Gavin R. Putland,  BE PhD

Sunday, October 12, 2014 (Comment)

Precedents say stamp duties on new cars are unconstitutional

According to the definition accepted by the High Court of Australia in Ha v. NSW and earlier cases, the duties imposed by State governments on initial registrations of new cars (and new motorbikes, caravans and trailers) are duties of excise, in contravention of s.90 of the Constitution. That means they're illegal — so illegal that no parliament can legalize them.


What is the Constitution?

The Australian Constitution is the basic law (that is, the law governing the making of laws) and the supreme law (that is, the law that takes precedence over all other laws) within the Commonwealth of Australia. Any purported law which is made in a manner contrary to the Constitution or which otherwise conflicts with the Constitution is said to be unconstitutional, and is invalid (that is, not a law at all). The Constitution is also entrenched (that is, harder to change than ordinary laws).

(Strictly speaking, a small part of Australia's basic, supreme, entrenched law is found in documents other than the one called the “Constitution”, wherefore it may be said that those other documents are also of “constitutional” significance and that Australia's “constitution” is not entirely contained in the document of that name. But these details need not concern us here.)

Are “duties of excise” unconstitutional?

Yes, except at the Federal level. Section 90 of the Constitution says in part:

On the imposition of uniform duties of customs the power of the Parliament to impose duties of customs and of excise, and to grant bounties on the production or export of goods, shall become exclusive.

In the context, “the Parliament” means the Federal Parliament. But stamp duties on cars are imposed by the States. So if these duties amount to “duties of excise”, they are unconstitutional.

Are the Territories, like the States, forbidden to impose excises?

Yes, according to a 4-3 split decision of the High Court in the case that has become known as Capital Duplicators No.1 (1992). The precise question referred to the Full Court was: Does Ch.IV of the Commonwealth Constitution operate so as to preclude the Legislative Assembly of the Australian Capital Territory from exercising the power to impose duties of excise within the meaning of s.90 of the Constitution? The three Justices who answered in the negative (Mason C.J., Dawson and McHugh JJ.) held that the Federal Parliament's power to impose excises could be and had been delegated to the ACT Legislative Assembly. Of the four who answered in the affirmative, three (Brennan, Deane and Toohey JJ.) held that the Federal Parliament could delegate powers to subordinate legislatures but had not done so, while one (Gaudron J.) went further, seeming to imply that no such delegation would be possible in the case of the exclusive power to impose excises.

If, as implied by Brennan, Deane and Toohey JJ., the invalidity of an excise imposed by a Territory is not guaranteed by the (Federal) Constitution but is merely due to the limitations of the Territory's self-government act, the excise is still “unconstitutional” in the wider sense that it is beyond the power of the Territory's legislature and therefore contrary to the basic, supreme, entrenched law of the Territory. But in that case the Federal Parliament could make the duty “constitutional” by suitably amending the self-government act. Whether the Federal Parliament would be inclined to do this is of course a separate question.

What exactly is a duty of excise?

The currently prevailing definition was given by a 4-3 decision of the High Court in Ha v. NSW (1997), hereinafter called Ha. The majority (Brennan C.J., McHugh, Gummow and Kirby JJ.) found that:

... duties of excise are taxes on the production, manufacture, sale or distribution of goods, whether of foreign or domestic origin. Duties of excise are inland taxes in contradistinction from duties of customs which are taxes on the importation of goods. Both are taxes on goods, that is to say, they are taxes on some step taken in dealing with goods.

The minority (Dawson, Toohey and Gaudron JJ.) drew a different distinction between customs and excise duties, namely that customs duties discriminate against imported goods in favour of locally produced goods while excise duties do the opposite:

A State tax which fell selectively upon imported goods would, of course, be a customs duty and be prohibited by s.90. A State tax which fell selectively upon goods manufactured or produced in that State would be an excise duty and be prohibited by s.90. A State tax which discriminated against interstate goods in a protectionist way would offend s.92 and be invalid.

