Sydney Law Review
The next excise tax case should tell whether Governments can look forward to a return to a measure of clarity and unanimity on Section 90 ....
On 5 August 1997, the High Court of Australia handed down its judgment in Ha v NSW. As constitutional cases go, this one was relatively concise and restrained, consisting of a joint four judge majority judgment and a joint three judge minority judgment. But the pandemonium that followed was out of all proportion to the judgment’s length; perhaps even out of all proportion to the ideas contained therein.
The judgment, after all, turned partly on the seemingly simple question of what exactly the word “excise” means in section 90 of the Commonwealth Constitution. Ever since the 1904 case of Peterswald v Bartley, debate has raged as to exactly what constitutes an excise. But deeper than that is the question of what exactly that section of the Constitution is intended to achieve. Arguably, there has never been a satisfactory answer. Is Ha to be the answer that commentators have awaited for 93 years?
The uproar was the result of the High Court’s decision that under section 90 of the Constitution, States could no longer levy any form of tax on any stage in the distribution of goods. This had serious ramifications in three main areas: alcohol, tobacco and petrol. For the past thirty years, State governments had been fairly comfortable with the idea that although section 90 contains a general prohibition against States imposing excise duties, these three products were somehow exempted from that prohibition. Even worse, they had relied on a line of High Court decisions supporting the notion that imposts couched in the language of licence fees imposed via back-dating devices could not be excises. In rendering unconstitutional a number of State laws imposing licence fees on retailers and wholesalers of tobacco, and, by implication, alcohol and petrol, the practical effect of the Ha decision was to deprive the States of considerable revenue, as much as sixteen per cent of their tax base.4 A hasty reorganisation of the taxation regime resulted, with the Commonwealth government agreeing to levy the excises itself, and return the money collected to the States. But was the decision in Ha a radical departure from previous rulings on section 90? Has it finally resolved the controversy about this section of the Constitution? Or is there more turmoil to come? These are some of the issues which I canvass in this case note.
On the imposition of uniform duties of customs, the power of the [Commonwealth] Parliament to impose duties of customs and of excise, and to grant bounties on the production or export of goods, shall become exclusive.
Two duty-free shop owners and a tobacco retailer were issued with notices of assessment by the delegate of the NSW Chief Commissioner of Business Franchise Licences (Tobacco) for moneys payable under the Business Franchise Licences (Tobacco) Act 1987 (NSW). Neither duty-free shop owner held a licence, as required by the Act, while the retailer held a wholesaler’s licence. The shop owners and the retailer were the plaintiffs in the case; the State, the Commissioner and his delegate were the defendants. The plaintiffs alleged that
the provisions of the Act which purport to impose liability to pay the amounts claimed by the third defendant and calculated in conformity with s  [of the NSW Act] are duties of excise which the State was not empowered to impose.
At first glance, the NSW Act does not seem to impose a tax of any kind, couching the impost in the language of a licence fee. But on closer inspection, the “licence” starts to look a bit peculiar:
39. A licence takes effect on and from the day specified in the licence as the day on which it takes effect and remains in force: (a) until the end of the 27th day of the month in which it took effect...
The licence is only valid for a month, an extremely short period of time. Furthermore,
41. (1) The fees to be paid for licences are as follows: ... (c) for a retailer’s licence, a fee of $100 together with an amount equal to 100 per cent of the value of tobacco sold by the applicant in the course of tobacco retailing during the relevant period ... .
The licence fee is extremely high, being 100 per cent of the value of the tobacco sold by the licensee in the previous month.
It was partly for these reasons that the High Court unanimously held this purported licence fee to be in substance a tax. But was it a tax on goods, and thus an excise for the purposes of section 90 of the Constitution? This is the question on which the Court disagreed.
The difference between the majority and the minority judgments turns on the definition of excise intended in section 90, which in turn depends on the reasons for the enactment of that section. The majority judges – Brennan CJ, McHugh, Gummow and Kirby JJ – held that “excise” in section 90 is to be given a broad interpretation: any inland tax on any step in the production, manufacture, sale or distribution of goods is an excise. A general tax on goods that does not distinguish between locally produced and imported goods is still an excise,10 because locally produced goods are among the goods it affects. This is the major point of disagreement between the two judgments. The minority judges – Dawson, Toohey and Gaudron JJ – took a narrow view of excise, holding that only taxes on locally manufactured goods that discriminate between locally manufactured goods and imported goods could be excises.
