Golden Ribbon Lumber Company, Inc. vs. The City of Butuan

An ordinance imposing a tax on lumber sawn, manufactured, or produced is not a license or privilege tax on the business of operating a lumber mill or lumber yard and is ultra vires where the city charter authorizes only the taxing of lumber mills and lumber yards. The nature of a tax is determined by its operation, practical results, and incidents, not by its title. Municipal corporations have no inherent power of taxation; a charter or statute must clearly show an intent to confer the power, and any grant of taxing power is construed strictly, with doubts resolved against the municipality. Only taxes paid under protest are recoverable in the action.

Golden Ribbon Lumber Company, Inc. was a domestic corporation operating a lumber mill and lumber yard in Butuan City. The City of Butuan enacted Ordinance No. 5 in September 1950, later amended by Ordinance Nos. 9, 10, 47, and 49, purportedly under paragraph (p), Section 15 of Republic Act No. 523, the Charter of the City of Butuan, which empowered the municipal board to tax, fix the license fee for, regulate the business and fix the location of lumber mills and lumber yards, among other establishments. The dispute concerned whether that charter provision authorized the City to impose the tax actually levied by the ordinance.

Golden Ribbon Lumber Company, Inc., a duly organized domestic corporation, operated a lumber mill and lumber yard in Butuan City. In September 1950, the City of Butuan enacted Ordinance No. 5, which was later amended by Ordinance Nos. 9, 10, 47, and 49. As amended, the ordinance imposed a tax of two-fifths of a centavo for every board foot of lumber sawn, manufactured, and/or produced, regardless of group; required payment within the first twenty days of the following month; imposed a surcharge of ten percent per month for late payment, not exceeding twenty-five percent; and required every operator to submit a sworn statement of the number of board feet produced during the preceding month. Pursuant to the ordinance, Golden Ribbon paid taxes; the original complaint alleged payments totaling P2,069.26, and an amended complaint later included taxes paid after the original complaint.

Claiming the ordinance was void, Golden Ribbon brought an action in the Court of First Instance of Agusan to have it declared void, recover the amounts paid, and permanently enjoin its enforcement. The City of Butuan and Francisco Magno, in his capacity as City Treasurer, moved to dismiss on the ground that the complaint did not state a cause of action; the motion was denied. In their answer, they alleged as affirmative defenses that the tax assessed under Ordinance No. 5, as amended, was a privilege tax on business and therefore legal under paragraph (p), Section 15, Article III of Republic Act No. 523, the Charter of the City of Butuan, and that because the payments were not made under protest, Golden Ribbon could not ask for their refund. They also counterclaimed for tax delinquencies and surcharges, later alleging in an amended answer and counterclaim that, after deducting taxes paid, a balance of P33,000.74 remained as of March 1958. Golden Ribbon denied the alleged delinquencies and averred that the ordinance was void.

The parties submitted a stipulation of facts on February 16, 1960. They stipulated that Golden Ribbon operated a lumber mill and/or lumber yard within Butuan City; that from September 1956 to March 1958 it sawn, manufactured, and/or produced 7,310,567 board feet of sawn lumber; that it was assessed tax liabilities and surcharges totaling P36,552.84 for that period; that it paid P2,982.11, leaving P33,570.73 unpaid; and that only the May 14, 1958 payment of P1,190.92 was made under protest. The City repeatedly demanded payment of the taxes, while Golden Ribbon refused and demanded that the City cease enforcing the ordinance. The parties agreed that there was no question of fact and submitted two legal questions: whether Ordinance No. 5, as amended, was valid and whether payments made without protest were subject to reimbursement.

• Nature of the Tax: Appellants (the City of Butuan and Francisco Magno, as City Treasurer) maintained that the tax imposed by Ordinance No. 5, as amended, is a license or privilege tax on the business of operating a lumber mill or lumber yard, imposed in the exercise of police power under Section 15 of the Charter of the City of Butuan.
• Charter Authority: Appellants argued that the tax is legal under paragraph (p), Section 15, Article III of Republic Act No. 523, which authorizes the City to tax, fix the license fee for, regulate the business and fix the location of lumber mills and lumber yards.
• Protest Requirement: Appellants contended that Golden Ribbon had no cause of action because the taxes sought to be recovered were not paid under protest.

• Nature of the Tax: Appellee Golden Ribbon Lumber Company, Inc. contended that the questioned ordinance imposes a tax not on lumber mills and lumber yards but on sawn manufactured and/or produced lumber, which are forest products and not among the taxable items enumerated in the charter.
• Ultra Vires: Appellee argued that even under the latest amendment, Ordinance No. 49, which purports to impose the tax on lumber sawn, manufactured, and/or produced, the ordinance is ultra vires because paragraph (p), Section 15 of the Charter authorizes a tax only on lumber mills and lumber yards, not on sawn manufactured or produced lumber.

