Municipality of San Mateo, Isabela vs. Smart Communications, Inc.

A local government ordinance imposing a regulatory fee enjoys a presumption of validity, and the party challenging the fee bears the burden of proving, by proper evidence, that the amount is unjust, excessive, oppressive, or confiscatory and not commensurate with the cost of regulation. Mere unsubstantiated allegations of excessiveness are insufficient to overcome the presumption; courts will not disturb the discretion of local authorities in setting fee rates absent a clear showing of unreasonableness or constitutional infirmity.

Petitioner Municipality of San Mateo, Isabela, enacted Ordinance No. 2005-491 on 27 June 2005, entitled “An Ordinance imposing Regulatory Fee known as Annual Antenna/Tower Fee for the Operation of All Citizens Band (CB), Very High Frequency (VHF), Ultra High Frequency (UHF) and Cellular Sites/Relay Stations Within the Municipality.” The ordinance was adopted pursuant to the municipality’s power under Section 186 of Republic Act No. 7160 (Local Government Code of 1991) to levy other taxes, fees, or charges. It imposed annual fees of ₱10,000.00 for citizens band radio antenna bases, ₱50,000.00 for VHF/UHF antenna masts, and ₱200,000.00 for tower sites for cell sites/relay stations. Respondent Smart Communications, Inc. operates telecommunications facilities, including cell sites, within the municipality.

• Nature and Purpose of the Ordinance: The Sangguniang Bayan of San Mateo, Isabela, enacted Ordinance No. 2005-491 on 27 June 2005. Its “whereas” clauses stated that due to its location, San Mateo was a strategic area for the installation of repeater/transmitter facilities, that communication facilities such as cellular sites and towers were proliferating, and that these facilities directly or indirectly affected the populace. The declared purpose was to regulate the installation and maintenance of such facilities to ensure the safety of their operations.
• Fee Structure: The ordinance imposed annual fees of ₱10,000.00 for antenna tower bases for citizens band radio, ₱50,000.00 for antenna mast bases/towers for VHF/UHF discs, and ₱200,000.00 for tower sites for cell sites/relay stations.
• Enactment Process: The municipality conducted public and committee hearings on 09 May 2005, with due notice to Smart’s Santiago City branch. The Committee on Rules recommended adoption. The ordinance was published in the 18-24 July 2005 issue of City Star, a newspaper of local circulation in Region 2, and was later validated by the Sangguniang Panlalawigan of Isabela on 21 November 2006.
• Assessment and Non-Payment: After the ordinance took effect, assessment notices were sent to Smart Communications and other affected businesses. Smart was required to pay the ₱200,000.00 annual tower fee. Despite receipt, Smart did not pay. Demand letters were sent on 14 July 2010, 31 July 2010, and 23 February 2011.
• Judicial Challenge: Smart Communications filed a petition for certiorari before the RTC, asserting that the ordinance was unjust, excessive, and confiscatory. It argued that the amount had no reasonable justification and that the imposition was disruptive to its business operations. Smart did not present evidence of the actual cost of operating, regulating, or inspecting its towers, nor did it compare the fee with its annual income from the towers.

• Exhaustion of Administrative Remedies: Petitioner maintained that Smart Communications should have questioned the validity of the ordinance through an appeal to the Secretary of Justice under Section 187 of the Local Government Code, not directly with the courts. The failure to exhaust this remedy was fatal to Smart’s petition.
• Validity of the Regulatory Fee: Petitioner argued that the fee was a valid regulatory measure. It claimed that Smart failed to prove its bare allegations of excessiveness and that the ₱200,000.00 fee represented only 2% of Smart’s gross sales in the preceding calendar year, consistent with the limit under Section 143(h) of the LGC. Petitioner further contended that Smart should have presented evidence that its gross sales did not exceed ₱10,000,000.00 to demonstrate non-compliance with the LGC.

