In a dispute between Manila Electric Company (MERALCO) and Lucena City, the Supreme Court addressed whether MERALCO’s electrical facilities should be subject to real property tax. The Court ruled that while MERALCO’s properties are no longer exempt from such taxes under the Local Government Code, the specific tax assessment conducted by Lucena City was invalid due to procedural deficiencies that violated MERALCO’s right to due process. This decision clarifies the scope of local government taxing powers over utility companies but also emphasizes the importance of following proper assessment procedures to protect taxpayers’ rights. Ultimately, the ruling requires Lucena City to conduct a new assessment that complies with the Local Government Code, ensuring fairness and legal compliance.

From Exemption to Assessment: Can MERALCO’s Power Lines Be Taxed?

The case arose when the City Assessor of Lucena assessed real property taxes on MERALCO’s facilities, including transformers, electric posts, transmission lines, insulators, and electric meters, starting in 1992. MERALCO contested this assessment, arguing that these properties were exempt under its franchise and previous court rulings. The legal battle escalated through the Local Board of Assessment Appeals (LBAA), the Central Board of Assessment Appeals (CBAA), and the Court of Appeals (CA), before reaching the Supreme Court. At the heart of the controversy was whether the Local Government Code of 1991 had effectively withdrawn MERALCO’s tax exemption and whether the assessment process complied with due process requirements.

The Supreme Court began its analysis by addressing MERALCO’s compliance with procedural requirements. Section 252 of the Local Government Code requires taxpayers to pay the tax under protest before an appeal can be entertained. In this case, MERALCO posted a surety bond instead of making a cash payment. The Court acknowledged this, noting a previous ruling where a surety bond was considered substantial compliance. By posting the surety bond, MERALCO ensured that the taxes would be paid pending the outcome of the appeal, satisfying the intent of the law. This initial determination allowed the Court to proceed to the substantive issues of the case.

The Court then considered MERALCO’s claim of tax exemption based on its franchise and prior rulings. MERALCO relied on a 1964 Supreme Court decision and subsequent rulings by the CBAA and LBAA that recognized its exemption. However, the Court distinguished these precedents, emphasizing that the legal landscape had changed significantly with the enactment of the Local Government Code. This Code explicitly withdrew all tax exemptions not expressly provided within its provisions. To illustrate this point, consider Section 193 of the Local Government Code:

Section 193. Withdrawal of Tax Exemption Privileges. – Unless otherwise provided in this Code, tax exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or juridical, including government-owned or controlled corporations, except local water districts, cooperatives duly registered under R.A. No. 6938, non-stock and non-profit hospitals and educational institutions, are hereby withdrawn upon the effectivity of this Code.

MERALCO, as a private corporation engaged in electric distribution, did not fall under any of the exemptions listed in the Local Government Code. Therefore, the Court concluded that MERALCO’s exemption under its franchise had been effectively withdrawn. This ruling underscores the principle that tax exemptions must be clear and express, and any ambiguity is resolved against the taxpayer. Furthermore, the Court emphasized the policy of ensuring local government autonomy, which necessitates broadening the tax base to provide local units with sufficient revenue.

Having established that MERALCO’s properties were no longer exempt, the Court examined whether they could be classified as “machinery” subject to real property tax. The Local Government Code defines “machinery” broadly, including equipment that may or may not be attached to real property, and that are directly and exclusively used to meet the needs of a particular industry. The Court noted that MERALCO’s transformers, electric posts, transmission lines, insulators, and electric meters constituted the physical facilities through which it delivers electricity. As such, they could be considered machinery under the Local Government Code, irrespective of their attachment to the land. This interpretation aligns with the legislative intent to expand the tax base and capture properties directly contributing to commercial activities.

In making this determination, the Court addressed MERALCO’s argument that its electric posts were not exclusively used by MERALCO, as other companies also utilized them. The Court deemed this a factual issue outside the scope of its review, emphasizing that such questions are best resolved by local assessors who can gather evidence on property usage. The Court however pointed out that even under the Civil Code which defines what constitutes real property, there are instances when properties are categorized as real for taxation purposes but otherwise considered personal properties.