The reason for this disagreement lies in the historical origins of section 90. According to the majority, the purpose of section 90 was to give the Commonwealth the exclusive power to levy taxes on goods, including import duties and duties of excise. Duties of excise were inland taxes on any stage in the production or distribution of local or foreign goods, because anything less would mean that the Commonwealth would not have control over the national economy. The purpose of section 90 was to operate in conjunction with sections 91–93 to ensure that the Commonwealth Parliament had the exclusive power to control fiscal policy. If the States could tax local goods in any way, they could subvert Commonwealth economic policy by negating the effects of import tariffs designed to give local industry an edge. State taxes which affected both locally made and imported goods were still excises to be forbidden by section 90 because allowing these imposts would be contrary to the spirit of section 92, which stipulated that there were to be no trade barriers between the States after federation.
The minority, on the other hand, felt that section 90 was only designed to give the Commonwealth exclusive control over imports and protect Australia’s common external tariff, not to create a single economy within Australia. To support this view, they drew on the correlation made between duties of customs and duties of excise in section 90 itself. This provision of the Constitution was drafted in this way, the minority felt, because the intention was that:
The States could not engage in discrimination of a protectionist kind against interstate goods, but otherwise they were left free to encourage or discourage trade within their boundaries, including trade in commodities, by such means as they saw fit provided that they did not do so by infringing the Commonwealth’s exclusive power to impose duties of customs and excise ... .
For the minority, this meant that an excise was a tax only on the production or manufacture of locally produced goods, and that since the licence fees in question were taxes on imported and local product alike (even given that the imported product only accounted for some four per cent of sales) and on sale rather than production, they were not excises and therefore valid.
The majority’s wide view of “excise” won the day, in keeping with the general trend, since Parton v The Milk Board (Vic), to regard excises as a tax on any stage in the production and distribution of goods. The policy underlying this view is clear: the Constitution was intended to create an economic union, with strict restrictions on the States to prevent them from interfering with the Commonwealth’s economic decisions. But the minority do not explicitly state why the Constitution should have been drafted so as to create a “customs union, not an economic union”. It seems that the minority judges believe that the majority reading of section 90, and the policy behind the Constitution, would severely impair the States’ ability to function by closing off a major source of revenue. The implication seems to be that the Constitution could not have been intended to do this. Unfortunately for supporters of this viewpoint, it does not seem in keeping with the general trend of High Court decisions over the past 50 years.
The first section 90 case heard by the High Court was Peterswald v Bartley. That case decided that a flat-rate licence fee was not a duty of excise: the Court took the narrow view of excise supported by the minority in Ha. In fact, Dawson, Toohey and Gaudron JJ quote from this case in their judgment:
[‘Excise’] is intended to mean a duty analogous to a customs duty imposed upon goods either in relation to quantity or value when produced or manufactured ... Reading the Constitution alone, that seems to be the proper construction ... .
The interpretation of the meaning of “excise” has developed radically since then. The cracks started to appear in the Commonwealth Oil Refineries case, when the Court held that a levy which fell equally upon local and imported petrol was an excise. Matthews v The Chicory Marketing Board followed in 1938, in which the Court agreed that an exaction unrelated to quantity of goods was still an excise.
The case which is often considered to have completely overturned Peterswald is the 1949 case Parton v The Milk Board (Vic). Justice Dixon said that Commonwealth Parliament had exclusive power to enact legislation imposing a tax on goods, and
it may be assumed that it was intended to give the Parliament a real control of the taxation of commodities and to ensure that the execution of whatever policy is adopted should not be hampered or defeated by State action.
This considerably expanded view of the meaning of “excise” was adopted by the majority – Dixon, Rich and Williams JJ – while Latham CJ and McTiernan J still held the old, narrow view of its meaning. Although subsequent cases have followed Parton, there has not been unanimous agreement on its correctness. And indeed, the decisions in Peterswald and Parton represent the minority and majority viewpoints in Ha, at least as regards the intended scope and meaning of “excise” in section 90.
On the position of a franchise licence as an excise, the Court in Ha is in complete agreement. It does not matter whether an impost is called a licence fee or a tax: it is its substance which is important. An impost which purports to be a licence fee will be held to be a tax, and in Ha itself,
the proximity of the relevant period [of fee assessment] to the licence period, the shortness of the licence period, the size of the tax imposed ad valorem and the fact that it is to be borne only once in the course of distribution [are] indicia that were inconsistent with the tax being merely a licence fee ... .