In the majority view, the Constitution gives the Commonwealth exclusive control of the taxation of goods and therefore prevents the States from taxing goods. In the minority view, the Constitution gives the Commonwealth exclusive control of tariff policy (be it protection or free trade) and therefore only prevents the States from taxing goods in a way that discriminates between local and non-local goods.

The stamp duty on a new vehicle would appear to be a “tax” on the “sale” of a “good” (the vehicle), or at least on “some step taken in dealing with” the good, in which case it is an excise according to the majority view. But because it does not discriminate between imported and locally-produced cars, it would not be a duty of customs or excise according to the minority view.

The majority and minority definitions in Ha essentially agreed with the majority and minority definitions, respectively, in the 3-2 decision of the High Court in Parton (1949), in which the majority ruled that a tax of 1/8 of a penny per gallon of milk sold or distributed in Melbourne was an excise.

Paradoxically, the minorities in Ha and Parton could claim support from the unanimous judgment in the first case in which the scope of “excises” came before the High Court, namely Peterswald (1904). In this case, however, the “discriminatory” definition of excises was not critical to the outcome because (a) the tax in question, as applied to the case in question, was a “fee” for a licence to brew beer, and as such discriminated against local brewers, and (b) the tax was nevertheless held not to be an excise because it was only loosely connected with goods; it was not apportioned to the quantity or value of goods sold, and therefore had little tendency to enter into prices.

Does it matter if the duty is on registrations rather than sales?

Almost certainly not. As the sale of a vehicle does not achieve its intended purpose until the vehicle is registered, and as a tax on the sale is forbidden, a law purporting to tax the registration rather than the sale would be a means to a forbidden end, and a form for a forbidden substance. Concerning means and ends, the majority in Ha quoted Isaacs J. in Commonwealth Oil Refineries (1926):

The prohibitions of secs. 90 and 92 of the Constitution may be transgressed not merely by a direct and avowed contravention. They are transgressed also by a statute — whatever its ultimate purpose may be, and however its provisions are disguised by verbiage or characterization, or by numerous and varied operations lengthening the connective chain, or by otherwise paying titular homage to the supreme law of the Constitution — if it operates in the end by its own force so as to do substantially the same thing as a direct contravention would do, either in attaining a forbidden result or in using forbidden means. The relevant constitutional prohibitions include both means and results. It is no justification for using forbidden means that permissible results are sought, nor for securing forbidden results that lawful means are employed.

The majority in Ha continued:

When a constitutional limitation or restriction on power is relied on to invalidate a law, the effect of the law in and upon the facts and circumstances to which it relates — its practical operation — must be examined as well as its terms in order to ensure that the limitation or restriction is not circumvented by mere drafting devices.

Concerning form and substance, the unanimous judgment of the High Court in Peterswald, written by Griffith C.J., stated that “In considering the validity of laws of this kind we must look at the substance and not the form.” This was quoted by the majority in Ha and clearly accepted by the minority, who wrote:

Whether a tax which falls upon locally produced goods discriminates against those goods in favour of imported goods is a question of substance, not form. It is the answer to that question which, upon the correct view of duties of excise, determines whether the tax is an excise duty.

In deciding whether a tax in substance is a tax on goods, the High Court has employed wide, almost catch-all criteria. In Matthews (1938), the majority held that a levy of £1 per half-acre planted with chicory was an excise on chicory. In Hematite Petroleum (1983), the majority held that a petroleum pipeline licence with a base fee of $10 million per annum was an excise on petroleum.

For a time, the States got away with taxing sellers of goods by means of the so-called backdating device: the seller needed a licence which had to be renewed periodically, and the renewal “fee” was apportioned to the quantity or value of goods sold in some previous period. The case that opened this loophole was Dennis Hotels (1960), in which the High Court, by a 4-3 majority, ruled that a 6% liquor licence fee with backdating was not an excise. Two of the majority (Taylor and Menzies JJ.) were influenced by the backdating. The other members of the majority were Fullagar J., who preferred the Peterswald definition of excises, and Kitto J., who formulated what has become known as the criterion of liability test:

... a tax is not a duty of excise unless the criterion of liability is the taking of a step in a process of bringing goods into existence or to a consumable state, or passing them down the line which reaches from the earliest stage in production to the point of receipt by the consumer.

