G.R. No. 211093 - Mindanao Shopping Destination Corp. vs. Duterte

Case Summary (G.R. No. 211093)

Key Dates and Procedural Posture

Original local ordinance at issue enacted November 16, 2005; published December 23–25, 2005.
Petitioners appealed to the Department of Justice (DOJ), which dismissed the appeal for procedural defects (July 12, 2006 resolution); Office of the President (OP) dismissed appeal on the merits (July 2, 2007; denial of reconsideration October 31, 2007).
Petitioners sought relief from the Court of Appeals, which affirmed the OP decision (August 29, 2013; reconsideration denied January 22, 2014).
Petition for review on certiorari was filed before the Supreme Court; the Supreme Court issued the dispositive ruling (decision rendered June 6, 2017, applying the 1987 Constitution).

Primary Legal Instruments and Constitutional Basis

1987 Constitution (local autonomy and taxing authority under Article X, Section 5).
Republic Act No. 7160, The Local Government Code of 1991 (LGC): relevant provisions include Sections 131 (definitions; wholesale/retail), 143 (tax on business), 151 (scope of city taxing powers), and 191 (limits on adjustments of tax rates).
Batas Pambansa Blg. 337 (old Local Government Code, pre‑1992) referenced for temporal context.

Facts Relevant to the Tax Change

Under the pre‑LGC Davao City ordinance (Ordinance No. 230, Series of 1990), wholesalers and retailers had been treated together and effectively subject to the same tax rate (retailers paying 50% of 1% = 0.5% for certain brackets).
The 2005 ordinance, implementing tax provisions aligned with R.A. 7160, established separate classifications and tax bases for wholesalers and retailers. Section 69(d) initially set retailers with gross receipts over P400,000.00 at 1.5% (later amended by Ordinance No. 0253, Series of 2006 to 1.25%).
Petitioners contended the new rates represented an excessive, unconstitutional increase that violated Section 191 of the LGC (which limits adjustments to not more than once every five years and not exceeding 10% of rates fixed under the Code), and related LGC provisions and constitutional protections against unjust/confiscatory taxation.

Issues Presented to the Court

Whether the Court of Appeals erred in upholding the validity of the ordinance and the local council's exercise of taxing power despite alleged illegality and unconstitutionality.
Whether Section 191 (and related LGC provisions) limited the city’s imposition of the increased tax rate on retailers and whether the city’s implementation violated the LGC or the Constitution.
Whether procedural defects in earlier administrative appeals precluded review on the merits.

Court’s Treatment of Procedural Defects

The Supreme Court deemed procedural challenges (timeliness and technical filing deficiencies before the DOJ) moot and academic because the Office of the President and the Court of Appeals had proceeded to decide the substantive issues on the merits. The Court therefore addressed the substantive issues directly.

Core Analytical Framework Employed by the Court

Presumption of constitutionality: ordinances and statutes are presumed valid; the party challenging must prove clear and unequivocal unconstitutionality.
Distinction between (a) an initial implementation of LGC‑compliant tax classifications/rates and (b) an adjustment of an existing LGC‑authorized tax rate governed by Section 191. Section 191 applies where there exists (i) an initial tax ordinance already imposing a tax in accordance with the LGC, and (ii) a later ordinance that effects an adjustment in the tax rate of that same class.

Majority Reasoning on Classification and Section 191

The Court concluded that Davao City’s pre‑LGC ordinance (1990) was enacted before R.A. 7160 and therefore was not an ordinance “imposing a tax in accordance with the provisions of the LGC.” The 2005 ordinance, in the Court’s view, represented the city’s initial implementation of the LGC’s taxonomy and tax scheme for wholesalers and retailers.
Because the 2005 ordinance established a new tax base and tax rate for retailers consistent with the LGC definitions and classifications (retail vs. wholesale), the Court held Section 191’s limitations on adjustments did not apply to this initial implementation. Section 191, the majority said, presupposes application where an LGC‑compliant tax already exists and is being adjusted.
The change that produced a higher tax liability for the petitioners was characterized as incidental to a lawful reclassification and not as a prohibited unilateral increase of an existing LGC tax rate. The reclassification merely corrected an earlier error of lumping wholesale and retail under a single tax treatment that predated the LGC.

