Victorian electric car tax held unconstitutional

Vanderstock v Victoria [2023] HCA 30

On 18 October 2023, by a 4:3 majority the High Court of Australia declared invalid a tax imposed by Victoria on the use of electric and hybrid vehicles. The tax imposed was held to be a “duty of excise” within the meaning of section 90 of the Constitution, and therefore a tax only able to be imposed by the Commonwealth.

Previous decisions of the High Court had held that taxes on the production, distribution and sale of goods were duties of excise, but that taxes on the use or consumption of goods by consumers were not. The majority in Vanderstock has now overruled a previous High Court authority and has extended the meaning of “excise” to consumption taxes on goods.

The facts

Section 7(1) of the Zero and Low Emission Vehicle Distance-based Charge Act 2021 (Vic) requires the registered operator of a “zero or low emissions vehicle” to pay a charge (ZLEV charge) for “use of the [vehicle]” at a prescribed rate for each kilometre travelled during a financial year. For FY21/22, the rate was 2 cents for a hybrid vehicle and 2.5 cents for an electric or hydrogen vehicle. The lead plaintiffs were registered operators of such vehicles (ZLEVs) who had paid the ZLEV charge for FY21/22.

The key issue

Before setting out the Court’s reasoning, it is important to understand the key interpretive issue that was in dispute, and its legal context and purpose.

First, the context: section 90 of the Constitution provides for the “exclusive” power of the Commonwealth Parliament to impose “duties of customs and of excise”. Many people will be broadly familiar with the notion of a customs duty, but not so many would be so familiar with what an “excise” means. Unfortunately, it does not have an agreed precise technical meaning.

The majority in Vanderstock stated that the High Court has previously held that duties of customs and duties of excise are the two possible forms of taxes on goods. Duties of customs are “border taxes” on goods, imposed at the stage of importation or exportation; duties of excise are “inland taxes” on goods, whether imposed at the stage of production, distribution or sale of the goods.

The key interpretive issue was whether a tax imposed at the stage of use or consumption of a good could also be an excise. The problem for the plaintiffs was that the Court had previously held in Dickenson’s Arcade Pty Ltd v Tasmania (1974) 130 CLR 177 (Dickenson’s Arcade) that a tax on the consumption of goods was not a duty of excise.

And what of the purpose and effect of section 90? The majority relied on the following statement of Dixon J in Parton v Milk Board (Vic) (1949) 80 CLR 229 in the context of a decision that extended the meaning of excise to a tax at the stage of retail sale to the consumer:

… it was intended to give the Parliament a real control of the taxation of commodities and to ensure that the execution of whatever policy it adopted should not be hampered or defeated by State action. A tax upon a commodity at any point in the course of distribution before it reaches the consumer produces the same effect as a tax upon its manufacture or production. If the exclusive power of the Commonwealth with respect to excise did not go past manufacture and production it would with respect to many commodities have only a formal significance.

This statement reveals two of the historical overarching issues when applying section 90:

1. the true constitutional conception of federalism with respect to taxing powers specifically and economic powers broadly (that is, what is the proper division of powers between the States and the Commonwealth in this area?); and,
2. the inquiry as to the legal form of the tax as against its substance or effect.

The majority’s reasoning

The majority consisted of the plurality judgment of Kiefel CJ, Gageler and Gleeson JJ, and the separate judgment of Jagot J.

The majority re-considered in great detail and overruled Dickenson’s Arcade, holding that a tax on the consumption of goods can constitute a duty of excise: [92]-[134] and [933]-[948]. Moreover, such a result was consistent with the broad constitutional purpose of section 90 identified above, having regard to the substantive economic effects of a tax on consumption, namely that:

• a tax on the use or consumption of goods increases the cost of those goods for consumers; and
• such a tax can therefore affect the market in those goods by depressing demand for them, in much the same way as a tax on production or distribution: [124]-[125].

That interpretive issue having been answered, the key question was then: was the ZLEV charge an inland tax on goods, and therefore an excise. The relevant questions to determine this, and the plurality’s answers, were as follows:

a.      Did the tax bear a “close relation” to the production, sale, distribution or consumption of goods? In other words, is it a tax on a “step” involving goods? – Yes, because there was a close relation between the tax and the use or consumption of ZLEVs. It was not merely a privilege, registration or regulatory licence fee. Nor was it merely a tax on the “activity of driving a ZLEV”: at [147] and [185]-[191].

b.      Is the tax of such a nature as to affect the goods “as the subjects of manufacture or production” or “as articles of commerce”, and as a matter of practical judgment? – Yes, as the tax affects ZLEVs as goods, including because of its tendency to affect demand for ZLEVs: at [148]-[154] and [192]-[194].

Justice Jagot concurred in the plurality’s framing of the above questions (at [943]), and their answers (at [949]).

The minority’s reasoning

It is not within the scope of this note to explain in detail the reasoning of the three minority judgments of Gordon J, Edelman J and Steward J.

Each disagreed with the majority judges’ interpretation of the authorities as to the broad constitutional concept of “excise” as any “inland tax on goods” and the broad asserted purpose of section 90. Each disagreed that the concept of a “duty of excise” extends to a charge on consumption. And each disagreed that the ZLEV charge was a tax on ZLEVs as goods, particularly because their Honours disagreed with the above subsidiary tests framed by the majority.

Further, the minority judgments noted that, as a result of the majority’s reasoning, many other duties and levies imposed by State governments may now be invalid: at [437], [677] and [785]. For Gordon J, “uncertainty … is likely to remain the default for many years”, and for Edelman and Steward JJ, this may ultimately herald the need for a “fresh start” in interpreting section 90. Only time will tell.

Conclusion

Vanderstock continues the long and contentious history of the High Court’s jurisprudence on section 90. Not only was the Court divided on the key interpretive issue and then the application of the section, but the Court was also fundamentally divided on the broader context and purpose of section 90.

Although Vanderstock has established a majority approach to section 90, the future application of the relevant tests to various other forms of State taxes is currently uncertain. It now remains to be seen whether the High Court will soon be hearing further cases applying section 90 to a variety of State taxes, and whether the Court will be able to resolve the uncertainties inherent in the application of a new approach.