Philip Morris Ltd v Commissioner of Business Franchises

The criterion of liability formula was also the basis of the decision in Anderson's Pty. Ltd. v. Victoria [73] where the Court held that legislation which imposed stamp duty, payable by the vendor, on hire purchase and credit purchase agreements fixed at the rate of 2 per cent of the "purchase price" of the goods did not levy a duty of excise. The "purchase price" was defined to mean the total amount payable under the agreement less the deposit or other consideration or for interest, insurance or other charge.

However, in no subsequent case has the criterion of liability formula constituted the ratio decidendi. Indeed, it is difficult to see how the criterion of liability formula can now be said to represent the law. The formula as expounded in Bolton is inconsistent with the decisions in Western Australia v. Chamberlain Industries Pty. Ltd. [74] ; I.A.C. (Wholesale) [74] ; Logan Downs [75] ; Hematite Petroleum [76] and Gosford Meats [77] .

1. (1970) 121 C.L.R. 1. 2. (1970) 121 C.L.R. 1. 3. (1977) 137 C.L.R. 59. 4. (1983) 151 C.L.R. 599. 5. (1985) 155 C.L.R. 368.

In Chamberlain Industries and in I.A.C. (Wholesale), the Court held that legislation imposing duties on receipts of payments in respect of sales were duties of excise within the meaning of s. 90. In Logan Downs, a statutory majority of the Court held that a duty of excise was levied by legislation which empowered the Minister to make and levy annual assessments, at rates fixed by him, on an owner of cattle, horses, sheep and swine. Mason J. said [78] that a tax on the ownership of livestock kept for their product was a tax on the meat, milk, wool and other commodities which they produced. In Hematite Petroleum, the Court held that a duty of excise was levied by legislation, which prohibited the use of a pipeline conveying hydrocarbons, without the grant of a licence upon which a fee of $10 million was payable. In Gosford Meats, the Court held that legislation requiring payment of an abattoir licence fee, which was calculated by reference to an amount for each animal slaughtered during a preceding period, was a tax upon the process of producing vendible meat products and a duty of excise within s. 90. The decisions in these cases are quite inconsistent with the criterion of liability determining whether a tax is a duty of excise. In each of them the legislation selected as the criterion of liability a fact, event or thing which was not itself a step in the process of bringing the goods into existence or passing them down the line from the earliest stage in production to the point of receipt by the consumer. Yet in each case the tax was held to be a duty of excise because in substance, although not in form, it imposed a burden on such a step.

In my opinion the criterion of liability does not determine whether or not a tax is an excise. In determining whether a tax is imposed on some step in the production or distribution of goods before they reach the consumer, consideration of many factors besides the "criterion of liability" is necessary. As Barwick C.J. pointed out in Anderson's [79] :

The "indirectness" of the tax, its immediate entry into the cost of the goods, the proximity of the transaction it taxes to the manufacture or production or movement of the goods into consumption, the form and content of the legislation imposing the tax - all these are included in the relevant considerations. But in the end what must be decided is that the tax is in substance a tax upon the relevant step. That being the central question in a controversy as to the nature of the tax, it will not, in my opinion, necessarily be resolved by the form of the tax or by identifying what according to that form the legislature has made the criterion of its imposition, however important in any particular case those matters may be. Regard must be had to the substance of the operation of the statute: Dickenson's Arcade [80] ; Hematite Petroleum [81] . Moreover, it is not essential that there should be a proportionate relationship between the tax and the value or quantity of the goods: cf. Hematite Petroleum [82] , per Brennan J. Hence, what purports to be a licence fee may in substance be a tax upon goods: Peterswald [83] ; Hematite Petroleum. However, a licence fee is not a duty of excise if in substance it is an exaction for the right to carry on a business generally and not an exaction in respect of a particular act done in the course of the business: Dennis Hotels [84] , per Kitto J.; Hematite Petroleum [85] , per Mason J. 1. (1964) 111 C.L.R., at pp. 365-366. 2. (1974) 130 C.L.R., at p. 186. 3. (1983) 151 C.L.R., at p. 663. 4. (1983) 151 C.L.R., at p. 657. 5. (1904) 1 C.L.R., at p. 509. 6. (1960) 104 C.L.R., at p. 563. 7. (1983) 151 C.L.R., at pp. 633-634.