This decision comes after a line of so-called “franchise” cases. In Dennis Hotels v Victoria, the first of these, a majority of the High Court decided that the Victorian Licensing Act which imposed a levy of six per cent of the wholesale value of liquor on liquor retailers was not an excise, and was a valid exercise of State legislative power. The licensing regime involved an ingenious back-dating scheme, so that the licence fee which the retailer had to pay was calculated on the basis of sales in a previous year, dating from eighteen months earlier to six months earlier. This effectively meant that there was a six month “buffer zone” between the period of sales on which the licence fee was assessed, and the date of imposition of the licence fee itself. The schism between the broad and narrow definitions of excise was apparent here, as it was to be in all the important subsequent cases, with Fullagar J clinging to the Peterswald definition.
Interestingly enough, Dixon CJ was one of the judges in Dennis Hotels who considered the licence fees to be in fact excises, although he had previously in Parton used a licence fee calculated using a back-dating device as an illustration of a valid State enactment concerning the distribution of goods. He had become “convinced that the illustration was entirely wrong”. Perhaps this simply demonstrates the difficulty of predicting exactly what sorts of imposts will be excises under a broad view of “excise”.
The most significant result of Dennis Hotels was the emergence of a new test to decide whether a tax is a duty of excise.
What is insisted upon may, I think, be expressed by saying that 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 [to] the consumer.
This became known as the “criterion of liability” test. It was approved in the High Court’s unanimous judgment in Bolton v Madsen. A licence fee for a transport operator calculated on the value of the goods carried was held not to be a tax on goods, but a tax on the transport service, and therefore not an excise. The Court held that the “criterion of liability” test was the sole test for determining whether an impost was an excise or not. Unfortunately, the High Court’s unanimity on the issues quickly disappeared, and barely ten years later in Dickenson’s Arcade v Tasmania, there was much disagreement among the members of the Court.
Dickenson’s Arcade, like WA v Hamersley Iron a few years earlier, confirmed the substance approach to the excise question – the statutory “criterion of liability” was only one of a number of factors. The case concerned Tobacco Regulations made under Part II of the Tasmanian Tobacco Act 1972, which purported to levy a consumption tax on tobacco, while Part III of the Act contained a licence fee on tobacco retailers based on a back-dating device similar to that in Dennis Hotels. Chief Justice Barwick held Part II of the Act and the Regulations invalid. He did not feel that a consumption tax was necessarily an excise; but on the facts of the case, the impost in question constituted “a tax upon a step in the movement of the tobacco into consumption”. Chief Justice Barwick held the licensing scheme, in Part III of the Act, valid under the Dennis Hotels principle, albeit without much enthusiasm. Justice Mason held the Regulations invalid, but the Act valid. Justices Menzies, Stephen and Gibbs felt that neither the Act nor the Regulations presented a problem as far as section 90 was concerned. Since Barwick CJ held the “casting vote”, the Regulations were declared invalid, but the Act valid.
In light of later cases, the viewpoint of McTiernan J is interesting. He held that a consumption tax was a tax on goods and hence an excise, and held Part II of the Act, and therefore the Regulations made under that Part, invalid. However, he also felt that Dennis Hotels was no precedent for this case, and also held the licensing scheme in Part III invalid. Although it was the consumption tax which attracted most judicial comment, the approach of McTiernan J was consistent with statements by Barwick CJ and Mason J that the operation of the Dennis Hotels precedent that held licensing schemes with back-dating devices to be valid exercises of State power should be restricted.
This narrowing of the operation of the Dennis Hotels precedent continued in the following years. In M G Kailis v WA, also handed down in 1974, a fisheries licensing scheme was held invalid on the grounds that it offended section 90 by imposing a tax on manufacturing. But three years later, in H C Sleigh v SA, Mason J held that
Since Dennis Hotels ... States have continued to rely on liquor licensing fees as an important source of revenue. Likewise, since Dickenson’s Arcade States have relied on tobacco licensing fees, similarly calculated, as an additional source of government revenue. It would, I think, lead to great uncertainty in government and commerce if the Court were now to hold [these cases] wrongly decided.