• Validity of Ordinance No. 5, as amended: Whether Ordinance No. 5, as amended, imposing a tax on lumber sawn, manufactured, or produced, falls within paragraph (p), Section 15 of Republic Act No. 523, the Charter of the City of Butuan, which authorizes the municipal board to tax, fix the license fee for, regulate the business and fix the location of lumber mills and lumber yards.
• Nature of the Tax: Whether the tax imposed by Ordinance No. 5, as amended, is a license or privilege tax on the business of operating a lumber mill or lumber yard, or a tax on lumber sold, manufactured, or produced.
• Refund of Payments Not Made Under Protest: Whether payments made without protest may be refunded in this action.

• Validity of Ordinance No. 5, as amended: No. The ordinance is ultra vires and void because the city charter authorizes only a tax or license fee on lumber mills and lumber yards, not a tax on lumber sawn, manufactured, or produced.
• Nature of the Tax: It is a tax on lumber sold, manufactured, or produced, not a license or privilege tax on the business, as shown by its operation and incidents.
• Refund of Payments Not Made Under Protest: No. The action involved only the recovery of P1,190.92 paid under protest; the contention that appellee had no cause of action because payments were not made under protest is untenable as to that sum.

• Validity of Ordinance No. 5, as amended: The charter provision relied upon, paragraph (p), Section 15 of Republic Act No. 523, empowers the municipal board to tax, fix the license fee for, regulate the business and fix the location of lumber mills and lumber yards. The ordinance, however, did not impose a tax on the business of operating a lumber mill or lumber yard. Its original title was “An ordinance imposing a tax on the sales of lumber”; Section 1 made the tax collectible on every board foot of lumber sold; and Section 4 exempted lumber mills from the quarterly sales tax. The amendatory ordinances did not change the nature of the tax: Ordinance No. 9 changed the title to “produce of lumber mills”; Ordinance No. 10, though entitled as imposing a tax on lumber mills, made the tax collectible on every board foot of lumber sawn, manufactured, or produced; Ordinance No. 47 made it collectible on every board foot of lumber sold and/or shipped; and Ordinance No. 49, while again entitled “An ordinance imposing a tax on lumber mills,” required payment for every board foot of lumber sawn, manufactured, and/or produced. The clear implication was that the tax was on lumber sold, manufactured, sawn, or produced by parties licensed to engage in the trade or business, not on the privilege of operating a lumber mill or lumber yard. The tax was virtually one on “forest products” because manufactured or sawn lumber is considered a forest product under Section 263, National Internal Revenue Code, Chapter V, “Charges on Forest Products,” as construed by Section VI, Regulation No. 85, Department of Finance; municipal corporations are prohibited from imposing charges or taxes of such nature under Commonwealth Act No. 472, Section 3, and Republic Act No. 2264. Thus, the ordinance was ultra vires and void.
• Nature of the Tax: The character or nature of a tax is determined not by the title of the act or ordinance imposing it but by its operation, practical results, and incidents. Neither the original nor the amendatory ordinances showed that the tax was imposed by reason of the enjoyment of the privilege to engage in a particular trade or business. They did not provide that payment was a condition precedent to the enjoyment of the privilege or that non-payment would cancel any previous license. The only consequence of non-payment was a surcharge or liability to penal sanctions under Section 3 of the original ordinance. These circumstances showed the tax was not one imposed for engaging in the business of operating a lumber mill or lumber yard. The City’s power to tax lumber mills and lumber yards did not include the power to tax the sale, production, sawing, and/or manufacture of lumber by them, because municipal corporations have no inherent power of taxation; the charter or statute must clearly show an intent to confer the power, and any such power must be construed strictly, with doubts resolved against the municipality.
• Refund of Payments Not Made Under Protest: The contention that appellee had no cause of action because the taxes sought to be recovered were not paid under protest was untenable. The present action involved only the recovery of P1,190.92, which was paid under protest, as stated in paragraph 8 of the Stipulation of Facts. The payments not made under protest were not the subject of the recovery in this case.

