FACTS: On January 10, 2005, the Sangguniang Panlungsod of Cagayan de Oro (City Council) passed Ordinance No. 9503-2005 imposing a tax on the lease or rental of electric and/or telecommunication posts, poles or towers by pole owners to other pole users at ten percent (10%) of the annual rental income derived from such lease or rental. 

The City Council, in a letter dated 15 March 2005, informed appellant Cagayan Electric Power and Light Company, Inc. (CEPALCO), through its President and Chief Operation Manager, Ms. Consuelo G. Tion, of the passage of the subject ordinance.

On September 30, 2005, appellant CEPALCO, purportedly on pure question of law, filed a petition for declaratory relief assailing the validity of Ordinance No. 9503-2005 before the Regional Trial Court of Cagayan de Oro City, Branch 18, on the ground that the tax imposed by the disputed ordinance is in reality a tax on income which appellee City of Cagayan de Oro may not impose, the same being expressly prohibited by Section 133(a) of Republic Act No. 7160 (R.A. 7160) otherwise known as the Local Government Code (LGC) of 1991. CEPALCO argues that, assuming the City Council can enact the assailed ordinance, it is nevertheless exempt from the imposition by virtue of Republic Act No. 9284 (R.A. 9284) providing for its franchise. CEPALCO further claims exemplary damages of PhP200,000.00 alleging that the passage of the ordinance manifests malice and bad faith of the respondent-appellee towards it.

In its Answer, appellee raised the following affirmative defenses: (a) the enactment and implementation of the subject ordinance was a valid and lawful exercise of its powers pursuant to the 1987 Constitution, the Local Government Code, other applicable provisions of law, and pertinent jurisprudence; (b) non-exemption of CEPALCO because of the express withdrawal of the exemption provided by Section 193 of the LGC; (c) the subject ordinance is legally presumed valid and constitutional; (d) prescription of respondent-appellee’s action pursuant to Section 187 of the LGC; (e) failure of respondent-appellee to exhaust administrative remedies under the Local Government Code;(f) CEPALCO’s action for declaratory relief cannot prosper since no breach or violation of the subject ordinance was yet committed by the City.

ISSUE: WON THE ORDINANCE IS VOID. 

HELD: YES. CEPALCO is mistaken when it states that a city can impose a tax up to only one-half of what the province or city may impose. A more circumspect reading of the Local Government Code could have prevented this error.Section 151 of the Local Government Code states that, subject to certain exceptions, a city may exceed by “not more than 50%” the tax rates allowed to provinces and municipalities. A province may impose a franchise tax at a rate “not exceeding 50% of 1% of the gross annual receipts.” Following Section 151, a city may impose a franchise tax of up to 0.0075 (or 0.75%) of a business’ gross annual receipts for the preceding calendar year based on the incoming receipt, or realized, within its territorial jurisdiction. A municipality may impose a business tax at a rate not exceeding “two percent of gross sales or receipts.” Following Section 151, a city may impose a business tax of up to 0.03 (or 3%) of a business’ gross sales or receipts of the preceding calendar year.HcSaAD

CEPALCO also erred when it equates Section 137’s “gross annual receipts” with Ordinance No. 9503-2005’s “annual rental income.” Section 2 of Ordinance No. 9503-2005 imposes “a tax on the lease or rental of electric and/or telecommunication posts, poles or towers by pole owners to other pole users at the rate of ten (10) percent of the annual rental income derived therefrom,” and not on CEPALCO’s gross annual receipts. Thus, although the tax rate of 10% is definitely higher than that imposable by cities as franchise or business tax, the tax base of annual rental income of “electric and/or telecommunication posts, poles or towers by pole owners to other pole users” is definitely smaller than that used by cities in the computation of franchise or business tax. In effect, Ordinance No. 9503-2005 wants a slice of a smaller pie.

However, we disagree with the City of Cagayan de Oro’s submission that Ordinance No. 9503-2005 is not subject to the limits imposed by Sections 143 and 151 of theLocal Government Code.On the contrary, Ordinance No. 9503-2005 is subject to the limitation set by Section 143 (h). Section 143 recognizes separate lines of business and imposes different tax rates for different lines of business. Let us suppose that one is a brewer of liquor and, at the same time, a distributor of articles of commerce. The brewery business is subject to the rates established in Section 143 (a) while the distribution business is subject to the rates established in Section 143 (b). The City of Cagayan de Oro’s imposition of a tax on the lease of poles falls under Section 143 (h), as the lease of poles is CEPALCO’s separate line of business which is not covered by paragraphs (a) to (g) of Section 143. The treatment of the lease of poles as a separate line of business is evident in Section 4 (a) of Ordinance No. 9503-2005. The City of Cagayan de Oro required CEPALCO to apply for a separate business permit.

