G.R. No. L-37684 September 10, 1975
ARABAY, INC., petitioner, vs. THE COURT OF FIRST INSTANCE OF ZAMBOANGA DEL NORTE, BRANCH II, THE CITY OF DIPOLOG and EMILIO L. TAGAILO, in his capacity as City Treasurer of the City of Dipolog, et al., respondents.

FACTS

The Municipality of Dipolog enacted Ordinance No. 19, amending Section 1 of Ordinance No. 53, series of 1964, which imposed a tax on the selling and distribution of refined and manufactured mineral oils, motor and diesel fuels, and petroleum. The tax was based on the monthly allocation actually delivered and distributed for sale, with specific rates per liter or gallon. Arabay, Inc., a distributor of petroleum products, paid taxes under this ordinance from December 1969 to July 1972. Subsequently, Dipolog was converted into a city by Republic Act No. 5520. Arabay, Inc. filed a complaint seeking the annulment of the ordinance and a refund of the taxes paid, arguing that the ordinance imposed a sales tax, which a municipality was prohibited from levying under Section 2 of the Local Autonomy Act ( Republic Act No. 2264 ). The Court of First Instance dismissed the complaint, ruling that the tax was on the privilege of selling, not a sales tax, and that Arabay, Inc. failed to prove otherwise.

ISSUE

The primary issue is whether Ordinance No. 53, as amended, imposes a sales tax, thereby rendering it invalid when enacted by a municipality. A secondary issue is whether Arabay, Inc. is entitled to a refund of the taxes paid.

RULING

The Supreme Court ruled that the ordinance imposes a sales tax and is therefore invalid as enacted by a municipality. The legal logic is anchored on the interpretation of Section 2 of the Local Autonomy Act, which prohibits municipalities from imposing “any percentage tax on sales or other taxes in any form based thereon.” The Court applied the settled doctrine that a municipal tax ordinance prescribing a set ratio between the tax amount and the volume of sales imposes a sales tax. The phraseology of the ordinance—taxing “the selling and distribution” based on “monthly allocation actually delivered and distributed and intended for sale”—reveals a direct dependency on sales volume, characteristic of a sales tax. However, the Court made a critical distinction regarding gasoline. The same proviso in the Local Autonomy Act also prohibits municipalities from imposing taxes on articles subject to specific tax under the National Internal Revenue Code, except gasoline. This exclusion of gasoline from the prohibition implies a deliberate legislative intent to allow municipalities to impose any form of tax on gasoline, including a sales tax. Consequently, while the ordinance was invalid as a municipal enactment for imposing a sales tax on most petroleum products, it was valid concerning gasoline. Therefore, Arabay, Inc. is entitled to a refund of all taxes paid under the ordinance, except the portion attributable to its gasoline sales. The judgment of the lower court was set aside, and the City of Dipolog was ordered to effect the refund accordingly.