The Supreme Court ruled that Lepanto Consolidated Mining Company is liable for the sand and gravel tax imposed by the Province of Benguet, even though the company extracted the materials from its own mining claim and used them exclusively for its mining operations. This decision clarifies that local government units can levy excise taxes on quarry resources extracted within their jurisdiction, regardless of whether the extraction is for commercial purposes or is incidental to the company’s primary business. This ensures that mining companies, despite holding mining lease contracts with the national government, are not exempt from local taxes on extracted resources.

Mining Rights vs. Local Taxes: Who Pays When a Company Extracts Resources on Its Own Land?

Lepanto Consolidated Mining Company held a mining lease contract with the national government, granting it the right to extract mineral deposits within its mining claim in Benguet. The company extracted sand and gravel from this site, using it to back-fill stopes and construct essential structures for its mining operations. The Provincial Treasurer of Benguet demanded payment of sand and gravel tax from Lepanto for the years 1997 to 2000, amounting to P1,901,893.22. Lepanto protested this assessment, arguing that the tax applied only to commercial extractions, not to materials used exclusively for its own mining activities. The central legal question was whether Lepanto, despite its mining lease with the national government, was liable for the local tax imposed by the Province of Benguet on the extraction of sand and gravel used solely for its mining operations.

The Court of Tax Appeals (CTA) initially upheld the assessment, a decision eventually brought before the Supreme Court. Lepanto argued that the tax on sand and gravel should apply only to commercial extractions, where the materials are sold for profit. Since it used the extracted materials solely for its mining operations, Lepanto contended its activities shouldn’t be subject to provincial tax. The Supreme Court disagreed, emphasizing that the tax’s applicability hinged on the Revised Benguet Revenue Code (the revenue code), not solely on the Local Government Code.

The relevant provision of the Local Government Code (Republic Act 7160) states:

Sec. 138. Tax on Sand, Gravel and Other Quarry Resources. – The province may levy and collect not more than ten percent (10%) fair market value in the locality per cubic meter of ordinary stones, sand gravel, earth, and other quarry resources, as defined under the National Internal Revenue Code, as amended, extracted from public lands or from the beds of seas, lakes, rivers, streams, creeks, and other public waters within its territorial jurisdiction.

However, the Court clarified that the Local Government Code serves only as the general law delegating taxing power to the provinces. The specific provisions of the Revised Benguet Revenue Code are what determines tax liability in this instance. The provincial revenue code provided that the subject tax had to be paid prior to the issuance of the permit to extract sand and gravel and enumerated four kinds of permits: commercial, industrial, special, and gratuitous. Special permits covered only personal use of the extracted materials and did not allow the permitees to sell materials coming from his concession.

Lepanto further claimed it was exempt from the tax because its mining lease contract with the national government granted it the right to extract and utilize mineral deposits without needing a separate permit from the local government. Paragraph 9 of its Mining Lease Contract provides that:

This Lease hereby grants unto the LESSEE, his successors or assigns, the right to extract and utilize for their own benefit all mineral deposits within the boundary lines of the mining claim/s covered by this Lease continued vertically downward.

The Court rejected this argument, stating that the mining lease merely acknowledges the national government’s consent to the extraction but doesn’t exempt Lepanto from securing necessary local permits or paying local taxes. The Court emphasized that such an exemption from local taxes should have a clear legal basis, whether in law, ordinance, or the contract itself, which Lepanto failed to demonstrate.

Lepanto’s final argument rested on the principle that a company taxed on its main business should not be taxed again for activities incidental to that main business. Since the extraction and use of sand and gravel were integral to its mining operations, Lepanto argued it shouldn’t be subjected to a separate tax. However, the Court distinguished this case from those involving business taxes. Here, the tax was an excise tax levied on the privilege of extracting sand and gravel, which provincial governments are independently authorized to impose, irrespective of whether it is connected to main business activity.

The Supreme Court, in denying Lepanto’s petition, underscored the province’s authority to levy excise taxes on quarry resources. The decision clarifies the interplay between national mining rights and local taxing powers. This ruling reaffirms that mining companies operating under national leases are not automatically exempt from local taxes for the extraction of quarry resources within their mining claims. It highlights the importance of complying with local government regulations and revenue codes, even when operating under a national mining lease.

This case serves as a reminder for businesses operating in the Philippines to be aware of both national and local regulations that may affect their operations. Companies should carefully review local ordinances and revenue codes to ensure compliance and avoid potential tax liabilities. Understanding the scope of local government taxing powers is crucial for financial planning and risk management. The Court’s decision emphasizes the balance between national development goals, represented by mining leases, and the fiscal autonomy of local government units, which rely on local taxes to fund essential services.

FAQs

What was the key issue in this case?	The key issue was whether Lepanto was liable for the tax imposed by the Province of Benguet on the sand and gravel it extracted from its mining claim and used solely for its mining operations.
What did Lepanto argue?	Lepanto argued that the tax on sand and gravel only applied to commercial extractions, and since they used the materials solely for their mining operations, they should be exempt. They also claimed that their mining lease contract with the national government exempted them from local taxes.
What did the Province of Benguet argue?	The Province of Benguet argued that it had the power to levy taxes on the extraction of sand and gravel within its jurisdiction, regardless of whether it was for commercial purposes or not.
What did the Supreme Court decide?	The Supreme Court ruled in favor of the Province of Benguet, holding that Lepanto was liable for the sand and gravel tax. The Court emphasized that the local tax applied regardless of commercial use.
Why did the Supreme Court rule against Lepanto?	The Court based its decision on the Revised Benguet Revenue Code, which imposed a tax on the extraction of sand and gravel, regardless of the purpose. It also stated that the mining lease contract did not exempt Lepanto from local taxes.
Does a mining lease contract exempt a company from local taxes?	No, a mining lease contract with the national government does not automatically exempt a company from local taxes imposed by local government units. Companies must comply with both national and local regulations.
What is an excise tax?	An excise tax is a tax imposed on the privilege of engaging in certain activities, such as extracting quarry resources. It is different from a business tax, which is levied on the revenue generated by a business.
What is the significance of this case?	The case clarifies the scope of local government taxing power over mining operations and emphasizes the importance of complying with local regulations, even when operating under a national mining lease.
What law gives local governments the power to tax quarry resources?	Section 138 of the Local Government Code (Republic Act 7160) grants provinces the power to levy and collect taxes on sand, gravel, and other quarry resources extracted from public lands within their territorial jurisdiction.

The Lepanto case is a significant reminder that mining companies must be aware of and comply with both national and local laws to ensure smooth and legally sound operations. This decision emphasizes the need for due diligence in understanding local tax ordinances and regulations.

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: Lepanto Consolidated Mining Company vs. Hon. Mauricio B. Ambanloc, G.R. No. 180639, June 29, 2010