The other judges agreed, leaving Jacobs J as the only dissenting voice. In a judgment perhaps predictive of Ha itself, he warned that this might be a way around section 90 that the States would exploit. “[This reliance on Dennis Hotels and Dickenson’s Arcade] must be curbed now before the Court is faced with ... a need at some later time to cry halt”.
Unfortunately, this warning of Jacobs J was to pass unheeded. Throughout the cases of Hematite Petroleum v Victoria (pipeline charge held to be an excise on petrol), Gosford Meats v NSW (meat industry licence held to be an excise), Philip Morris v Commissioner of Business Franchises (Vic) (tobacco licensing scheme held not to be an excise) and Capital Duplicators v ACT (X-rated video licensing scheme held to be an excise), there has never been a unanimous decision in support of one view on whether the impost in question is in fact an excise, and on whether licensing schemes in general are valid State enactments under section 90.
There has also been a measure of support for the notion (now firmly rejected) that alcohol, tobacco and petrol are somehow “shielded” from the operation of section 90, under the “Dennis Hotels formula”. The rationale for “shielding” them has been ascribed to the need for regulation of the sale of these products, as each has wide and diverse social effects. It was this factor which encouraged Mason CJ and Deane J to side with the majority in the Philip Morris case. However, regarding the view that the States would be unduly affected if the High Court were to overrule its earlier decisions allowing licensing schemes, the two judges warned that
The power of this court to overrule its previous decisions would not be properly exercised to disturb those arrangements unless, in the light of later insights into the true meaning of the Constitution, obedience to its terms or the interests of certainty in those arrangements clearly demanded that those decisions be reconsidered. [emphasis added]
This is in effect what has happened in Ha. But it is interesting that Dennis Hotels has not been overruled so much as sidelined. It is now seen as precedent only for the very limited fact circumstances which arose in that case. This is consistent with the line of cases since Dickenson’s Arcade, in which judges have sought to cut back the seemingly wide scope for the States to avoid the operation of section 90.
The judgement in Ha, consisting as it does of one majority joint decision and one minority joint decision, is quite a neat summary of the two views on section 90. On one side, there is the majority view that section 90 was intended to catch all State taxes on any stage in the production, manufacture and distribution of goods, because its intent was to give the Commonwealth exclusive control over the economy and fiscal policy. On the other, there is the minority view that the narrow Peterswald definition of excise is the true meaning of the word as used in section 90. Section 90, they say, was only intended to give the Commonwealth control over customs duty and the common external tariff, but the States were to be left free to regulate their own economies. What makes these issues even more tangled is the thread of the “franchise cases” which winds through them, bringing with it the related issues of whether a substance approach is the correct approach, and whether licensing schemes with backdating devices are in fact excises or not.
Certainly, the judgment in Ha was of no great surprise to some commentators. McLeod, writing in 1994, asked “whether much State taxation is currently avoiding proper constitutional scrutiny” and whether “the only road [for its] salvation ... is the path that leads to the narrow interpretation of excise in section 90”. Obviously, following the later section 90 cases, it was becoming increasingly difficult to see how such imposts could be upheld as valid.
Another issue McLeod raised was the size of the charges levied. In Dennis Hotels and H C Sleigh, the levies were in the order of 10 per cent, and as low as 2.5 per cent in Dickenson’s Arcade. By 1997, retailers of tobacco in NSW were paying a levy of 100 per cent of the value of the tobacco sold. Majority justices in successive cases have continued to point out that Dennis Hotels is only an example of a licensing scheme that is not an excise: it does not mean that all such schemes will be valid State enactments. A judicial realist might wonder whether the High Court justices were not fed up at the States for abusing a privilege which has only been maintained as a concession to their history of revenue raising.
To couch it in purely legal terms, the size of the imposts was relevant as an indication of the true substance of the law as one that imposes a tax on goods, rather than a regulatory scheme. The majority talk of the Dennis Hotels formula as an “insubstantial cloak” which is not able to cover the “significantly increasing tax rates imposed by State and Territory laws”. However, since the Court specifically declined to overrule Dennis Hotels and Dickenson’s Arcade, a licensing scheme where the licence fee is a small percentage of the amount of goods sold in the previous licensing period may presumably still be valid. “Dennis Hotels [and] Dickenson’s Arcade ... may stand as authorities for the validity of the imposts therein considered.” Be that as it may, Ha has laid firmly to rest the idea that petrol, tobacco, or alcohol are in any way “special categories” of goods as had been suggested by Mason CJ and Deane J in Philip Morris.