Majority Considerations on Reasonableness, Equality and Limits

The Court emphasized that the reclassification and separate taxation of wholesalers and retailers are reasonable classifications: they rest on substantial distinctions, are germane to the purpose of the law, are not limited to existing conditions only, and apply equally to members of the same class.
The new retail tax rate under the amended ordinance (1.25%) remained below the maximum permitted for cities under the LGC (1.5% for retailers with gross receipts over P400,000), which supported the conclusion that the ordinance was not confiscatory or unconstitutional.
Nonetheless, the Court recognized equity concerns given the prolonged period during which Davao City had not implemented LGC tax classifications and thereby allowed retailers to enjoy lower taxes. Balancing the City’s ability to rectify revenue shortfalls and the taxpayers’ legitimate expectations, the Court stated that the City should have phased in the higher rate rather than immediately imposing a straight 1.25% at initial implementation.

Prescriptive Remedy Adopted by the Court

The Supreme Court partially granted relief by modifying the effective tax rate to be imposed on the petitioners: the 1.25% rate was reduced to 1.21%. The Court affirmed the decisions of the Court of Appeals and the Office of the President except for that modification.
The Court articulated a staggered approach as equitable and consistent with Section 191 principles once the LGC framework is being implemented late: starting with the LGC minimum of 1.0% for retailers (for the first five‑year adjustment period from initial implementation), then 1.1% for the following five years, and reaching 1.21% for the next period—illustrating how, given elapsed time since implementation

Case Syllabus (G.R. No. 211093)

Procedural Posture

Petition for Review on Certiorari under Rule 45 seeking reversal of the Court of Appeals Decision dated August 29, 2013 and Resolution dated January 22, 2014 in CA-G.R. SP No. 101482, which affirmed the Office of the President Decision dated July 2, 2007 and Resolution dated October 31, 2007.
Petitioners are seven corporations engaged in retailing in Davao City: Mindanao Shopping Destination Corporation; Ace Hardware Philippines, Inc.; International Toyworld, Inc.; Star Appliance Center, Inc.; Surplus Marketing Corporation; Watsons Personal Care Stores (Philippines), Inc.; and Supervalue, Inc.
Procedural history includes: enactment and publication of Davao City Ordinance No. 158-05 (Dec. 23–25, 2005); petitioners’ appeal to the Department of Justice (DOJ) MTO-DOJ Case No. 02-2006 dismissed by DOJ-OSec (Resolution dated July 12, 2006) for procedural defects; appeal to the Office of the President (OP) dismissed July 2, 2007 and motion for reconsideration denied Oct. 31, 2007; petition for review to the Court of Appeals dismissed Aug. 29, 2013 and reconsideration denied Jan. 22, 2014; the present petition to the Supreme Court resulted in Decision dated June 6, 2017.

Facts

On November 16, 2005, the Sangguniang Panglungsod of Davao City enacted Davao City Ordinance No. 158-05, Series of 2005, titled “An Ordinance Approving the 2005 Revenue Code of the City of Davao, as Amended,” attested by then Vice‑Mayor Hon. Luis B. Bonguyan and approved by then City Mayor Hon. Rodrigo R. Duterte.
The Ordinance was published in the Mindanao Mercury Times for three consecutive days: December 23, 24 and 25, 2005, and thus took effect after publication.
Petitioners were previously taxed under Davao City Ordinance No. 230, Series of 1990 at a rate amounting effectively to 50% of 1% (0.5%) of gross sales/receipts for the relevant tax bracket.
Section 69(d) of Davao City Ordinance No. 158-05 initially provided a tax schedule on retailers: more than P50,000 but not over P400,000 — 2%; in excess of P400,000 — 1 1/2% (1.5%).
Petitioners challenged Section 69(d) as unconstitutional and violative of RA No. 7160 (Local Government Code, “LGC”), arguing the increase to 1.5% (later amended to 1.25%) constituted an adjustment in excess of the limitation in Section 191 of the LGC.
Petitioners’ DOJ appeal was initially filed by registered mail (mailed Jan. 24, 2006) without verification/certification of non‑forum shopping and postal money order for fees; those attachments were mailed Jan. 25, 2006 with a covering manifestation. Respondents alleged untimeliness for failure to pay filing fees within prescribed period.
DOJ-OSec dismissed the appeal (Resolution dated July 12, 2006) and denied motion for reconsideration.
Davao City Ordinance No. 0253, Series of 2006 (Amended Ordinance, dated Sept. 26, 2006) amended Section 69(d) reducing the rate on retailers in excess of P400,000 from 1.5% to 1.25% (1 1/4%).
The Office of the President dismissed the appeal on substantive grounds (Decision July 2, 2007) and denied reconsideration (Resolution Oct. 31, 2007).
The Court of Appeals affirmed (Decision Aug. 29, 2013; Resolution Jan. 22, 2014). The Supreme Court subsequently rendered the challenged decision on June 6, 2017.

