VICTORIAS MILLING CO., INC., PETITIONER, VS. COMMISSIONER OF INTERNAL REVENUE, ET AL., RESPONDENTS; COMMISSIONER OF INTERNAL REVENUE, PETITIONER VS. VICTORIAS MILLING COMPANY, E…

Victorias Milling versus Commissioner of Internal Revenue

The Case

This is a tax case between Victorias Milling Company and the Commissioner of Internal Revenue, decided by the Supreme Court in February 1967. The milling company imported sugar bags and materials, used them as containers for the sugar it sold, and paid the advance sales tax under protest; it then asked for a refund. The Commissioner insisted the bags were imported for sale and were taxable in themselves. The case matters because it fixes the boundary between the percentage tax on sugar and the sales tax on containers, and because it tells us when a tax refund carries interest — only when the collector has been arbitrary.

Procedural History

The milling company brought its claim for refund before the Court of Tax Appeals. The Tax Court ruled that the sugar bags and materials imported from September 1959 to August 1960, and later used and disposed of as containers for the sugar sold, were not subject to advance sales tax, and it ordered the Commissioner to refund the sum of 158,269 pesos and 61 centavos, without interest. Both sides appealed to the Supreme Court. The Commissioner's appeal attacked the ruling that the bags were not taxable; the company's appeal attacked the refusal to award interest. The Supreme Court noted that the issues were identical to those already resolved in an earlier case between the same parties decided on the last day of January 1967, and it decided the two appeals together.

Facts

Victorias Milling Company imported sugar bags and materials between September 1959 and August 1960. It used those bags as containers for the sugar it manufactured and sold. The Bureau of Internal Revenue collected the advance sales tax on the importations, and the company paid under protest.

The company then sought a refund before the Court of Tax Appeals. It argued that the bags were not sold separately, since the sugar was taxed on its market value or actual selling price at the time it left the factory or mill warehouse, and there was no showing that the price of the bags was excluded from that value or charged separately from the sugar.

The Tax Court agreed and ordered a refund without interest. Both parties appealed: the Commissioner on the taxability of the bags, the company on the refusal to award interest on the ground that the Commissioner had earlier ruled such importations exempt and had reversed himself.

Issues

• Whether or not the sugar bags and containers imported by the milling company were subject to the advance sales tax, or were instead exempt because the sugar contained in them had already been taxed under the percentage tax on sugar.
• Whether or not the refund of the sales tax collected should be paid with interest, on the theory that the Commissioner was guilty of arbitrariness in reversing his previous ruling of exemption.

Applicable Provisions

Section 188, paragraph (d) of the Internal Revenue Code provides the exemption on which the case turns:

Articles subject to tax under section 189 of this Code shall be exempt from the sales tax.

Because the bags are sold together with sugar that is taxed under Section 189, the exemption reaches the value of the bags contained in the taxed price of the sugar.

Section 189 of the Internal Revenue Code imposes the tax on the manufacturer:

On the gross value in money of all sugar manufactured or milled by the proprietor, based on the market value or actual selling price of the article at the time it leaves the factory or mill warehouse.

Since the tax is measured by the selling price of the sugar as it leaves the mill, and the bags are not shown to be charged separately, the value of the bags is already inside the tax base.

Ruling

On the first issue, the Court held that the bags were not subject to the advance sales tax. The payment by the milling company of the two percent tax under Section 189 on the gross value of all sugar manufactured or milled, based on the market value or actual selling price at the time it leaves the factory or mill warehouse, necessarily excludes from the sales tax the value of the bags in which the sugar is contained. There was no evidence that the price of the bags was not included in the price of the sugar, or that it was charged or sold separately. Alternatively, if the price of the sugar did not include the bags, then the bags were not sold at all, and there was no sale of bags to tax, since no evidence showed a separate consideration for them. The Commissioner's argument that Section 189 mentions only sugar and not containers ignores the absence of proof that the company deducted the value of the bags in reporting the price of the sugar.

On the second issue, the Court refused interest. The mere reversal of a previous ruling is not per se evidence of arbitrariness, nor is the fact that an administrative ruling is later found by the courts not to accord with law. Arbitrariness presupposes an inexcusable or obstinate disregard of legal provisions, and the Court found none here, since the Commissioner's position was to some extent plausible on the strict letter of the law.

Doctrine

First, where a manufacturer pays the percentage tax on the gross value or selling price of the article it produces, and the containers are not shown to be charged or sold separately, the value of those containers is deemed included in the taxed price and is exempt from the sales tax under the express exemption of articles subject to the tax on the manufacturer. Second, if the containers are not included in that price, then they were not sold, and no sales tax may be imposed for want of a sale. Third, a refund of taxes collected does not carry interest merely because the Commissioner reversed an earlier ruling or because his ruling was later held contrary to law; arbitrariness requires an inexcusable or obstinate disregard of the law.

Disposition

The Supreme Court affirmed the decision of the Court of Tax Appeals, upholding the refund of 158,269 pesos and 61 centavos without interest, with no costs.

Remember This

Memorize this line: the value of containers not separately charged is already inside the taxed selling price of the product, so it cannot be taxed again as a sale of bags. Examiners use this case on the sales tax exemption of articles subject to the tax on the manufacturer, and on the rule that a mere reversal of an administrative ruling is not arbitrariness that earns interest on a refund.