But the vexed question here, which still has not been answered in any satisfactory manner, concerns the proper construction of section 90. The minority view in Ha has had widespread support in the past, and is attractive because it seems to uphold the federal balance. On the other hand, the majority view is compatible with the notion of the Constitution as an “organic document”, evolving to meet the needs of new ages. The federal balance has swung to favour the Commonwealth in the ninety six years since federation. Certain constitutional milestones like the Engineers’ case have robbed the States of much of the power which the founding fathers might have expected them to retain after federation. If this is so, then there is nothing wrong with the idea of “excise” changing over time as the federal balance changes. Just as before 1942 no-one might ever have foreseen the States losing their ability to levy an income tax, before 1949 no-one might have foreseen the possibility that States would not be able to tax any stage in the production or distribution of goods. Circumstances change, and hopefully the Constitution, or our interpretation of it, is robust enough to change with them.
In 1993, Nicolee Dixon briefly raised the interesting possibility that the implied nationhood power might be used in conjunction with section 90 to support a view like that of the majority in Ha. She points out that only Jacobs J, in the Australian Assistance Plan case, has ever suggested that the nationhood power might extend to give the Commonwealth control of the national economy. The majority in Ha did not discuss this, as they felt that they had sufficient authority from previous decisions and the Constitutional Conventions of 1891 and 1897. However, this might be an interesting counterargument to that of the minority, who have found “no justification for the assumption ... either in section 90 or elsewhere in the Constitution, or in history”.
Perhaps the most frustrating aspect of the Ha case is that, for all the panic it caused, it is so legally unsurprising. The majority view undoubtedly continues the High Court’s meandering trend over the last fifty years to construe “excise” in section 90 in its widest possible sense. The sole reason for the huge turmoil caused by the decision can be seen as the States’ use of an “insubstantial cloak” provided by the High Court as a base for large revenue-raising schemes. The majority in Ha did not say that licensing fees could never be valid State imposts; all they did was to remove the “special category” tag from tobacco (and alcohol and petrol by implication), especially where States have turned a regulatory framework into a revenue-raising device. And because the minority concentrated on demonstrating that only taxes on local production and manufacture could be described as excises under section 90, they did not need to discuss the idea of “shielding”. The result is that the minority is silent on one of the most practically important aspects of the judgment.
Even the flurry caused by the decision has precedent. In 1969, Lane was able to write of the panic caused by the decision in Hamersley Iron in which the High Court held receipt duties to be taxes on goods. Many commentators have written of the continuing uncertainty caused by the Court’s divided opinions, and the need to resolve the two views on section 90 “excises”. In 1986, Opeskin commented that the 1984 referendum question would have solved these problems if it had passed, as it
would have given the States the power to impose duties of excise, and thus would have bestowed a good measure of certainty on the financial relations between the States and the Commonwealth.
To return to the quote I used to preface this paper, twenty years ago, McCarry wrote with a measure of optimism that the divided opinions of the judges on the “criterion of liability” test might at last be showing signs of reconciliation. While that question was resolved in favour of a substance approach, it is ironic and unfortunate that twenty years later the question of what “excise” means is still no closer to consensus than before. It is true that the majority decision in Ha will mean that future judges will be hesitant to overturn the wider view of “excise”. And yet, the majority was four judges to three: is the current view of section 90 totally secure?
Ha v New South Wales had a great impact on the States when it was handed down. But the case itself is unremarkable, as it tells us very little new about excise. It does tell us once and for all that the Dennis Hotels formula is looked on with disapproval when used to cloak what is in substance a revenue raising scheme, although the High Court has declined to overrule that case.
With such a close balance between the majority and the minority, it is still uncertain what will happen in the next excise case. On the one hand, the High Court has firmly upheld Parton, by majority; on the other hand, there is only a majority of one judge. It is not inconceivable that the current minority opinion will become the majority opinion at some time in the future.
What is needed more than anything else is stability and consensus on this issue. If the High Court cannot decide, one way or another, the true intent of section 90 and the true meaning of “excise”, perhaps a legislative solution is needed. Perhaps the question needs to be put to the voters again, to clarify the meaning of section 90.
Whatever solution may be arrived at, Ha is neither saviour nor daemon. It is simply another case in a long line of section 90 cases which demonstrates the High Court’s struggle with the vexed question of the meaning of “excise”.