LEPANTO CONSOLIDATED MINING COMPANY, PETITIONER, VS. HON. MAURICIO B. AMBANLOC, IN HIS CAPACITY AS THE PROVINCIAL TREASURER OF BENGUET, RESPONDENT.

Lepanto Consolidated Mining versus Ambanloc

The Case

This is a petition for review brought by Lepanto Consolidated Mining Company against the Provincial Treasurer of Benguet, questioning a provincial tax on sand and gravel. The Province assessed Lepanto for quarry materials it extracted from within its own mining claim and used exclusively in its mining operations. The case matters because it fixes the reach of a province's power to tax quarry resources: the tax is an excise tax on the privilege of extraction, it may be imposed even on non-commercial extraction, and a national mining lease does not by itself exempt the mining company from the local levy.

Procedural History

Lepanto questioned the assessment before the Regional Trial Court of Benguet, which ruled that Lepanto was liable for the amount assessed, with interest at two percent per month from the time the tax should have been paid. Lepanto appealed to the Court of Tax Appeals, where the case was raffled to the Second Division. The Second Division affirmed the trial court, modifying only the interest so that it shall not exceed thirty-six months. Lepanto then appealed to the Court of Tax Appeals En Banc. Three justices voted to affirm and three dissented; because the required vote of four members could not be obtained, the En Banc dismissed the appeal, which resulted in the affirmance of the Second Division's decision. Lepanto's motion for reconsideration met the same fate, and the case reached the Supreme Court on appeal.

Facts

The national government issued to Lepanto a mining lease contract covering, among others, its leased mining claim in Mankayan, Benguet. The contract granted Lepanto the right to extract and use for its purposes all mineral deposits within the boundary lines of its mining claim. Upon inquiry, the Mines and Geo-sciences Bureau of the Department of Environment and Natural Resources advised Lepanto that, under its contract, it did not have to secure a permit to extract and use sand and gravel from within the mining claim for its operational and infrastructure needs. Relying on that advice, Lepanto extracted sand, gravel, and other earth materials from the mining site.

Lepanto used the quarried materials to back-fill stopes, replacing what had been mined to maintain the integrity of the ground. It also used sand and gravel to construct and maintain concrete structures needed in its mining operation, such as a tailings dam, access roads, and offices. Using quarry resources readily available within its claim was more practical and cheaper than outsourcing them.

The Provincial Treasurer of Benguet sent a demand letter asking Lepanto to pay sand and gravel tax for the materials it extracted from 1997 to 2000. Lepanto filed a letter-protest, which the Provincial Treasurer denied, insisting on payment. Lepanto then went to court.

Issues

• Whether or not Lepanto is liable for the tax imposed by the Province of Benguet on the sand and gravel that it extracted from within the area of its mining claim and used exclusively in its mining operations.

Applicable Provisions

Section 138 of the Local Government Code, Republic Act 7160, provides:

Section 138. Tax on Sand, Gravel and Other Quarry Resources. The province may levy and collect not more than ten percent (10%) fair market value in the locality per cubic meter of ordinary stones, sand gravel, earth, and other quarry resources, as defined under the National Internal Revenue Code, as amended, extracted from public lands or from the beds of seas, lakes, rivers, streams, creeks, and other public waters within its territorial jurisdiction.

This is the general law delegating to provinces the power to tax the extraction of quarry resources, but the Court held it is not itself the basis for taxing Lepanto.

Section 3 of the Revised Benguet Revenue Code provides:

Section 3. Imposition of Tax. There shall be levied a tax of ten (10) percent of fair market value in the locality per cubic meter of ordinary stones, sand, gravel, earth, and other quarry resources, applied for and expected to be extracted or removed from public lands within the territorial jurisdiction of Benguet Province. This provision may not apply in case of gratuitous permits for government projects within Benguet Province.

This is the actual revenue measure whose scope and validity the Court examined to determine Lepanto's liability.

Section 6 of the same revenue code provides:

Section 6. Surcharges and Interests. Failure to pay the tax as provided herein shall subject the permittee to a surcharge of Twenty-five (25%) percent of the original amount of tax due plus Two (2%) percent per month of the unpaid amount including the surcharges until such amount is fully paid, but in no case shall the total amount or portion thereof exceed thirty-six (36) months.

This fixes the interest and surcharge upheld against Lepanto, capped at thirty-six months.

Ruling

On the first point, Lepanto argued that the tax covered only commercial extractions, since it extracted the materials solely for its mining operations and sold nothing for profit. The Court disagreed. The provincial revenue code required payment of the tax before a permit to extract could issue, and its Article D, Section 2 enumerated four kinds of permits: commercial, industrial, special, and gratuitous. Special permits covered only personal use and did not allow the permittee to sell materials from his concession. Among applicants for permits, only gratuitous permits were exempt from the sand and gravel tax. It follows that persons who applied for special permits needed to pay the tax even though they did not extract for commercial purposes. The tax, therefore, had to be paid regardless of the administrative and reportorial requirements of the revenue code.

On the second point, Lepanto claimed that the tax could be levied only on persons required to apply for permits, and that its mining lease contract with the national government gave it the right to extract and use all mineral deposits without a separate local permit. The Court held that the lease merely declared that Lepanto's extraction and use of mineral deposits bore the consent of the national government, in line with the principle that exploration of natural resources can only be done under the control and supervision of the State. The contract made no mention of any exemption from securing government permits. The Bureau of Mines and Geo-sciences' view applied only to permits under its own administrative order, and the Bureau had no authority to determine the applicability of local ordinances. An exemption from the requirements of the provincial government should have a clear basis in law, ordinance, or the contract itself, and Lepanto failed to show its entitlement to such exemption.

On the third point, Lepanto invoked the principle that when a company is taxed on its main business, it is no longer taxable for an activity that is but a part of, incidental to, and necessary to that main business. The Court held that in the cases where this principle was applied, the taxes stricken down were in the nature of business taxes, because the incidental activity could not be treated as a business separate and distinct from the main business. Here the tax is an excise tax imposed on the privilege of extracting sand and gravel, and provincial governments may levy excise taxes on quarry resources independently from the national government.

Doctrine

A province may levy an excise tax on the privilege of extracting sand and gravel and other quarry resources, and this tax may be imposed even on non-commercial extraction. Under Section 138 of the Local Government Code, the province may levy and collect not more than ten percent of the fair market value in the locality per cubic meter of quarry resources extracted from public lands, without distinguishing between personal and commercial use. The liability is determined by the provincial revenue measure itself, not by the general delegating law. A national mining lease grants the right to extract and use mineral deposits but does not exempt the lessee from local permits or taxes; any exemption must have a clear basis in law, ordinance, or the contract. Finally, the rule that an incidental activity merged in the main business is not separately taxable applies only to business taxes, not to an excise tax on the privilege of extraction.

Disposition

The Court denied Lepanto's petition and affirmed the decision of the Court of Tax Appeals En Banc, holding Lepanto liable for the sand and gravel tax.

Remember This

Memorize this line: the sand and gravel tax is an excise tax on the privilege of extraction, imposable even on non-commercial use, and a national mining lease is no exemption from local taxes. Examiners use this case to test the scope of the provincial taxing power over quarry resources and the limits of the incidental-activity defense against local excise taxes.