Hence, according to Kitto, the disputed “license fee” was not an excise, because “The tax is not on the liquor; it is on the licence”.

In Bolton (1963), in which a fee for a road-transport permit was found not to be an excise, the “criterion of liability” was unanimously accepted as the sole test of an excise — to the exclusion of any consideration of discrimination against local goods. This case was the zenith not only for the “criterion of liability” test but also the Parton definition; Peterswald was not even cited. The validity of the backdating device was confirmed by 5-1 majorities in Dickenson's Arcade (1974) and H.C. Sleigh (1977), in which the disputed licence fees were for tobacco and petroleum, respectively. (In M.G. Kailis (1974), a 3-2 majority ruled that a similarly backdated fishing “licence fee” was an excise; but in this case the outcome was influenced by a loose connection between the licence and the fee.)

The dissenter in Sleigh was Jacobs J., who warned:

... the idea that by setting up a licensing system in respect of dealing in any commodity at all, the States can overcome the s.90 embargo on imposition of excise duties is of comparatively recent origin. It must be curbed now before the Court is faced either with the virtual supersession of s.90 or a need at some later time to cry halt.

Jacobs was vindicated as the trilogy of “franchise cases” — Dennis Hotels, Dickenson's Arcade, and H.C. Sleigh — led to a proliferation of revenue-raising schemes involving “licence fees” or “franchise fees” on liquor, tobacco, and fuel, apportioned to the quantity or value of goods handled in some previous reference period. As the licence periods grew shorter, the reference periods more recent, and the “fees” higher in relation to the values of goods traded, the High Court began to back-pedal. The majority in Hematite Petroleum (1983) rejected the “criterion of liability” as the sole test. So did the majority in Gosford Meats (1985), in which an abattoir licence fee (per animal, with backdating) was found to be an excise. After these decisions, it seemed that the only way to salvage Dennis Hotels and Dickenson's Arcade was to argue that liquor and tobacco were special categories of “goods”, requiring regulation. Even that argument, as we shall see, was short-lived. Finally, in Ha (1997), the majority decided to “cry halt”. They confessed their concern at “the significantly increasing tax rates imposed by State and Territory laws under the insubstantial cloak of the Dennis Hotels formula”, declared that “The States and Territories have far overreached their entitlement to exact what might properly be characterised as fees for licences”, pulled the plug on the “criterion of liability” subterfuge, including backdating, and acknowledged the resulting severe limits on the applicability of Dennis Hotels and Dickenson's Arcade (but stopped short of overruling them altogether).

Returning to the matter of new-car duties, I submit that if an excise cannot be transubstantiated into something else by licensing and backdating, neither can it be transubstantiated by “licensing” — or “registration” — alone. Similar reasoning applies to duties purportedly imposed on registration of other goods, such as motorbikes, caravans and trailers.

Can a duty on registration of vehicles be excused as a regulatory provision?

Almost certainly not. In Philip Morris and Coastace (two cases with similar facts, heard simultaneously in 1989), tobacco licence fees with backdating were found not to be excises. The majority included Toohey and Gaudron JJ., who applied the Peterswald definition. Mason C.J. and Deane J. rejected the “criterion of liability” test, but sided with the majority partly because of the need for regulation of “goods” such as liquor and tobacco. Brennan J., in the minority, was unimpressed by that argument for three reasons, which he stated in Philip Morris as follows:

First, the Constitution makes no distinction among commodities for excise purposes. Second, if the nature of the commodity were relevant to the character of a tax related to dealings in it, liquor and tobacco are historically the prime excisable commodities. Third, if liquor and tobacco had been thought to be commodities to which special principles applied, the decisions in Dennis Hotels and Dickenson's Arcade would have been distinguished on that ground in H.C. Sleigh.

