Sy Kiong vs. Sarmiento

A sale of raw materials to a manufacturer who processes them into a finished product for resale is a retail sale, not a wholesale sale, where the purchaser is deemed a consumer of the materials. The character of the purchaser determines the nature of the sale: if the purchaser buys for his own consumption, the sale is retail regardless of quantity; if the purchaser buys for resale, the sale is wholesale. A bakery that purchases flour to manufacture into bread is a consumer of the flour, and the sale is therefore retail.

Petitioner Sy Kiong was the owner of a duly licensed grocery store in the City of Manila and an importer of flour who sold it either to bakeries or to retail dealers for purposes of resale. The Treasurer of the City of Manila assessed against him the sum of P566.50, claimed to represent the deficiency municipal license tax due on his gross sales made to retail dealers for purposes of resale. The assessment was made under Ordinance No. 2723 of the City of Manila, which subjected the retail gross sales of a grocery store to a license fee but did not define what constituted "retail gross sales." The National Internal Revenue Code likewise provided no definition or pattern for determining whether a sale to a bakery or manufacturer should be considered retail or wholesale for taxation purposes.

Petitioner Sy Kiong was the owner of a duly licensed grocery store in the City of Manila and an importer of flour who sold it either to bakeries or to retail dealers for the purposes of resale. Sometime in September 1948, the Treasurer of the City of Manila assessed against him the sum of P566.50, which was claimed to represent the alleged deficiency municipal license tax due from him on his gross sales made to retail dealers for the purposes of resale. Petitioner, instead of honoring the demand, filed the present action for declaratory relief.

In his answer, respondent admitted all the factual allegations of the complaint but contended that the sales in question are sales at retail and in this sense are subject to the provisions of Ordinance No. 2723, as amended. As the pleadings only raised questions of law, the case was submitted for decision after the parties had submitted their respective memoranda. On March 4, 1949, the court rendered judgment upholding the contention of the petitioner and declaring that he is not liable to pay the tax in question. From this decision respondent appealed.

The only issue involved in the appeal was whether the sales of flour made by petitioner to bakeries to be manufactured into bread are retail or wholesale. The Court noted that the Ordinance under which the municipal license tax was assessed did not contain any definition of "retail gross sale," and the National Internal Revenue Code likewise did not furnish any lead as regards the nature of a sale for purposes of taxation. The Court observed that in many states of the American Union, sales of tangible property to manufacturers, producers, or processors are not taxable as retail transactions because they are considered wholesale transactions, but noted that these transactions are so treated not by judicial interpretation but by express statutory provisions.

• Nature of the Sale: Petitioner argued that his sales of flour to bakeries are wholesale, not retail, because the flour, after its conversion into bread, is resold to the public.
• American Jurisprudence: Petitioner's counsel argued that in many American states, sales of goods which as ingredients or constituents go into and form part of tangible personal property sold by the buyer are not taxable as retail transactions because they are considered wholesale transactions, and that these transactions are considered wholesale either because they are so declared by retail sales statutes of different American States, by administrative rules and regulations promulgated thereunder, or by judicial decisions construing and applying them.

• Nature of the Sale: Respondent contended that the sales in question are sales at retail and in this sense are subject to the provisions of Ordinance No. 2723, as amended.

• Retail vs. Wholesale: Whether the sales of flour made by petitioner to bakeries to be manufactured into bread are retail or wholesale for purposes of municipal license tax under Ordinance No. 2723.

• Retail vs. Wholesale: Retail. The sale of flour to a bakery is a retail sale because the bakery, which purchases flour to be manufactured into bread, is a consumer of the flour, notwithstanding that the bread is later resold to the public. The character of the purchaser, not the quantity of the commodity sold, determines whether a sale is wholesale or retail.

• Retail vs. Wholesale: The Court applied the criterion established in City of Manila vs. Manila Blue Printing Co., which set out two criteria for determining whether a sale is retail or wholesale: one by the quantity, whether small or large, and the other by the nature of the buyer, whether he is a consumer or a merchant who resells to a profit. The Court followed the second criterion, holding that it is the character of the purchaser and not the quantity of the commodity sold that determines if the sale is wholesale or retail. If the purchaser buys the commodity for his own consumption, the sale is considered retail, irrespective of the quantity of the commodity sold; if the purchaser buys the commodity for resale, the sale is deemed wholesale regardless of the quantity of the transaction.