• Exhaustion of Administrative Remedies: Respondent countered that exhaustion was unnecessary because the challenge involved a purely legal question — the validity of the ordinance on its face.
• Excessive Regulatory Fee: Respondent maintained that the imposition of tower fees, being a regulatory measure, was legally infirm because the fee was excessive. It insisted that the ordinance provided no reasonable justification for the amount, that the wisdom of the imposition was left for Smart to decipher, and that the fee was disruptive to its business operations.

• Nature of the Imposition and Exhaustion of Administrative Remedies: Whether the Court of Appeals erred in entertaining Smart Communications’ appeal despite its failure to exhaust administrative remedies under Section 187 of the Local Government Code, given that the ordinance imposed a fee rather than a tax.
• Validity of the Ordinance — Proof of Excessiveness: Whether the Court of Appeals erred in declaring Ordinance No. 2005-491 unjust, excessive, and confiscatory when Smart Communications failed to present evidence establishing that the fee was not commensurate with the cost of regulation, inspection, and licensing.

• Nature of the Imposition and Exhaustion of Administrative Remedies: The fees imposed under Ordinance No. 2005-491 were regulatory fees, not taxes. The primary purpose of the ordinance, as revealed by its whereas clauses, was to regulate the proliferation of communication facilities and ensure the safety of their operations — a valid exercise of police power. Revenue generation was merely incidental. Because the imposition was a fee and not a tax, the procedure under Section 187 of the LGC, which governs challenges to the constitutionality of a tax ordinance, was inapplicable. Consequently, direct recourse to the courts was proper, and the issue of non-exhaustion of administrative remedies required no further resolution.
• Validity of the Ordinance — Proof of Excessiveness: Smart Communications failed to overcome the presumption of validity that attaches to the ordinance. The alleged invalidity did not appear on the face of the ordinance; it contravened no constitutional or statutory provision and was not per se unreasonable, oppressive, or discriminatory. As the party assailing the ordinance, Smart bore the burden of proving that the fee was not commensurate with the cost of regulation, inspection, and licensing as required by Section 147 of the LGC. Beyond bare and self-serving allegations, Smart presented no evidence — such as its own regulatory, inspection, and licensing costs, a comparison with the towers’ annual income, or any other data — to demonstrate excessiveness. In the absence of such proof, courts are bound to respect the discretion of local authorities in setting fee rates. The lower courts erred by effectively reversing the presumption of validity and requiring the municipality to justify the fee. Accordingly, the ordinance was declared valid and constitutional. The ordinance also did not encroach on the regulatory powers of the National Telecommunications Commission, as it merely regulated the installation and maintenance of physical structures, not the administrative or technical operations of telecommunications entities.

• Distinction Between a Tax and a Regulatory Fee — The purpose of the imposition determines its nature. If the primary purpose is to generate revenue, or if revenue is at least one of the real and substantial purposes, the exaction is a tax. If the primary purpose is to regulate, the imposition is a regulatory fee, even though revenue is incidentally generated. Consequently, the procedure under Section 187 of the LGC (protest to the Secretary of Justice) applies only to tax ordinances, not to ordinances imposing regulatory fees, against which direct recourse to the courts may be had.
• Presumption of Validity of Ordinances — Every law, including municipal ordinances, enjoys a presumption of constitutionality and validity. The presumption may be overcome only when invalidity or unreasonableness (1) appears on the face of the ordinance, or (2) is established by proper evidence. The burden of proof rests upon the party challenging the ordinance, who must demonstrate a clear and unequivocal breach of the Constitution or the governing statute. Courts will not review the wisdom or propriety of governmental policies and will strike down an ordinance only on grounds of unconstitutionality or illegality, or grave abuse of discretion.
• Test for Validity of a Regulatory Fee — Under Section 147 of the Local Government Code, fees and charges imposed on business and occupation must be reasonable and commensurate with the cost of regulation, inspection, and licensing. If a regulatory fee produces revenue in excess of the cost of regulation, it is considered excessive and fails judicial scrutiny. The assailant must adduce proper evidence of such excessiveness; unsubstantiated allegations are insufficient.
• Deference to Local Legislative Discretion — Local governments are allowed wide discretion in determining the rates of imposable fees. In the absence of proof of unreasonableness, courts are bound to respect the judgment of local authorities. Undue interference with that discretion will warrant review and correction.

