G.R. No. 192945 ; September 5, 2012
CITY OF IRIGA, Petitioner, vs. CAMARINES SUR III ELECTRIC COOPERATIVE, INC. (CASURECO III), Respondent.

FACTS

Respondent CASURECO III, an electric cooperative organized under Presidential Decree No. 269, distributes power within Iriga City and several municipalities in Camarines Sur. In 2003, petitioner City of Iriga required CASURECO III to submit gross receipts reports from 1997-2002 to compute local franchise taxes. After assessment, the City made a final demand for payment of franchise taxes for 1998-2003. CASURECO III refused, claiming exemption as a non-profit electric cooperative provisionally registered with the Cooperative Development Authority (CDA). The City filed a collection case before the Regional Trial Court (RTC).
The RTC held CASURECO III liable for franchise taxes from 2000-2003 based on gross receipts from Iriga City and the wider “Rinconada” service area, ruling the tax situs is where the franchise privilege is exercised. Only CASURECO III appealed. The Court of Appeals (CA) reversed the RTC, ruling that as a non-profit entity, CASURECO III did not qualify as a “business enjoying a franchise” under the Local Government Code and was thus exempt. The City’s motion for reconsideration was denied for being filed a day late, prompting this petition.

ISSUE

The core issues are: (1) whether an electric cooperative under P.D. No. 269 is liable for local franchise tax; and (2) whether the situs of the franchise tax is the place where the franchise is exercised, regardless of where services are delivered.

RULING

The Supreme Court granted the petition, reinstating the RTC’s decision on CASURECO III’s tax liability. Initially, the Court noted a procedural flaw: when the RTC decided the case in 2005, Republic Act No. 9282 had already expanded the Court of Tax Appeals’ (CTA) jurisdiction to include local tax cases. Thus, CASURECO III’s appeal should have been filed with the CTA, not the CA. The CA’s decision was consequently void for lack of jurisdiction, rendering the issue of the City’s late motion for reconsideration moot.
On the substantive merits, the Court held CASURECO III liable for local franchise tax. The Local Government Code empowers local governments to impose a tax on businesses enjoying a franchise. The Court clarified that a franchise tax is an excise tax on the exercise of the privilege granted by the franchise. The test for liability is not the taxpayer’s profit motive but whether it is engaged in an activity conducted for profit or not. CASURECO III, by distributing electricity for a fee, is engaged in an activity with a profit objective, making it a “business” subject to the franchise tax under the Code. Its non-profit corporate structure does not negate the commercial nature of its operations. Furthermore, tax exemptions must be granted expressly and categorically. The Court found no such clear statutory provision exempting electric cooperatives like CASURECO III from local franchise taxes. The situs of the tax is correctly the place where the franchise is exercised, which for CASURECO III includes Iriga City.