More importantly, because “any person, who in the course of trade or business . . . leases goods or properties . . . shall be subject to the value-added tax,” the imposable tax rate should not exceed two percent of gross receipts of the lease of poles of the preceding calendar year. Section 143 (h) states that “on any business subject to . . . value-added . . . tax under the National Internal Revenue Code, as amended, the rate of tax shall not exceed two percent (2%) of gross sales or receipts of the preceding calendar year” from the lease of goods or properties. Hence, the 10% tax rate imposed by Ordinance No. 9503-2005 clearly violates Section 143 (h) of the Local Government Code.Finally, in view of the lack of a separability clause, we declare void the entirety of Ordinance No. 9503-2005. Any payment made by reason of the tax imposed by Ordinance No. 9503-2005 should, therefore, be refunded to CEPALCO. Our ruling, however, is made 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.

The Court’s Ruling

Failure to Exhaust Administrative Remedies

Ordinance No. 9503-2005 is a local revenue measure. As such, the Local Government Code applies. IaHCAD

SEC. 187.   Procedure for Approval and Effectivity of Tax Ordinances and Revenue Measures; Mandatory Public Hearings. — The procedure for approval of local tax ordinances and revenue measures shall be in accordance with the provisions of this Code: Provided, That public hearings shall be conducted for the purpose prior to the enactment thereof: Provided, further, That any question on the constitutionality or legality of tax ordinances or revenue measures may be raised on appeal within thirty (30) days from the effectivity thereof to the Secretary of Justice who shall render a decision within sixty (60) days from the date of receipt of the appeal:Provided, however, That such appeal shall not have the effect of suspending the effectivity of the ordinance and the accrual and payment of the tax, fee, or charge levied therein: Provided, finally, That within thirty (30) days after receipt of the decision or the lapse of the sixty-day period without the Secretary of Justice acting upon the appeal, the aggrieved party may file appropriate proceedings with a court of competent jurisdiction.

SEC. 188.   Publication of Tax Ordinances and Revenue Measures. — Within ten (10) days after their approval, certified true copies of all provincial, city, and municipal tax ordinances or revenue measures shall be published in full for three (3) consecutive days in a newspaper of local circulation: Provided, however, That in provinces, cities and municipalities where there are no newspapers of local circulation, the same may be posted in at least two (2) conspicuous and publicly accessible places.

The Sangguniang Panlungsod of Cagayan de Oro approved Ordinance No. 9503-2005 on 10 January 2005. Section 5 of said ordinance provided that the “Ordinance shall take effect after 15 days following its publication in a local newspaper of general circulation for at least three (3) consecutive issues.” Gold Star Daily published Ordinance No. 9503-2005 on 1 to 3 February 2005. Ordinance No. 9503-2005 thus took effect on 19 February 2005. CEPALCO filed its petition for declaratory relief before the Regional Trial Court on 30 September 2005, clearly beyond the 30-day period provided in Section 187. CEPALCO did not file anything before the Secretary of Justice. CEPALCO ignored our ruling in Reyes v. Court of Appeals on the mandatory nature of the statutory periods:

Clearly, the law requires that the dissatisfied taxpayer who questions the validity or legality of a tax ordinance must file his appeal to the Secretary of Justice, within 30 days from effectivity thereof. In case the Secretary decides the appeal, a period also of 30 days is allowed for an aggrieved party to go to court. But if the Secretary does not act thereon, after the lapse of 60 days, a party could already proceed to seek relief in court. These three separate periods are clearly given for compliance as a prerequisite before seeking redress in a competent court. Such statutory periods are set to prevent delays as well as enhance the orderly and speedy discharge of judicial functions. For this reason the courts construe these provisions of statutes as mandatory.

A municipal tax ordinance empowers a local government unit to impose taxes. The power to tax is the most effective instrument to raise needed revenues to finance and support the myriad activities of local government units for the delivery of basic services essential to the promotion of the general welfare and enhancement of peace, progress, and prosperity of the people. Consequently, any delay in implementing tax measures would be to the detriment of the public. It is for this reason that protests over tax ordinances are required to be done within certain time frames. In the instant case, it is our view that the failure of petitioners to appeal to the Secretary of Justice within 30 days as required by Sec. 187 of R.A. 7160 is fatal to their cause.As in Reyes, CEPALCO’s failure to appeal to the Secretary of Justice within the statutory period of 30 days from the effectivity of the ordinance should have been fatal to its cause.

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