But in Capital Duplicators No.2 (1993), the majority, including Mason and Deane, held that a backdated licence fee on Χ-rаted videοs was an excise; the “special categories” issue was found irrelevant in this case because of the absence of regulatory provisions in the disputed legislation. Finally in Ha (1997), the majority held that a tobacco “franchise fee” with backdating was an excise, rejecting the “special categories” notion (thus vindicating Brennan, who by then was Chief Justice), and acknowledging the implication that Philip Morris and Coastace were wrongly decided. As the minority preferred the Peterswald definition, they did not need to consider the “special categories” and “criterion of liability” arguments, but still made it clear that they had little sympathy for either:

For our purposes it is unnecessary to determine whether the taxes were taxes upon goods, but it is obvious that the judgments in Philip Morris and Coastace... provide only a shaky foundation for the view that they were not. In those cases taxes similar to those in the present cases were held not to be duties of excise, but Brennan and McHugh JJ. dissented and Mason C.J. and Deane J. so held only upon the basis that alcohol and tobacco were in a special category...

Moreover, as new cars tend to be safer and more fuel-efficient than old ones, we can hardly pretend that an impost on new cars is in the same moral category as an impost on cigarettes or beer, or even petrol.

An excise is a tax. Is the new-car duty a tax?

Yes. It cannot be a fee for the “service” of registering the vehicle, because there is a separate annual “registration” fee which more than covers the cost of the “service”. Neither can it be a fee for the “service” of creating a new registration number, because it far exceeds the cost of the “service” and indeed bears no relation to that cost — as becomes especially obvious where the duty is apportioned to the value of the vehicle. The duty is simply a revenue-raising device — that is, a tax.

Moreover, every time a “licence fee” or “franchise fee” is declared by the High Court to be an excise, it is by implication declared to be a tax.

An excise is a tax on goods. Are vehicles goods?

Yes. They are not services, and they are not real estate, so they must be goods.

Does it make any difference that the duty is imposed at the retail step?

Almost certainly not.

In Commonwealth Oil Refineries (1926), Higgins J. said that “it matters not whether the duty is imposed at the moment of the actual sale or not, or sale and delivery, or consumption.” In Fairfax v. NSW (1927), Rich J. characterized an excise as “an inland imposition... imposed sometimes on the manufacturer or dealer, sometimes on the commodity itself or the retail sale.” In Matthews (1938), Latham C.J. wrote that

... the reasoning which led to the conclusion in Peterswald v. Bartley does not necessarily limit the application of the term “excise” to taxes imposed upon goods at the very moment when they are “produced or manufactured”. A tax possessing the other attributes mentioned ... may be an excise duty if it is imposed upon the sale or consumption of goods. It has been so held, in relation to sale, in ... Commonwealth Oil Refineries...

Dixon J. agreed, noting that

... so far there is no direct decision inconsistent with the view that a tax on commodities may be an excise although it is levied not upon or in connection with production, manufacture or treatment of goods or the preparation of goods for sale or for consumption, but upon sale, use or consumption and is imposed independently of the place of production...

But in 1943, the Privy Council in Atlantic Smoke Shops Ltd v. Conlon held that a tax on consumption was not an excise. As this case concerned Canada, its applicability to Australia was questionable.

Hence in Parton (1949), Dixon wrote that the Privy Council's decision “perhaps makes it necessary to that extent now to modify the statement ... [quoted above] ... with respect to consumption” (emphasis added). Rich, Williams, and McTiernan JJ. disagreed, quoting Higgins J. in Commonwealth Oil Refineries. McTiernan stated: “Excise also means a duty on the manufacture, production, sale or consumption of goods.” But he seemed to imply that a retail tax is not an excise when he added:

The weight of judicial authority favours the view that s.90 withdraws from the States power to levy a duty on the production or manufacture of goods, but not that s.90 goes as far as to withdraw from the States the power to levy a tax on goods which is in fact unconnected with their production and is imposed merely with respect to the sale of the goods as existing articles of commerce.