• Municipal corporations have no inherent power of taxation; charter grants are strictly construed — A municipal corporation, unlike a sovereign state, possesses no inherent power of taxation. Its charter or a statute must clearly show an intent to confer the power, and any grant of taxing power must be construed strictly, with any doubt or ambiguity resolved against the municipality. In this case, the City of Butuan relied on paragraph (p), Section 15 of its charter, which authorized it to tax, fix the license fee for, regulate the business and fix the location of lumber mills and lumber yards. Because the ordinance actually taxed lumber sawn, manufactured, or produced, the grant did not clearly authorize it, and the ordinance was ultra vires.
• Nature of a tax is determined by its operation, practical results, and incidents, not by its title — The label or title of an ordinance does not control its tax character. The Court examined the ordinance’s operation: it imposed a tax per board foot of lumber sold, sawn, manufactured, or produced; it did not condition the privilege to operate a lumber mill or lumber yard on payment; and non-payment resulted only in a surcharge or penal liability, not cancellation of a license. Thus, despite titles referring to lumber mills, the tax was not a license or privilege tax on business.
• Tax on forest products — Manufactured or sawn lumber is considered a forest product under Section 263 of the National Internal Revenue Code, Chapter V, “Charges on Forest Products,” as construed by Section VI, Regulation No. 85, Department of Finance. Municipal corporations are prohibited from imposing charges or taxes of such nature under Commonwealth Act No. 472, Section 3, and Republic Act No. 2264. The ordinance was therefore virtually a tax on forest products and invalid.
• Recovery of taxes paid under protest — In this action, only the payment of P1,190.92 made under protest was subject to recovery. The contention that appellee had no cause of action because other taxes were not paid under protest did not defeat the claim for the under-protest payment.

• "The character or nature of a tax is determined not by the title of the act or ordinance imposing it but by its operation, practical results and incidents (Dawson vs. Distilleries, etc., 255 U.S. 288, 65 L. Ed. 638; Association of Customs Brokers, Inc., et al. vs. The Municipal Board, et al., G.R. No. L-4376, May 22, 1953)." — This states the controlling test for classifying a tax and explains why the ordinance was not a privilege tax despite its title.
• "The rule is well-settled that municipal corporations, unlike sovereign states, are clothed with no power of taxation; that its charter or a statute must clearly show an intent to confer that power or the municipal corporation cannot assume and exercise it, and that any such power granted must be construed strictly, any doubt or ambiguity arising out from the terms of the grant to be resolved against the municipality." — This is the Court’s canonical formulation of the strict-construction rule for municipal taxing powers.
• "The clear implication from the original as well as the amendatory ordinances is that the tax imposed is one on lumber sold, manufactured, sawn or produced by parties duly licensed to engage in said trade or business." — This is the ratio for the holding that the ordinance imposed a tax on lumber products rather than on the business of operating a lumber mill or lumber yard.
• "The present action involves only the recovery of the sum of Pl,190.92 which was paid under protest (paragraph 8, Stipulation of Facts, p. 53, Record on Appeal)." — This limits the refund to the under-protest payment and disposes of the argument that non-protest payments barred the action.

• Dawson vs. Distilleries, etc., 255 U.S. 288, 65 L. Ed. 638 — Cited for the rule that the character or nature of a tax is determined by its operation, practical results, and incidents, not by its title.
• Association of Customs Brokers, Inc., et al. vs. The Municipal Board, et al., G.R. No. L-4376, May 22, 1953 — Cited for the same rule on determining the nature of a tax by its operation and incidents.
• Cu Unjieng vs. Patstone, 42 Phil. 818 — Cited for the rule that municipal corporations have no inherent power of taxation, that the charter or statute must clearly show an intent to confer the power, and that grants of taxing power are strictly construed.
• Vega, et al. vs. Municipal Board, etc., 50 O.G. No. 6, p. 2456 — Cited for the same strict-construction rule on municipal taxing powers.

• Paragraph (p), Section 15, Republic Act No. 523 (Charter of the City of Butuan) — Empowers the municipal board to tax, fix the license fee for, regulate the business and fix the location of lumber mills and lumber yards, among other establishments. The Court held this did not authorize a tax on lumber sawn, manufactured, or produced.
• Section 263, National Internal Revenue Code — Manufactured or sawn lumber is considered a forest product under Chapter V, “Charges on Forest Products,” as construed by Section VI, Regulation No. 85, Department of Finance. The Court used this to characterize the ordinance as imposing a tax on forest products.
• Section 3, Commonwealth Act No. 472 — Cited as prohibiting municipal corporations from imposing charges or taxes of the nature of forest-products charges. The Court relied on this to support the invalidity of the ordinance.
• Republic Act No. 2264 — Cited together with Commonwealth Act No. 472, Section 3, as prohibiting municipal corporations from imposing charges or taxes of such nature.

Bengzon, C.J.; Concepcion; Reyes, J.B.L.; Barrera; Regala; Makalintal; Bengzon, J.P.; and Zaldivar, JJ., concurred. Bautista Angelo and Paredes, JJ., took no part.