G.R. No. 33403, September 4, 1930
THIRTY-FIRST INFANTRY POST EXCHANGE and FIRST LIEUTENANT DAVID L. HARDEE vs. JUAN POSADAS, JR., Collector of Internal Revenue

FACTS

The Thirty-First Infantry Post Exchange, an agency of the United States Army operating under Army Regulations and U.S. laws, purchased goods from merchants in the Philippine Islands for resale to Army personnel. The Philippine Collector of Internal Revenue, Juan Posadas Jr., imposed and collected a 1.5% sales tax on these transactions from the merchants, based on Philippine laws (Section 1459 of Act No. 2711 and Act No. 3243), which were ratified by U.S. Congress. The tax increased the cost of goods to the Post Exchange. The plaintiffs sought a writ of prohibition to stop the tax collection, arguing that it constituted a burden on a U.S. government instrumentality.

ISSUE

Whether the Philippine Government may levy a sales tax on merchants for sales made to U.S. Army Post Exchanges in the Philippines.

RULING

NO. The Supreme Court granted the writ of prohibition, holding that the sales tax could not be levied on transactions with the Post Exchange. The Court ruled that the Post Exchange is an instrumentality of the United States government, established to promote the morale and efficiency of the Army. Taxing sales to such an instrumentality directly burdens the U.S. government in the performance of its constitutional functions. Applying the doctrine of intergovernmental immunity, the Court emphasized that a state (or in this case, the Philippine Government) may not tax the means or agencies used by the federal government to execute its powers. The tax, though collected from merchants, effectively increased costs for the U.S. Army, thereby impeding a federal function. The Court distinguished this from the Olsen & Co. vs. Rafferty case involving specific taxes, noting that the sales tax here directly affected government operations. The dissent argued that the tax was valid under Philippine laws ratified by the U.S. Congress, but the majority upheld the immunity of federal instrumentalities from state taxation.