• “If the purpose is primarily revenue, or if revenue is at least one of the real and substantial purposes, then the exaction is properly classified as an exercise of the power to tax. On the other hand, if the purpose is primarily to regulate, then it is deemed an exercise of police power in the form of a fee, even though revenue is incidentally generated.”
• “Ordinances that impose regulatory fees do not need to be challenged before the Secretary of Justice. To stress, the procedure found in Section 187 must be followed when an ordinance imposes a tax; the institution of an action in court without complying with the requirements of the provision will lead to the dismissal of the case on the ground of non-exhaustion of administrative remedies. However, when an ordinance imposes a fee, as in this case, direct recourse to the courts may be had without prior protest before the Secretary of Justice.”
• “The presumption of validity is a corollary of the presumption of constitutionality … In effect, it places a heavy burden on the act’s assailant to prove invalidity beyond reasonable doubt; it commands the clearest showing of a constitutional infraction. … To doubt, it has been said, is to sustain.”
• “Besides the self-serving statement that the amount was excessive since there was no substantial comparison between the sum assessed and the cost to operate the tower, SCI showed nothing tending to prove the fee was indeed excessive and unreasonable. … The record, nonetheless, fails to reveal that the imposition was not commensurate with the actual cost of regulation and inspection. Besides SCI’s bare and unsubstantiated allegations, nothing remotely denotes the fee’s excessiveness.”
• “Local governments are allowed wide discretion in determining the rates of imposable fees. In the absence of proof of unreasonableness, courts are bound to respect the judgment of the local authorities. Any undue interference with their sound discretion will imperatively warrant review and correction.”

• Smart Communications, Inc. v. Municipality of Malvar, 727 Phil. 430 (2014) — Followed. This case established the methodology for distinguishing a tax from a regulatory fee by examining the ordinance’s whereas clauses to determine its primary purpose; the same approach was applied to Ordinance No. 2005-491.
• City of Cagayan De Oro v. Cagayan Electric Power & Light Co., Inc., G.R. No. 224825, 17 October 2018 — Followed. The Court adopted its reasoning on the presumption of validity, the burden of proof, and the necessity of evidence to prove excessiveness. The same standard that upheld an annual ₱500.00 fee per electric or telecommunications post was applied to the ₱200,000.00 tower fee.
• Morcoin Co., Ltd. v. City of Manila, 110 Phil. 920 (1961) — Followed. The case provided the evidentiary standard for evaluating fee excessiveness: comparing the fee with the cost of operation or annual income from the regulated item. Its methodology was relied upon to conclude that Smart failed to offer comparable proof.

• Section 5, Article X, 1987 Constitution — Recognizes the power of local government units to create their own sources of revenues and to levy taxes, fees, and charges, subject to congressional guidelines. The provision served as the constitutional foundation for the municipality’s ordinance.
• Section 130(b)(3), Local Government Code (R.A. No. 7160) — Mandates that taxes, fees, charges, and other impositions shall not be unjust, excessive, oppressive, or confiscatory. The Court assessed whether the fee violated this standard.
• Section 147, Local Government Code — Empowers municipalities to impose fees and charges on business and occupation, provided they are “commensurate with the cost of regulation, inspection and licensing.” This was the central statutory test against which the ordinance was measured.
• Section 186, Local Government Code — Authorizes local government units to levy other taxes, fees, or charges, subject to the condition that they not be unjust, excessive, oppressive, confiscatory, or contrary to declared national policy. The ordinance was enacted pursuant to this provision.
• Section 187, Local Government Code — Prescribes the procedure for questioning the constitutionality or legality of a tax ordinance by filing an appeal with the Secretary of Justice within 30 days. The Court held that this provision was inapplicable because the ordinance imposed a regulatory fee, not a tax.

Gesmundo, C.J. (Chairperson), Caguioa, Carandang, and Gaerlan, JJ.