For ease of expression I shall refer to the current effect of the Act on the sales of the plaintiffs, but what follows applies equally to the past effect of the Act on the sales of the plaintiffs in so far as they are the subject of the present proceedings and irrespective of whether the tax was 25 per cent or 30 per cent. Upon the facts in the case stated, I think that s. 10 imposes a duty of excise on Philip Morris Ltd. ("P.M.L.") unless the legislation is indistinguishable from that considered in the franchise cases. I think that s. 10 imposes a duty of excise because it imposes a tax of 30 per cent on the estimated value of tobacco which P.M.L., as manufacturer, sells in any month for which it holds its licence. Quantification of a licence fee by reference to events in a past period of business will not prevent that fee from being characterized as a duty of excise: Gosford Meats. The fee for the month in the present case is calculated by reference to the sales for the last preceding month but one. The close proximity between the two periods shows that the purpose of the legislation is to tax the sale of tobacco by reference to the estimated value of what will be sold. If the fee were calculated by reference to the likely or projected sales for that month, the fee would be an excise: cf. Matthews . The Act does not, of course, select the likely or projected sales for the licence month as the criterion of liability. But by selecting the sales in the preceding month but one, it selects a period which, according to the ordinary course of business, is likely to give as accurate a guide to the likely sales during the month of the licence as can be practically achieved. The fee bears, therefore, "a natural, although not a necessary relation to the quantity of the commodity" sold during the month of the licence: cf. Matthews [86] . The relationship between the fee and the quantity of tobacco sold is even more direct than the relationships between the fees and the quantities of commodities produced in Hematite Petroleum and Logan Downs and which were held to be excises. Moreover, the calculation of the fee by reference to a percentage of actual sales in the preceding month but one, the size of the percentage, and the recurrent nature of the fee as a monthly outgoing lead to the conclusion that what is admitted to be a tax of 30 per cent was intended to be passed down the line to the consumer as part of the price of tobacco products sold by the licensee during the month of the licence. Demand for tobacco products seems to be relatively inelastic (i.e. relatively irresponsive to price change): see New South Wales Tax Task Force, Tax Reform and N.S.W. Economic Development: Review of the State Tax System, August 1988, p. 81. It is almost inevitable, therefore, that the incidence of the monthly licence fee will be shifted to the consumer. But whether or not the whole of the tax is passed onto the consumer, it is enough, according to the theory of this Court's decisions on excise, that the tax from its nature has "a tendency to enter into the price obtained": Parton [87] . Most of the monthly fee paid by P.M.L. is a direct tax on the sales made by a local manufacturer of its products (the balance is paid in respect of the sale of products which it does not manufacture). A tax payable by the producer of goods upon the first sale of goods produced by him is an excise: the Commonwealth Oil Refineries Case; John Fairfax & Sons.

1. (1938) 60 C.L.R., at p. 303. 2. (1949) 80 C.L.R., at p. 259.

The fee cannot be characterized as the right to carry on a business. The terms of s. 10 operate to ensure that the fee is paid once only. If P.M.L. sold its products only to wholesalers during the relevant month, it would be under no obligation to pay the 30 per cent fee. Likewise, a retailer who has purchased tobacco in the course of intrastate trade from the holder of a wholesale tobacco merchant's licence or a group wholesale tobacco merchant's licence is under no liability to pay any fee other than the nominal fixed fee. This feature of the legislation makes it clear that the fee is not a price for carrying on the business. Its purpose is to ensure that, in the ordinary course of distribution, tobacco products will be taxed but once before they reach the consumer. Moreover, the selection of a period of one month for the duration of the licence tells heavily against the notion that the fee is an exaction for the price of carrying on the business. Annual licences for engaging in business, sporting and social activities are common enough. But, outside the field of revenue statutes dealing with business franchise licences, monthly licences are not common, if indeed they exist at all.

P.M.L. is a producer of tobacco, and s. 10 operates to impose a tax on the sale of its tobacco products during the month in respect of which it is required to have a licence. Section 10, therefore, prima facie imposes an excise on the tobacco products manufactured by P.M.L. and sold by it by wholesale. In truth, the fee is a sales tax.

The decisions in Parton and I.A.C. (Wholesale) and so much of the decision in Dennis Hotels as related to the temporary licensing fee also require the prima facie conclusion that so much of the licence fee as is calculated by reference to the sale by P.M.L. of products which it does not manufacture (approximately 1.55 per cent of its sales) is a duty of excise on those sales. For the same reason, the licence fee payable by the second plaintiff is also prima facie a duty of excise.

In principle, therefore, I would conclude that the licence fee which the Act imposes on the plaintiffs is an excise unless the decisions in the franchise cases require, as a matter of authority, a contrary conclusion. Accordingly, I turn to the question whether there is any principle in those cases which governs the present case or whether, alternatively, the effect of the legislation in those cases is sufficiently comparable to the present Act to make the decisions in those cases applicable to the present case.