Statutory Provisions and Ordinance Provisions Quoted in the Record

Section 69 of Davao City Ordinance No. 158‑05 (Imposition of Tax), including subsections:
- (b) Wholesalers, distributors or dealers: gross receipts in excess of P2,000,000 — at a rate of fifty (50%) percent of one percent (1%) (i.e., 0.5%).
- (d) Retailers: More than P50,000 but not over P400,000 — 2%; in excess of P400,000 — 1 1/2% (as originally enacted), later amended to 1 1/4% by Ordinance No. 0253, Series of 2006.
Section 191, Local Government Code (RA No. 7160): local government units may adjust tax rates not oftener than once every five (5) years, and in no case shall such adjustment exceed ten percent (10%) of the rates fixed under the Code.
Section 143(d), Local Government Code (municipal tax on retailers): P400,000.00 or less — 2.00%; more than P400,000 — 1.00%.
Section 151, Local Government Code: scope of taxing powers — cities may levy taxes that provinces or municipalities may impose and the rates cities may levy may exceed the maximum rates allowed for the province or municipality by not more than fifty percent (50%) (except professional and amusement taxes).
Section 131 definitions (RA No. 7160): “Retail” means sale where purchaser buys commodity for own consumption; “Wholesale” means sale where purchaser buys or imports commodities for resale to persons other than the end user.

Petitioners’ Contentions

Petitioners contend Section 69(d) of Davao City Ordinance No. 158‑05 is unconstitutional, illegal, unjust, excessive, oppressive and confiscatory, and contrary to the 1987 Constitution and the LGC.
Petitioners assert the new ordinance increases their tax burden from 0.5% (50% of 1%) under the old ordinance to 1.5% (or as later amended, 1.25%), an increase alleged to exceed the maximum allowable adjustment under Section 191 of the LGC.
Petitioners maintain that the ordinance effect constitutes an adjustment exceeding the 10% cap (0.15% of the 1.5% maximum) or, alternatively, an illegal increase from the previous rate.
Petitioners challenged failure to timely comply with procedural requirements before DOJ, but sought relief on substantive constitutional and statutory grounds.

Respondents’ Contentions (City of Davao and Officials)

Respondents assert the new tax ordinance corrects classification and implements the tax provisions of the LGC; the old ordinance (1990) predated RA 7160 and had lumped wholesalers and retailers under one tax and one rate.
Respondents maintain that the ordinance’s adjustment is an initial implementation of RA 7160 and not an adjustment under Section 191, which presupposes an existing tax ordinance imposed in accordance with the LGC and a subsequent adjustment.
Respondents point out that after amendment by Ordinance No. 0253, Series of 2006, the rate for retailers in excess of P400,000 was 1.25%, which is 0.25% short of the 1.5% maximum cities may impose under the LGC, and therefore within permissible limits.
Respondents contend there was no unilateral increase forbidden by Section 191 because the change involved creation of the appropriate tax base for retailers and wholesalers pursuant to the LGC, not an adjustment to a pre‑existing LGC‑compliant tax.

DOJ and Office of the President Proceedings

Petitioners’ appeal to the Department of Justice (MTO‑DOJ Case No. 02‑2006) was dismissed by DOJ‑OSec in a July 12, 2006 Resolution for procedural defects involving attachments and payment of filing fees; petitioners’ motion for