The recent High court decision denying Victoria’s distance charge on electric vehicles casts doubt on a whole raft of state excise.
How EV duty decision could run state taxes off the road
The High Court case
The issue before the High Court in Vanderstock v State of Victoria  HCA 30 was whether section 7(1) of the Zero and Low Emission Vehicle Distance-based Charge Act 2021 (Vic) was unconstitutional (and so invalid) on the basis that state law cannot impose a duty of excise, which the Constitution deems to be in the exclusive jurisdiction of the Commonwealth.
The sole issue was whether or not the charge imposed under the ZLEV act was to be characterised as a duty of excise.
The ZLEV Act required registered operators of electric vehicles to pay a per-kilometre charge to the Victorian government provided the distance travelled was driven on public roads. Other states were in the process of enacting similar legislation.
The majority of the High Court (by four to three) held that the ZLEV act sought to impose a duty of excise and, accordingly, was unconstitutional.
In arriving at its view, the majority reopened and overruled earlier decisions that had held that a duty of excise was limited to a tax imposed on the steps up to (supply side only) but not including consumption (demand side).
The majority has simplified the definition of a duty of excise by extending the concept to include taxes imposed on goods at any stage in the life cycle, including at the stage of consumption or use of the goods. As a result, a duty of excise is now considered to include a tax that tends to directly or indirectly decrease the demand for a good.
Although the ZLEV charge was not a tax on a step in the production, manufacture, sale or distribution of goods, the majority of the Court still found it to be an excise because by increasing the cost of use of an electric vehicle, it had, in the majority’s view, a natural tendency to indirectly depress demand for consumption of electric vehicles.
Three judges dissented and each wrote their judgement. Though the reasoning was not identical among the three, they each preferred to follow precedent.
Two of the judges observed that the ZLEV charge was not even a tax on goods but was rather a tax on the use of the goods.
Edelman went even further, claiming that the removal of the prior constraints into what constitutes an excise represents a “neglect of constitutional structure, constitutional text, contemporary understanding, history, political choice, economics, principle, precedent, authority and of the future”.
In terms of overruling precedent, Edelman listed the names of each of the 21 former High Court judges that the majority had now, in effect, said had all been wrong.
He claimed that removing the important constraints of an excise – a tax with a reasonably anticipated, real and substantial, direct economic effect on the supply side of a market for the sale of goods – to include a consumption tax on goods, has created an “unbounded scope ... [that] will considerably expand the concept of an excise and introduce uncertainty that will generate years of litigation”.
He also criticised the majority for relying on assumptions that were not based on argument (such as that a tax of $260 to $330 per year will tend to indirectly decrease the demand for vehicles that cost up to $300,000). Edelman even indicated that this may mean the decision is not binding on later courts on the basis that a “proposition of law [that] is incorporated into the reasoning of a particular court ... even if it forms part of the ratio decidendi, is not binding on later courts if the particular court merely assumed its correctness without argument”.
What does this mean for other state taxes?
Until this decision, the states could have been reasonably certain that an excise did not include:
(a) A tax on a gift of goods.
(b) A tax on an inheritance of goods.
(c) A payroll tax.
(d) An industrial land tax on a producer of goods.
(e) A tax for a licence to carry on a business.
(f) Duties on the transfer or conveyance of goods as part of dutiable transactions.
(g) Motor vehicle duties.
(h) Vehicle registration charges
(i) A consumption tax.
However, such taxes could now potentially each constitute an invalid excise because each could be regarded as tending to indirectly reduce the demand for goods.
By way of example, a payroll tax with a direct economic effect in the market for the sale of labour has never been regarded as an excise. But payroll tax could now be an excise, at least in some of its applications, because of its anticipated indirect effect in the separate market for the sale of the goods produced with that labour.
Whether or not royalties are at risk will depend on the particular royalty, as it is not immediately clear that a royalty, if regarded as a tax, would not fall within the terms of the majority’s extended definition of a duty of excise.
Each of these taxes, and others, will require closer examination.
Moreover, the case could also cast doubt on the status of prior authorities concerning the application of a “bounty”, as it can no longer be certain that the High Court will not revisit previous understandings that limited the definition of a bounty.
Despite the aberration of the Covid response leading some to say that states had all the power, Vanderstock reflects a long-term trend of the High Court increasing the scope of centralised powers of the Commonwealth at the expense of the states.
This decision will put further pressure on state budgets as it will further restrict the capacity of states to raise revenue.
Further litigation is likely to ensue to test the bounds of the majority’s new formulation on various state taxes. Moreover, with the upcoming retirement of Chief Justice Kiefel (who formed part of the majority), the High Court’s position on the test for an excise will then be determined in effect by the view of the incoming Justice Beech-Jones, as his position will be a deciding vote to make the (new) majority.
Jeremy Makowski is a partner at Coghlan Duffy Lawyers.
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