How can a consumption tax be an excise while a retail tax is not? The explanation apparently lies in McTiernan's acceptance of the Peterswald definition: in the respective contexts, the “consumption” tax was related to the place of production while the retail tax was not.

In the case known as Anderson's (1964), the High Court unanimously found that a stamp duty on hire-purchase agreements was not an excise. But each member of the Court wrote a judgment. Barwick C.J. characterized an excise as “a tax upon the taking of a step in a process of bringing goods into existence or to a consumable state, or of passing them down the line which reaches from the earliest stage in production to the point of receipt by the consumer.” He then remarked: “I would merely add ... that the step which puts the goods into consumption is still in the line, albeit at the end of the line...” Kitto and Taylor JJ. agreed with Barwick's “I would merely add...” McTiernan J., who was influenced by whether the tax entered into prices, apparently agreed. Menzies and Windeyer JJ. may also have agreed, although their wording was less specific. But none of these opinions mattered, because the tax in question was found not to be on the final sale to the consumer.

In Chamberlain Industries (1970), the High Court ruled by a 4-3 majority that a broad-based tax on receipts of money — effectively a cascading turnover tax — was an excise. Again there were seven separate judgments. Menzies J., in the majority, described an excise as a “tax upon the sale of new goods manufactured in Australia and sold in retail sale, or at any point anterior thereto”, and held that the tax in question was an excise in so far as it happened to meet that description. He was not dissuaded by the fact that the tax also applied to goods not manufactured in Australia, because a State could not escape s.90 by “throwing its net widely.” Expressed in abstract terms, his argument was that if a wide tax necessarily included a narrow one, prohibition of the narrow one implied prohibition of the wide one, as if the very definition of the prohibited tax had been widened. Windeyer J. agreed, except that he did not make an issue of where the goods were manufactured. Among the dissenters, McTiernan and Kitto JJ. thought it significant that the tax did not discriminate between payments for goods and payments for other things, while Walsh J. thought the duty as payable by Chamberlain Industries was not an excise because it was on the final sale to the consumer.

Not until Dickenson's Arcade (1974) did the High Court actually rule on whether a retail tax was an excise. More precisely, this case concerned a backdated licence fee for tobacco retailers (already discussed) plus a purported tax on consumption of tobacco. The latter was payable on consumption (smoking or chewing!) unless it had already been paid at the time of purchase. It was accompanied by regulations requiring tobacco retailers to provide facilities for paying the tax at the point of sale. The Court ruled that the arrangements for paying the tax on consumption were deliberately impractical, and that therefore the regulations actually imposed a retail tax, which was an excise. This ruling was carried by the narrowest possible margin: 3-3, plus the casting vote of Chief Justice Barwick. But even the dissenters seemed to acknowledge, and one of them (Stephen J.) expressly affirmed, that a retail sales tax would be an excise; the point of disagreement was whether the tax in question was indeed a retail sales tax. Only McTiernan J. thought that every consumption tax was an excise.

Thus the Court effectively said that while a consumption tax is not an excise, the only practical method of collecting it — namely a tax on retail sales — would make it an excise! If this amounts to a contradiction, the Court can resolve it either by admitting that a retail sales tax is not an excise, or by admitting that a consumption tax is an excise. The former course is unlikely because it would imply that Dickenson's Arcade was wrongly decided. The latter course would contradict the overwhelming weight of opinion expressed by individual Justices of the High Court in the course of their judgments, but would not contradict any actual decision of the Court. Technically, then, whether consumption taxes are excises is still an open question — as was acknowledged by the majority in Ha.

What about duties on used cars? Are they excises?

