G.R. No. 250287 - Fopalan vs. Fopalan

Case Digest (G.R. No. 250287)
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Facts:

Parties Involved

Petitioners:

Mindanao Shopping Destination Corporation
Ace Hardware Philippines, Inc.
International Toyworld, Inc.
Star Appliance Center, Inc.
Surplus Marketing Corporation
Watsons Personal Care Stores (Phils.), Inc.
Supervalue, Inc.

Respondents:

Hon. Rodrigo R. Duterte, in his capacity as Mayor of Davao City
Hon. Sara Duterte, in her capacity as Presiding Officer of the Sangguniang Panlungsod
The Sangguniang Panlungsod (City Council) of Davao

Background and Chronology

Enactment of Ordinance

On November 16, 2005, the Davao City Sangguniang Panlungsod enacted Ordinance No. 158-05, Series of 2005 (also known as “An Ordinance Approving the 2005 Revenue Code of the City of Davao”) after due notice and hearing.
The ordinance was attested by the Vice-Mayor and approved by the then City Mayor.
It took effect after publication in the Mindanao Mercury Times for three consecutive days (December 23–25, 2005).

Specific Provision at Issue

Section 69 (d) of the ordinance imposed a graduated business tax on retailers based on their gross sales/receipts of the preceding year.
The provision set the rates as:

2% for gross sales/receipts exceeding P50,000 but not over P400,000.00
1½% for gross sales/receipts in excess of P400,000.00

The prior tax rate under the old Davao City Ordinance No. 230 (Series of 1990) was substantially lower (50% of 1% or 0.5%) for retailers.

Petitioners’ Grievances

Petitioners argued that the new rate increased their tax burden by 200% from the previous rate.
They claimed that such increase was not permissible under Republic Act (RA) No. 7160 (the Local Government Code or LGC).
The petition sought to declare Section 69 (d) as null and void ab initio on the grounds of unconstitutionality and illegality.

Procedural Developments

Petitioners filed an appeal with the Department of Justice (DOJ) under docket MTO-DOJ Case No. 02-2006, asserting unconstitutionality and procedural irregularities (failure to attach a verification/certification of non-forum shopping and a postal money order with the initial filing).
Respondents argued that the appeal was untimely due to the delay in submitting the required attachments; however, both the Office of the President (OP) and later the Court of Appeals ruled on the substantive merits of the case rather than on the technical default.

Amendments to the Initial Ordinance

On September 26, 2006, Davao City enacted Ordinance No. 0253, Series of 2006, which amended Section 69 (d), reducing the rate on retailers from 1½% to 1¼%.
This amendment became an important point of contention regarding whether the change satisfied the limitations imposed by the LGC.

Subsequent Judicial Proceedings

Petitioners filed an appeal before the OP which dismissed their appeal on July 2, 2007.
After a failed motion for reconsideration by petitioners (October 31, 2007), the petition was elevated to the Court of Appeals.
On August 29, 2013, the Court of Appeals dismissed the petition with an affirmation of the OP decision.
Petitioners again sought reconsideration, which was denied on January 22, 2014.

Tax Classification and Contentions

Under the old ordinance, wholesalers and retailers were grouped together under one business tax schedule, albeit with the same tax rate.
With the implementation of RA 7160, a clear distinction between wholesalers and retailers was introduced.

The LGC provided for different tax bases and rates for each group.
Petitioners argued that the reclassification and the resultant rate imposition contradicted Section 191 of the LGC, which limits tax rate adjustments.

Petitioners contended that the new ordinance effectively increased their tax rate beyond the allowable adjustment (0.15% or 10% of the maximum 1.5%), thereby violating statutory limits.
Respondents maintained that:

The reclassification corrected an error in the old ordinance.
The imposition of 1¼% was merely an application of the LGC’s prescribed parameters for retailers, not an unwarranted increase.

Issues:

Substantive Validity of the Ordinance

Whether the Court of Appeals, in affirming the decisions of the OP, upheld the ordinance’s validity despite allegations of unconstitutionality and alleged violation of RA 7160.
Whether the reclassification of taxpayers (from a unified category for wholesalers and retailers to separate categories) was proper and in accordance with the LGC.

Application of Section 191 of the Local Government Code

Whether the increase in the tax rate imposed on retailers (from the previous rate to 1½% or then to 1¼% as amended) violated the limitations under Section 191, which restricts adjustments to not more than 10% of the prescribed rate and not oftener than once every five years.
Whether the tax rate adjustment should have been conducted in a staggered manner rather than an immediate imposition.

Procedural and Technical Issues

Whether the procedural deficiencies (e.g., late submission of required attachments and filing fees) should render the appeal moot, especially as the substantive merits were eventually decided by both the OP and the Court of Appeals.

Classification and Tax Basis Issues

Whether the correction from the erroneous grouping of wholesalers and retailers to separate classifications amounts to an impermissible upward adjustment under the LGC.
Determining if petitioners, as retailers, are subjected to the appropriate tax rate and base as mandated by the LGC.

Equal Protection and Reasonableness of Classification

Whether the differentiation between wholesalers and retailers under the new ordinance satisfies the constitutional requirement of equal protection of the law.
Whether the adjustment in tax rates, even though resulting in increased tax liabilities for retailers, is justified by the need to correct a prior misclassification.

Ruling:

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Ratio:

(Subscriber-Only)

Doctrine:

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