The Supreme Court case of Protector’s Services, Inc. vs. Court of Appeals clarifies that for the purpose of computing percentage taxes for contractors, gross receipts include all amounts received, undiminished by expenses like employee salaries or contributions to SSS, SIF, and Medicare. This means that businesses cannot deduct these costs when calculating their taxable base, ensuring a broader tax base for the government. The decision underscores the principle that contractor’s tax is a tax on the privilege of doing business, calculated on total earnings before deductions for operational expenses.

Security Agency’s Tax Woes: When Does Gross Mean Everything?

Protector’s Services, Inc. (PSI), a security agency, contested deficiency percentage tax assessments from the Bureau of Internal Revenue (BIR) for the years 1983, 1984, and 1985. The core of the dispute lay in whether the salaries of security guards and the employer’s share in Social Security System (SSS), State Insurance Fund (SIF), and Medicare contributions should be included in the computation of PSI’s gross receipts for tax purposes. PSI argued that these amounts were earmarked for other parties and should not be considered part of their taxable income, while the BIR maintained that all amounts received by the contractor should be included.

The case hinges on the interpretation of “gross receipts” under the National Internal Revenue Code (NIRC) and its application to contractors. At the time of the assessment, Section 191 of the Tax Code, later renumbered, imposed a tax on the gross receipts of business agents, including private detective and watchman agencies. The BIR argued, citing its own rulings and jurisprudence, that the salaries paid to security guards are the liability of the agency and should be included in gross receipts.

The Court of Tax Appeals (CTA) dismissed PSI’s petition for review, citing the finality of the assessments due to a late protest and lack of jurisdiction. PSI then appealed to the Court of Appeals (CA), which affirmed the CTA’s decision. The CA held that PSI’s protest was filed beyond the 30-day period from receipt of the assessment notices, thus rendering the assessments final and unappealable. Dissatisfied, PSI elevated the case to the Supreme Court, raising issues regarding the CTA’s jurisdiction, the timeliness of the assessments, and the correctness of including employee salaries and contributions in the gross receipts.

The Supreme Court addressed several critical issues in its decision. First, it examined whether the CTA had jurisdiction to act on PSI’s petition for review. The Court affirmed the lower courts’ findings that PSI’s protest was filed beyond the 30-day period prescribed by the NIRC, thus rendering the assessments final and unappealable. The Court emphasized the importance of adhering to statutory deadlines in tax matters, noting that failure to comply results in the loss of the right to contest assessments.

Regarding the timeliness of the assessments, PSI argued that the government’s right to assess and collect taxes for 1983, 1984, and 1985 had already prescribed, citing Batas Pambansa (BP) Blg. 700, which reduced the period of limitation for assessment and collection of internal revenue taxes from five to three years. However, the Supreme Court clarified that BP 700 applied to taxes paid beginning 1984, meaning that the 1983 assessment was still governed by the original five-year prescriptive period. The Court also dismissed PSI’s denial of receiving the 1985 assessment, citing evidence that it was mailed by registered mail and presumed to have been received in the regular course of mail.

The Supreme Court also addressed the issue of whether the salaries of security guards and employer’s contributions should be included in gross receipts. The Court defined “gross receipts” as all amounts received by the contractor, undiminished by the amount paid to subcontractors. The Court cited consistent BIR rulings that the salaries of security guards are the liability of the agency and therefore includible in its gross receipts for percentage tax purposes.

Moreover, the Court referenced the case of Commissioner of Internal Revenue vs. Court of Appeals, which held that the three-year prescriptive period for tax assessment of contractor’s tax should be computed at the time of filing the “final annual percentage tax return,” when it can be finally ascertained if the taxpayer still has an unpaid tax, and not from the tentative quarterly payments. Building on this principle, the Supreme Court underscored the significance of the final annual tax return in determining the complete tax liability of the business.

Furthermore, the Supreme Court addressed PSI’s argument that the failure of the CIR to commence collection of the deficiency tax means that the right to collect had also prescribed. The court cited Section 271 of the 1986 Tax Code, which provides for the suspension of the running of the statute of limitation of tax collection for the period during which the Commissioner is prohibited from making the assessment or beginning distraint or levy or a proceeding in court, and for sixty days thereafter. The Court found that PSI’s petition before the CTA, seeking to prevent the collection of the assessed deficiency tax, suspended the running of the statute of limitation.

FAQs

What was the key issue in this case?	The main issue was whether the salaries of security guards and employer’s contributions to SSS, SIF, and Medicare should be included in the computation of gross receipts for percentage tax purposes. The court determined that gross receipts include all amounts received, without deduction for these expenses.
What does “gross receipts” mean in this context?	“Gross receipts” refers to all amounts received by the contractor as payment for services, undiminished by the amount paid to subcontractors or expenses like employee salaries and contributions. This definition broadens the base upon which percentage taxes are calculated.
Did Batas Pambansa Blg. 700 affect the assessment period in this case?	No, Batas Pambansa Blg. 700, which reduced the prescriptive period for tax assessment and collection, applied only to taxes paid beginning in 1984. The 1983 assessment in this case was still governed by the original five-year period.
What happens if a taxpayer files a protest late?	If a taxpayer files a protest beyond the 30-day period from receipt of the assessment notices, the assessment becomes final and unappealable. This highlights the importance of adhering to statutory deadlines in tax matters.
How is the prescriptive period for tax assessment of contractor’s tax computed?	The three-year prescriptive period for tax assessment of contractor’s tax should be computed at the time of filing the “final annual percentage tax return,” when the taxpayer’s unpaid tax can be ascertained. It is not computed from the tentative quarterly payments.
What suspends the statute of limitations for tax collection?	The statute of limitations for tax collection is suspended during the period when the Commissioner is prohibited from collecting, such as when a taxpayer files a petition to prevent collection. This prevents taxpayers from delaying payment indefinitely.
Why were the BIR’s rulings given weight in this case?	The BIR’s rulings were given weight because they represent the agency’s interpretation and implementation of the tax code. Courts often defer to the expertise of administrative agencies in interpreting and applying laws within their jurisdiction.
What is the practical implication of this ruling for security agencies?	Security agencies must include the salaries of their security guards and the employer’s share in SSS, SIF, and Medicare contributions in their gross receipts for percentage tax purposes. This increases their tax liability but reflects a broader definition of gross receipts.

In conclusion, the Supreme Court’s decision in Protector’s Services, Inc. vs. Court of Appeals reinforces the principle that gross receipts for tax purposes encompass all amounts received by a contractor, without deductions for operational expenses. The ruling provides clarity on the computation of percentage taxes for contractors and underscores the importance of adhering to statutory deadlines in tax matters. This case serves as a reminder for businesses to accurately calculate their gross receipts and comply with tax regulations to avoid deficiency assessments and penalties.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Protector’s Services, Inc. vs. Court of Appeals, G.R. No. 118176, April 12, 2000