in the Court of First Instance of Ilocos Norte. The trial court found that the company held a municipal franchise granted under Act Number 667 in relation to Act Numbers 1022, 3636 and 3108, and that under Act Number 3636 it paid a tax equal to two per cent of its gross earnings in lieu of any and all taxes. The trial court sustained the company, held the ordinance null and void, and ordered the municipality to refund the amount paid under protest. The Municipality of Laoag appealed directly to the Supreme Court, which decided the appeal on November 23, 1966.

Facts

The Municipality of Laoag, Ilocos Norte, granted the Ilocos Norte Electric Company a municipal franchise, by resolution, to operate an electric plant within the municipality. The franchise was granted pursuant to Act Number 667 in relation to Act Numbers 1022, 3636 and 3108. Under Act Number 3636, the company paid a tax equal to two per cent of its gross earnings, and that tax was expressly in lieu of any and all taxes.

On September 29, 1960, the municipality enacted Ordinance Number 20, series of 1960, imposing an annual rate tax of 800 pesos on persons engaged in the business of supplying electricity. By January 1962, the company had paid under protest the total amount of 1,200 pesos under that ordinance.

The company contended that the ordinance impaired the obligations of its contract, since under Act Number 3636 and under its franchise it was exempted from any tax other than the one provided therein. The municipality asserted its power to tax on the basis of the Local Autonomy Act of 1959, Republic Act Number 2264, section 2. The trial court sustained the company and voided the ordinance, and the municipality appealed.

Issues

• Whether or not the Municipality of Laoag may impose a municipal rate tax on an electric power company that already pays a franchise tax under its franchise and under Act Number 3636.
• Whether or not Ordinance Number 20, series of 1960, is null and void, and whether or not the amount paid under protest must be refunded.

Applicable Provisions

Section 2 of the Local Autonomy Act of 1959, Republic Act Number 2264, provides in part:

Any provision of law to the contrary notwithstanding, all chartered cities, municipalities and municipal districts shall have authority to impose municipal license taxes or fees upon persons engaged in any occupation or business, or exercising privileges in chartered cities, municipalities or municipal districts by requiring them to secure licenses at rates fixed by the municipal board or city council of the city, the municipal council of the municipality, or the municipal district; Provided, however, That no city, municipality or municipal district may levy or impose any of the following: (d) Taxes on persons operating waterworks, irrigation and other public utilities except electric light, heat and power; (j) Taxes of any kind on banks, insurance companies, and persons paying franchise tax.

This is the provision the municipality invoked as the source of its taxing power, and the provision the Court construed to withhold that power over persons paying franchise tax.

Section 10 of Act Number 3636 provides:

In consideration of the franchise and rights hereby granted, the grantee shall pay into the municipal treasury of the municipality in which it is supplying electric current to the public under the franchise, a tax equal to two per centum of the gross earnings sold or supplied under this franchise in said municipality. Said tax shall be due and payable quarterly and, shall be in lieu of any and all taxes of any kind, nature or description levied, established, or collected by any authority whatsoever, municipal or provincial, or insular, now or in the future, on its poles, wires, insulators, switches, transformers and structures, installations, conductors, and accessories, placed in and over and under all public property, including public streets and highways, provincial roads, bridges and public squares, and on its franchise, rights, privileges, receipts, revenues and profits, from which taxes the grantee is hereby expressly exempted.

This is the exemption the company relied upon, and it is the reason the Court held that the later ordinance could not reach the company.

Ruling

On the first issue, the Court held that local governments are without power to tax electric power companies already subject to a franchise tax, unless their franchise allows the imposition of additional tax. The Court found the question already resolved in the Butuan Sawmill case, decided earlier that same year, and adopted its reasoning. The municipality had argued that electric light, heat and power, being an exception in subparagraph (d) to the utilities a municipality cannot tax, fell within its taxing power. The Court rejected that argument for two reasons. First, subparagraph (j) of the same section specifically withholds the imposition of taxes on persons paying franchise tax, like the company. Second, the municipality's reading would result in double taxation, because the Internal Revenue Code already imposes a franchise tax. The Court quoted the governing rule:

The logical construction of section 2(d) of Republic Act No. 2264 that would not nullify section 2(j) of the same Act is that the local government may only tax electric light and power utilities that are not subject to franchise taxes, unless the franchise itself authorizes additional taxation by cities or municipalities.

On the second issue, it followed that Ordinance Number 20 is null and void, and that the amount paid under protest must be refunded. The trial court's decision was affirmed.

Doctrine

A local government may not impose taxes on an electric power company that already pays a franchise tax, unless the franchise itself authorizes additional taxation by the city or municipality. Subparagraph (d) of section 2 of Republic Act Number 2264, which excepts electric light, heat and power from the utilities that cannot be taxed, must be read together with subparagraph (j) of the same section, which withholds taxes of any kind on persons paying franchise tax. To construe the exception in (d) as a grant of power over all electric utilities would nullify (j) and produce double taxation, since the Internal Revenue Code already imposes a franchise tax. The franchise tax paid under Act Number 3636 is in lieu of any and all taxes, and the exemption it carries bars the municipal rate tax.

Disposition

The Supreme Court affirmed the decision of the trial court, without costs, holding the ordinance null and void and sustaining the refund to the electric company; the Municipality of Laoag lost the appeal.

Remember This

The one line to memorize: local governments cannot tax electric power companies already paying a franchise tax unless the franchise itself authorizes additional taxation. Examiners use this case on municipal taxing power under the Local Autonomy Act, on the interplay of subparagraphs (d) and (j) of section 2, and on the franchise tax as a bar to double taxation.