ILOILO BOTTLERS, INC., PLAINTIFF-APPELLEE, VS. CITY OF ILOILO, DEFENDANT-APPELLANT.

Iloilo Bottlers versus City of Iloilo

The Case

This is a tax case that every reviewee should know by heart. Iloilo Bottlers, Incorporated, a corporation that bottles Pepsi-Cola and Seven-Up, sued the City of Iloilo to recover municipal license taxes it had paid under protest. The company had moved its bottling plant out of the city, into the neighboring town of Pavia, and insisted it was no longer taxable. The City of Iloilo said it was, because it was still distributing softdrinks inside city limits. The case matters because it draws the line between a manufacturer that merely sells its own products and a manufacturer that has taken on the separate business of selling — and it reminds us that an excise tax may be levied only where the taxed act is actually performed.

Procedural History

Iloilo Bottlers filed a complaint with the Court of First Instance of Iloilo, seeking to recover the amount it had paid under protest. The parties then submitted a partial stipulation of facts. On the strength of that stipulation, the trial court ruled in favor of the company, declaring it not liable under the ordinance and ordering the City of Iloilo to refund the amount paid. The decision was later amended by order to include amounts the company paid after the complaint was filed. The City of Iloilo appealed to the Court of Appeals, which in turn certified the case to the Supreme Court. The Supreme Court decided the appeal and reversed the trial court.

Facts

The City of Iloilo enacted an ordinance imposing a municipal license tax on persons, firms, or corporations engaged in the distribution, manufacture, or bottling of softdrinks within the jurisdiction of the city. Before September 1966, Santiago Syjuco, Incorporated operated a bottling plant on Muelle Loney Street inside Iloilo City, bottling Pepsi-Cola and Seven-Up, and it religiously paid the city tax. That plant closed and was later sold to Iloilo Bottlers, Incorporated, which continued the bottling operations in the city.

In July 1968, Iloilo Bottlers closed the city plant and transferred its bottling operations to a new plant in Barrio Ungca, Municipality of Pavia, outside the jurisdiction of Iloilo City. From then on, it stopped paying the city tax. The company kept no store or commercial establishment in the city. Instead, it distributed its softdrinks from the Pavia plant by means of a fleet of delivery trucks that went directly to customers in the different towns of Iloilo province, including Iloilo City. Sales were entered into and perfected by route salesmen, and the trucks served as selling units.

The city demanded payment, and the company resisted, invoking several Supreme Court decisions holding that a manufacturer selling its own products is not a distributor. When the city threatened to cancel its business operations, the company paid the first quarter tax for 1972 under protest, and continued paying quarterly under protest. It also paid the national government a manufacturer's sales tax and paid municipal license taxes to the Municipality of Pavia.

Issues

• Whether or not Iloilo Bottlers, Incorporated may be considered engaged in the distribution of softdrinks in Iloilo City, and thus liable under the city ordinance, even after it transferred its bottling plant to Pavia.
• Whether or not the ordinance covers only manufacturers or bottlers whose plants are situated inside the territorial jurisdiction of the city.

Applicable Provisions

Section 1 of Iloilo City Ordinance Number 5, series of 1960, as amended, provides:

Any person, firm or corporation engaged in the distribution, manufacture or bottling of coca-cola, pepsi cola, tru-orange, seven-up and other soft drinks within the jurisdiction of the City of Iloilo, shall pay a municipal license tax of ten (P0.10) centavos for every case of twenty-four bottles; PROVIDED, HOWEVER, that soft drinks sold to the public at not more than five (P0.05) centavos per bottle shall pay a tax of one and one half (P0.015) (centavos) per case of twenty four bottles.

This is the taxing provision whose coverage the Court had to construe.

Section 1-A of the same ordinance provides:

For purposes of this Ordinance, all deliveries and/or dispatches emanating or made at the plant and all goods or stocks taken out of the plant for distribution, sale or exchange irrespective (of) where it would take place shall be covered by the operation of this Ordinance.

This provision shows that the ordinance reaches distribution and sales even where the plant is elsewhere, which bears directly on the situs question.

Ruling

On the second issue first, the Court held that the company's claim was manifestly devoid of merit. The ordinance covers three distinct activities: distribution, manufacture, and bottling. A person engaged in any or all of these activities is subject to the tax. The Court quoted the ordinance:

Any person, firm or corporation engaged in the distribution, manufacture or bottling of coca-cola, pepsi cola, tru-orange, seven-up and other soft drinks within the jurisdiction of the City of Iloilo, shall pay a municipal license tax of ten (P0.10) centavos for every case of twenty-four bottles; PROVIDED, HOWEVER, that soft drinks sold to the public at not more than five (P0.05) centavos per bottle shall pay a tax of one and one half (P0.015) (centavos) per case of twenty four bottles.

Since the company no longer manufactured or bottled inside the city after the transfer, it could not be taxed under the second or third activity. Everything turned, therefore, on whether it was engaged in distribution in the city.

On the first issue, the Court acknowledged that the right to manufacture implies the right to sell the manufactured products, so that for tax purposes a manufacturer does not necessarily become engaged in the separate business of selling simply because it sells what it makes. But a manufacturer may also be considered engaged in the separate business of selling, and to determine this, its marketing system or sales operations must be examined. The Court distinguished two systems. Under the first, the manufacturer enters into sales transactions and invoices them at its main office, with warehouses serving only as storage and delivery points; such an entity is not engaged in the separate business of selling. Under the second, sales are entered into and perfected at stores or warehouses maintained by the company, which serve as selling centers; such an entity is engaged in the separate business of selling.

Applying this to the facts, the Court found that the company's delivery trucks were not used solely to deliver softdrinks previously sold at Pavia. They served as selling units, what were then called rolling stores. Sales were entered into and perfected by route salesmen, independently of transactions in the main office. The trucks were therefore much the same as the stores and warehouses under the second system. The company was thus engaged in the separate business of distributing softdrinks, independently of its bottling business.

Finally, the Court held that the tax is an excise tax, a tax on the privilege of distributing, manufacturing, or bottling softdrinks. Being an excise tax, it can be levied only when the acts, privileges, or businesses are done or performed within the jurisdiction of the taxing authority. The situs of the act of distributing must be within city limits. Since sales were made by the company in Iloilo City, the Court had no option but to declare it liable under the ordinance.

Doctrine

First, the right to manufacture implies the right to sell the manufactured products, so a manufacturer does not necessarily become engaged in the separate business of selling merely because it sells its own products. Second, to determine whether a manufacturer is also engaged in the separate business of selling, examine its marketing system: if sales are perfected at the main office and warehouses merely store and deliver, there is no separate selling business; if sales are perfected at stores, warehouses, or rolling stores that serve as selling centers, there is. Third, a municipal license tax on distribution, manufacture, or bottling is an excise tax on a privilege, and it may be levied only where the taxed act is performed within the taxing authority's jurisdiction.

Disposition

The Supreme Court reversed the trial court, dismissed the company's complaint, and ordered that the City of Iloilo need not refund the taxes paid, with no costs.

Remember This

Memorize this line: a manufacturer that sells through rolling stores perfecting sales on the road is engaged in the separate business of distributing, and an excise tax may be levied only where that act is done. Examiners like to use this case to test the two marketing systems and the situs rule for municipal license taxes.