Apparently not. In Kithock Pty Ltd v. ACT (1999), a used-car dealer went to the ACT Supreme Court alleging that a stamp duty on the transfer of registration of a used car was an excise. Although the case was clearly constitutional, no Attorney-General sought to have it transferred to the High Court. So Miles C.J. proceeded to hear it himself. He noted the breadth of the following statement (already quoted) in Ha:

... duties of excise are taxes on the production, manufacture, sale or distribution of goods, whether of foreign or domestic origin. Duties of excise are inland taxes in contradistinction from duties of customs which are taxes on the importation of goods. Both are taxes on goods, that is to say, they are taxes on some step taken in dealing with goods.

While noting that other statements of the High Court referred to excises as taxes on goods that had not yet reached the consumer, Miles did not regard those statements as restrictive, and concluded that the duty in question was an excise.

On appeal (ACT v. Kithock, 2000), a Federal Court full bench consisting of Spender, Mathews, and Sundberg JJ. unanimously overturned the decision. Their Honours quoted a long list of statements by the High Court on the meaning of “excises”, noted which ones were apparently intended to be used as definitions in other contexts and which were not, and noted that the former excepted taxes on goods that had already reached the consumer. They concluded that taxes on second-hand goods in general, and used cars in particular, are not excises. There the matter stands.

The elephant in the courtroom was that the reasoning by which Their Honours excused a duty on used cars would not have been applicable to a duty on new cars.

What are the most likely ways in which a constitutional attack on new-car duties might fail?

In the most recent relevant High Court case (Ha v. NSW, 1997), there was clearly no remaining enthusiasm for any kind of “licensing” or “franchising” for any category of goods, with or without backdating, by which a tax on goods might be dressed up as something other than a tax on goods. The Court has been there, done that, and lived to regret it. But in the same case, three out of seven Justices preferred the Peterswald view: that a tax is not an excise unless it falls more heavily on locally produced goods than imported goods. It is possible that changes in the personnel of the Court have brought or will bring a majority of its members to that view. It is also possible, but far less likely, that such a majority would not feel constrained by past decisions of the Court.

If the High Court were to adopt the Peterswald definition, new-car duties would not be excises. But that would be among the least of the consequences. Under the Peterswald definition, the Australian States, like their American counterparts, would be free to impose broad-based retail sales taxes. That would instantly remove every resemblance of an excuse not only for “nuisance” taxes such as vehicle stamp duties, but also for the GST (the revenue from which is distributed to the States) and State payroll taxes.

(By the way, payroll tax has some propensity to feed into prices, including prices of goods. Moreover, payroll tax applies to labour employed in production and manufacture of goods, but only within the State imposing the tax. It also applies to labour employed in distribution and sale of goods, but only within the State imposing the tax. Hence it taxes local goods more heavily than imported goods at the same stage of refinement, and has as much capacity to frustrate Federal tariff policy as any other tax on goods. Thus payroll tax would appear to be an excise even under — yea, especially under — the Peterswald definition, and a constitutional attack on payroll tax would find support among both the Peterswald and Parton factions of the High Court.)

A less likely way in which the High Court might accept new-car duties is to revisit the boundary between an excise and a consumption tax and conclude that a tax on the final sale to the consumer is the latter, contrary to the decision in Dickenson's Arcade. But this also would clear the way for State retail taxes (and would not give any support for payroll taxes).

So this contest has a consolation prize: if you go to the High Court arguing that new-car duties are excises, and lose, you'll fail to get your money back, but you won't fail to make history!

In the mean time, all payments of stamp duty on new cars should be notified as PAID UNDER PROTEST, to maximize the chances of recovering them if the duty is subsequently declared unconstitutional.

Further reading

Ian Halliday, “Ha & Anor v State of New South Wales & Ors; Walter Hammond & Associates v State of New South Wales & Ors”, Sydney Law Review, vol.20 (1998).

Patricia Sampathy, “Section 90 of the Constitution and Victorian Stamp Duty on Dealings in Goods”, Journal of Australian Taxation, Vol.4, no.1 (2001), pp.133–155.

[First posted 16 August 2009. Edited 5 September 2009, 20 May 2013 and 15 October 2014. Relocated 5 April 2012 and 12 October 2014. The author is not a lawyer and this article is not advice.]

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