Situs rule on local business tax by: Senen M.

Quizon
One of the most contentious issues in local taxation is the taxing jurisdiction
of other local governments over businesses. This issue arises because most busin
ess operations span multiple jurisdictions as evidenced by the presence of a bra
nch, factory, warehouse, or plantation in different localities resulting in a co
nflict among competing local government units (LGUs) as to the exercise of taxin
g power.
To avoid this conflict, Section 150 of the Local Government Code (LGC) of 1991 p
rovides for rules on the situs of local business tax (LBT) particularly, the all
ocation of sales which applies to manufacturers, assemblers, contractors, produc
ers, and exporters with factories, project offices, plants, and plantations loca
ted in different LGUs. These rules are implemented by Article 243 of the Impleme
nting Rules and Regulations (IRR) of the LGC. The Department of Finance has also
prepared specific guidelines on the situs of LBT for certain industries like ba
nks and other financial institutions, insurance companies, exporters, and very r
ecently, mining companies taking into account their peculiarities.
The basic rule in determining the situs of LBT is that all sales made in a locali
ty where there is a branch or sales office or warehouse should be recorded in sa
id branch or sales office or warehouse and the LBT due should be paid to the cit
y or municipality where the same is located. The foregoing rule appears to be st
raightforward but a closer look at the definition of a branch, sales office, and
warehouse under Article 243 (a)(2) and (3) of the IRR of the LGC provides us a
better understanding on how this specific situs rule is implemented.

Under Section 243(a)(1) and (2) of the IRR of the LGC, the term branch or sales
office is defined as a fixed place in a locality which conducts operations of the
business as an extension of the principal office. As further defined by the IRR,
branches or sales offices used only as display areas of the products where no st
ocks or items are stored for sale, although orders for the products may be recei
ved, are not considered branches or sales offices. On the other hand, the term w
arehouse is defined as a building utilized for the storage of products for sale an
d from which goods or merchandise are withdrawn for delivery to customers or dea
lers, or by persons acting in behalf of the business. A warehouse that does not
accept orders and/or issues sales invoices as aforementioned shall not be consid
ered a branch or sales office.
Following the above definition, mere presence of a branch, sales office or wareh
ouse in a locality does not automatically give rise to LBT liability to the host
LGU. The IRR requires that the sales should be recorded in the branch, sales o
ffice or warehouse before it can be considered as such, and for the LGU to be ab
le to collect LBT on such establishment within its territorial boundary. Otherw
ise, the host LGU may only collect Mayors permit fee and other regulatory fees pr
ovided for under the existing local ordinance of the said LGU. This view has be
en consistently expressed by the Bureau of Local Government Finance (BLGF) in th
e various opinions it has issued on the matter.
There are also specific rules if a factory, project office, plant or plantation
is maintained by the taxpayer and 100 percent of the sales are recorded in its p
rincipal office. The LGU where the principal office is located cannot tax 100 p
ercent of its sales. Instead, a sales allocation is required to be applied. In
this regard, Article 243(b)(3) of the IRR of LGC provides that only 30 percent o
f all sales recorded in the principal office shall be taxable in the LGU where i
t is located while the 70 percent shall be taxable in the LGU where the factory,
project office, plant or plantation is located.
In certain cases, even the plantation maintained by a taxpayer and the factory m
ay be situated in s eparate localities. In this particular case, the 70 percent
sales allocation shall be further allocated between the LGUs where the factory a
nd plantation are located i.e., 60 percent should accrue to the city of municipa
lity where the factory is located while 40 percent shall be taxable to the city
or municipality where the plantation is located. It is also possible that two or
more factories, project offices, plants or plantations are located in different
localities. In that case, the 70 percent sales allocation shall be prorated amo
ng the localities in proportion to the volumes of production generated in each l
ocality during the period for which the tax is due.
Despite these rules, many LGUs still believe that they are not getting their pro
portionate share of taxes from business establishments which maintain their phys
ical presence in their locality. Hence, they try to exert their taxing authority
by imposing LBT on all the facilities in their jurisdiction, regardless of the
situs rules. In some cases, they impose LBT on 100 percent of the recorded sales
in the principal instead of applying the mandated sales allocation.
When this happens, a taxpayer should not feel helpless. He can file a protest a
gainst the LBT assessment issued by the local treasurer. Under the rules, the pr
otest to the assessment should be filed within 60 days from the receipt of notic
e of the LBT assessment; otherwise, the assessment shall become final. The prot
est letter shall be persuasive enough, citing the facts of the case, the legal b
asis to dispute the assessment and any other documentary support or issuances.
It is also helpful to secure an opinion from the BLGF on the correct interpretat
ion of the codal provisions in the situation at hand. The taxpayer can use this
opinion to support its position against the LBT assessment, or persuade the conc
erned LGU to reconsider its assessment.