In Dennis Hotels [88] , a bare majority of the Court (Fullagar, Kitto, Taylor and Menzies JJ., Dixon C.J., McTiernan and Windeyer JJ. dissenting) held that the Licensing Act 1958 Vict. did not impose a duty of excise in requiring payment of an annual licence fee of 6 per cent on the gross amount paid or payable for all liquor purchased for the premises during the twelve-month period ended on the last day of June preceding the date of the application for the licence. No common thread can be found in the reasoning of the majority Justices. Fullagar J. [89] held that there was no excise because the fee "does not fall upon any producer or manufacturer, and it does not in any way affect production or manufacture". Kitto J. [90] said that the exaction was "only in respect of the business generally, and not in respect of any particular act done in the course of the business". His Honour said [91] that, although the figures for past transactions might not provide in every case or perhaps in any case an accurate indication of future business, nevertheless "in so far as they are a guide to the probable volume of business in the near future they are a guide to the relative values, as between different businesses in the same class, of the advantages which licences will confer". Taylor J. recognized that a system of licensing might frequently be adopted as a convenient aid to the administration of excise laws and the collection of excise duties. But his Honour thought that that was not the part played by this licensing system. His Honour said [92] that:

the issue of licences under that Act is, as already appears, a traditionally accepted method of regulating a trade which the public interest demands shall be subject to strict supervision. In other words the requirement that liquor shall not be sold or disposed of without a licence appears as a substantive provision and not merely as an adjunct to a revenue statute. But this very requirement necessarily means that partial monopolies will be enjoyed by licensees and that licensed premises will, as such, achieve an enhanced value. Menzies J. [1] said that the fees in question were "imposed as part of the State's detailed control of the liquor trade which is effected by the Act". His Honour pointed out that it was part of the statutory scheme that there should be a licensing fund to be applied towards the carrying out of the provisions of the Act including the payment of compensation to owners and occupiers of licensed premises deprived of licences under the Act and that it was into that fund that all licence fees were to be paid. Menzies J. [2] concluded the licence fee was "a tax upon a licensed victualler as the price for his franchise to carry on a business, the most important element of which is to sell liquor from the licensed premises independently of whether the liquor is produced in Australia or abroad, or partly in Australia and partly abroad". 1. (1960) 104 C.L.R. 529. 2. (1960) 104 C.L.R., at p. 558. 3. (1960) 104 C.L.R., at p. 563. 4. (1960) 104 C.L.R., at p. 566. 5. (1960) 104 C.L.R., at p. 576. 6. (1960) 104 C.L.R., at p. 579. 7. (1960) 104 C.L.R., at p. 591.

The reasoning of the majority judges in Dennis Hotels is so divergent that the decision is an authority only for the proposition that the Licensing Act did not impose a duty of excise on a licensee: see Dickenson's Arcade [3] , per Barwick C.J. I am unable to agree with the statement of Gibbs J. in Dickenson's Arcade [4] that Dennis Hotels "is authority for the proposition that legislation which provides for the grant of a licence to sell goods, on payment of a licence fee, the quantum of which is based on the value of the goods purchased for the premises in a previous year, does not impose a tax directly related to the goods". His Honour in my opinion incorrectly rejected the submission in that case that the decision in Dennis Hotels "should not be regarded as a binding authority because the reasons of Fullagar J. cannot be regarded as fully acceptable and the other members of the Court were equally divided in opinion". With respect, only the reasoning of Kitto, Taylor and Menzies JJ. in Dennis Hotels arguably supports the proposition for which Gibbs J. said that Dennis Hotels is an authority. Since the reasons for decision of Fullagar J. were different from those of the other judges in the majority, the case is an authority only for what it decided in respect of the legislation there under examination. That is to say, the Licensing Act in requiring the payment of an annual fee did not impose a duty of excise. Dennis Hotels is not an authority for any wider proposition. Ironically, the correct approach to a case like Dennis Hotels was expounded by Gibbs J. in H.C. Sleigh [5] , when he said that since the reasoning of the majority of the Court in M.G. Kailis (1962) Pty. Ltd. v. Western Australia [6] had no common basis "the authority of that case would appear to be limited to the very question it decided, i.e. that s. 35G is invalid". See also the remarks of Gibbs C.J. in Gosford Meats [7] , where he said that M.G. Kailis [1] was "of no value as an authority".

1. (1974) 130 C.L.R., at p. 188. 2. (1974) 130 C.L.R., at p. 226. 3. (1977) 136 C.L.R., at p. 493. 4. (1974) 130 C.L.R. 245. 5. (1985) 155 C.L.R., at p. 379. 6. (1974) 130 C.L.R. 177.

