G.R. No. L-12738; January 8, 1919
WALTER E. OLSEN & CO., plaintiff-appellant, vs. JAMES RAFFERTY, Collector of Internal Revenue of the Philippine Islands, defendant-appellee.

FACTS:
The facts were stipulated. The case involves the question of whether merchandise generally subject to internal revenue tax is exempt from such tax when sold to the United States Army or Navy for resale to individuals through post exchanges or ship’s stores. The plaintiff-appellant claimed the exemption under the relevant law. The lower court ruled against the exemption, prompting this appeal.

ISSUE:
Whether merchandise sold to the United States Army or Navy, but intended for resale to individuals through post exchanges or ship’s stores, is exempt from the payment of internal revenue tax under the law.

RULING:
No. The Supreme Court affirmed the lower court’s decision. The exemption under Section 55 of Act No. 2339 applies only to articles “sold and delivered directly to the United States Army or Navy for actual use or issue by the Army or Navy.” While post exchanges and ship’s stores are institutions within and controlled by the Army and Navy, sales made through them to individual soldiers and sailors are not sales “directly” to the Army or Navy for its “actual use or issue.” Such sales are for the benefit of the exchanges and the individuals, not for the institutional use of the Army or Navy itself. The funds involved are not supplied by nor do they become part of the general funds of the Army or Navy. Therefore, the merchandise is not exempt from the internal revenue tax.