Despite affirming the potential taxability of MERALCO’s properties, the Supreme Court found critical flaws in the assessment process conducted by the City Assessor of Lucena. The Court held that the appraisal and assessment of MERALCO’s properties were not in accordance with the Local Government Code and violated MERALCO’s right to due process. Sections 224 and 225 of the Local Government Code require individual appraisal and assessment of each machinery item, considering factors such as acquisition cost, economic life, and depreciation. This requirement ensures that the tax assessment is fair, accurate, and based on verifiable data.

The Court found that the City Assessor had failed to provide specific descriptions or identification of the machinery covered by the tax declarations. The assessment lumped all the properties together, without providing details on the number of transformers, electric posts, insulators, or the length of transmission lines. This lack of factual basis rendered the assessment arbitrary and deprived MERALCO of the opportunity to verify the correctness and reasonableness of the valuation. As the court stated, the city assessor should not simply lump together all the transformers, electric posts, transmission lines, insulators and electric meters of MERALCO.

The Court emphasized the importance of a valid notice of assessment, which should inform the taxpayer of the value of the property, the basis for the tax, and the procedures for appealing the assessment. The notice of assessment received by MERALCO lacked essential information, such as specific details about each item of machinery, making it impossible for MERALCO to understand and challenge the assessment effectively. Given these deficiencies, the Court concluded that the assessment violated MERALCO’s right to due process and declared it null and void.

The ruling in this case balances the power of local governments to tax real property with the constitutional right of taxpayers to due process. While the Court affirmed the authority of local governments to tax properties like MERALCO’s electrical facilities, it also underscored the importance of adhering to proper assessment procedures. This decision protects taxpayers from arbitrary or oppressive tax assessments and ensures that the taxing power is exercised fairly and in accordance with the law.

FAQs

What was the key issue in this case?	The key issue was whether MERALCO’s electrical facilities were subject to real property tax under the Local Government Code and whether the assessment process complied with due process requirements.
Did the Supreme Court find MERALCO’s properties to be taxable?	Yes, the Court ruled that MERALCO’s properties were no longer exempt from real property tax under the Local Government Code, as the prior exemptions had been withdrawn.
What is the definition of “machinery” under the Local Government Code?	The Local Government Code defines “machinery” broadly, including equipment that may or may not be attached to real property, and that is directly and exclusively used to meet the needs of a particular industry.
Why did the Court invalidate the tax assessment in this case?	The Court invalidated the assessment because the City Assessor failed to provide specific details about each item of machinery and lumped all the properties together, violating MERALCO’s right to due process.
What is required for a valid notice of assessment?	A valid notice of assessment should inform the taxpayer of the value of the property, the basis for the tax, and the procedures for appealing the assessment.
What does “payment under protest” mean?	“Payment under protest” is a requirement that taxpayers must pay the tax before they can appeal the assessment. However, the court has allowed surety bonds in lieu of actual payment.
What was the implication of the Local Government Code on tax exemptions?	The Local Government Code withdrew all tax exemptions not expressly provided within its provisions, signaling a shift towards greater local autonomy and revenue generation.
What did the Supreme Court order in its decision?	The Supreme Court ordered the cancellation of the tax assessment against MERALCO and directed the City Assessor of Lucena to conduct a new appraisal and assessment in compliance with the Local Government Code.

The Supreme Court’s decision underscores the importance of local governments adhering to proper legal procedures when exercising their taxing powers. While the ruling affirms the authority of local governments to tax previously exempt properties, it also safeguards taxpayers’ rights by ensuring that assessments are based on accurate data and comply with due process requirements. The new appraisal and assessment ordered by the Court will ensure a fairer and more transparent tax system for MERALCO and other similarly situated entities.

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: Manila Electric Company vs. The City Assessor and City Treasurer of Lucena City, G.R. No. 166102, August 05, 2015