The Court then addressed whether a bakery that purchases flour to be manufactured into bread is a consumer. The Court found persuasive the ruling in Buenaventura vs. Collector of Internal Revenue, wherein the sale of fish to a hotel by a vendor in a public market was held to be a sale at retail and subject to the retail sales tax law, with the implication that the sale of fish to a hotel is retail even if the same is to be sold later in the form of food. The Court found the parallelism between that case and the present one apparent: in one case, the fish is converted into food through certain physical process and suffers an alteration in form before it is sold; a similar situation obtains in the case of a bakery, where the flour is converted into bread through a physical or chemical process and later is sold to the public in the form of bread.

The Court acknowledged that in many states of the American Union, sales of tangible property to manufacturers, producers, or processors are not taxable as retail transactions because they are considered wholesale transactions, but noted that these transactions are so treated not by judicial interpretation but by express statutory provisions. Because Philippine law on the point is silent, the Court did not feel justified to extend the force and effect of American statutes to the jurisdiction, as to do so would be to incorporate into the statutes some legislative matter by judicial ruling, which is beyond the province of the Court.

• Character of the Purchaser Test — The nature of a sale as retail or wholesale is determined by the character of the purchaser, not the quantity of the commodity sold. If the purchaser buys the commodity for his own consumption, the sale is retail irrespective of quantity; if the purchaser buys for resale, the sale is wholesale regardless of quantity. The Court applied this test to hold that a bakery purchasing flour to manufacture into bread is a consumer, making the sale retail.

• Manufacturer as Consumer — A manufacturer who purchases raw materials to be converted into a finished product for resale is a consumer of those raw materials. The Court reasoned that because the flour undergoes a physical or chemical process to become bread before it is resold, the bakery consumes the flour in the manufacturing process, and the sale of flour to the bakery is therefore retail.

• Judicial Restraint in Tax Interpretation — Where a tax statute is silent on a particular point, courts should not extend the force and effect of foreign statutes to the jurisdiction by judicial ruling. The Court declined to adopt American statutory treatment of sales to manufacturers as wholesale transactions because such treatment in the United States is based on express statutory provisions, not judicial interpretation, and Philippine law on the point is silent.

• "There are two criteria by which this can be determined. 'Only is by the quantity, whether small or large; and the other is by the nature of the buyer, whether he is a consumer or a merchant who resells to a profit.' The Court followed the second criterion and held that it is the character of the purchaser and not the quantity of the commodity sold that determines if the sale is wholesale or retail." — This passage articulates the controlling test for distinguishing retail from wholesale sales, which is the ratio decidendi of the case.

• "If the purchaser buys the commodity for his own consumption, the sale is considered retail, irrespective of the quantity of the commodity sold. If the purchaser buys the commodity for resale, the sale is deemed wholesale regardless of the quantity of the transaction." — This is the canonical formulation of the character-of-the-purchaser test, frequently cited in subsequent taxation jurisprudence.

• "The implication of this ruling is that the sale of fish to a hotel is retail even if the same is to be sold later in the form of food." — This passage explains the Court's reliance on Buenaventura vs. Collector of Internal Revenue and establishes the principle that a purchaser who processes goods before resale is nonetheless a consumer of the raw materials.

• "To do so would be to incorporate into our statutes some legislative matter by judicial ruling which is certainly beyond our province to do." — This passage articulates the Court's rationale for declining to adopt American statutory treatment of sales to manufacturers as wholesale transactions, grounding its decision in the principle of judicial restraint.

• City of Manila vs. Manila Blue Printing Co., 74 Phil. 317 — Controlling precedent establishing the two criteria for determining whether a sale is retail or wholesale, with the Court adopting the character-of-the-purchaser test over the quantity-based test.

• Buenaventura vs. Collector of Internal Revenue, 50 Phil. 875 — Persuasive authority holding that the sale of fish to a hotel is a retail sale subject to the retail sales tax law, with the implication that a sale is retail even if the goods are later sold in altered form; the Court found this ruling in point and of persuasive force.

• Ordinance No. 2723, City of Manila — The ordinance under which the municipal license tax was assessed; it subjected the retail gross sales of a grocery store to a license fee but was silent as to what constituted "retail gross sales," leaving the Court to determine the nature of the sales in question.

• Section 194(x), National Internal Revenue Code — The provision defining "manufacturer" for purposes of the specific tax; the Court held that this definition merely gives an idea of who would be considered manufacturers for purposes of paying the specific tax and does not state when a manufacturer should be considered a retail dealer or wholesale dealer of the raw materials used in the process of manufacture.

Paras, C.J., Feria, Pablo, Bengzon, Padilla, and Jugo, JJ., concurred.