In Dickenson's Arcade [1] however, the decision in Dennis Hotels was influential, if not decisive, in this Court's conclusion that Pt III of the Tobacco Act 1972 Tas. did not impose a duty of excise on the retail sale of tobacco. In Dickenson's Arcade the licence fee was calculated by reference to the average monthly value of tobacco "handled" at the premises over the period of twelve months ending six months before the commencement of the annual period in respect of which the licence was granted. The effect of Pt III was that the maximum fee payable was 2.5 per cent of the value of the tobacco handled in the relevant assessment period where the value was not less than $7,200.00. Barwick C.J. [2] , although doubting the correctness of the reasoning and the decision in Dennis Hotels, thought that the "statutory and factual situation in this case is so substantially similar to and not distinguishable from the statutory and factual situation" in that case that he should follow that decision. Mason J. [3] said that he also was unable to discern any difference between the two pieces of legislation. Menzies J. [4] concluded that the licence fee was a personal tax "for a franchise to sell tobacco in Tasmania". His Honour thought that Dennis Hotels was an authority "against treating the tax as a duty of excise" [5] . Gibbs J. [6] was of the opinion that Kitto J. was correct in Dennis Hotels in stating that the licence fee was an exaction "only in respect of the business generally, and not in respect of any particular act done in the course of the business". His Honour went on to conclude [7] that the reasoning for which Dennis Hotels was authority led to the conclusion that the fee was not a tax on any purchase or sale of tobacco. I have already pointed out, however, that Dennis Hotels is only an authority for the proposition that the Licensing Act did not impose a duty of excise. Stephen J. [8] said that it was clear that current dealings in tobacco played no part in determining the amount of the licence fee and that, quite apart from authority, he would not regard the fee as demonstrating that what was being taxed was the taking of a step in dealing with particular quantities of tobacco. His Honour thought that the view he took of the "significance of the basis upon which licence fees are to be calculated" was supported by Dennis Hotels. McTiernan J. dissented.

1. (1974) 130 C.L.R. 177. 2. (1974) 130 C.L.R., at p. 189. 3. (1974) 130 C.L.R., at pp. 243-244. 4. (1974) 130 C.L.R., at p. 213. 5. (1974) 130 C.L.R., at p. 211. 6. (1974) 130 C.L.R., at p. 255. 7. (1974) 130 C.L.R., at p. 227. 8. (1974) 130 C.L.R., at p. 236.

Again, I do not think that it is possible to hold that Dickenson's Arcade is an authority for any general principle. The most that can be said about Dickenson's Arcade as an authority is that the reasons of three of the six judges - Menzies, Gibbs and Stephen JJ. - support the proposition that the nature of the fee imposed by the legislation in that case was not one directly related to goods. But that proposition adds nothing to what is to be derived from the actual decision in the case, namely that upon the legislation in that case no duty of excise was imposed.

Finally, I turn to consider H.C. Sleigh [9] where the plaintiff alleged that the Business Franchise (Petroleum) Act 1974 S.A., which made it unlawful to carry on the business of selling petroleum products on and from 24 March 1975 unless a person was a holder of a licence, imposed a duty of excise. During the currency of the Act there were two licence periods. The first commenced on 24 March 1975 and ended on 23 September 1975. The second commenced on 24 September 1975 and ended on 23 December 1975. The fee payable for a licence comprised a fixed sum of money and a further amount which with one exception was "the prescribed percentage of the value of the quantity of petroleum products sold by the applicant during the relevant period reduced by the quantity of any petroleum products non-accountable in respect of that period". The relevant period for the first licence period was the financial year ending 30 June 1974 and for the second licence period the financial year ending 30 June 1975. Barwick C.J. [10] held that the case was governed by the decision in Dickenson's Arcade. Gibbs J. [11] was also of the opinion that the case was governed by Dickenson's Arcade. His Honour said [11] that the Act did not "impose a tax on goods, because the fee for a licence to carry on the business of selling petroleum products is quantified by reference to the value of the quantity of petroleum products sold during a period preceding that in respect of which the licence is granted". Stephen J. [12] also held that the legislation in all relevant respects was indistinguishable from that considered in Dickenson's Arcade. He also rejected the notion that there was anything artificial in distinguishing between current and past sales. Mason J. [13] said there was nothing to distinguish the licence fee from that which was dealt with in Dickenson's Arcade. His Honour said that although "some attempt was made to suggest that the plaintiff was engaged in manufacturing operations in that it included one or more additives in the petroleum products which it obtained from refiners, the prohibition is against carrying on the business of selling petroleum products without a licence, that is against selling, not against manufacturing". Murphy J. [14] was of the opinion that the licence fees imposed no excise because "duties of excise for the purposes of Ch. IV of the Constitution are taxes on goods produced or manufactured in the State". Jacobs J. dissented.

1. (1977) 136 C.L.R. 475. 2. (1977) 136 C.L.R., at p. 488. 3. (1977) 136 C.L.R., at p. 491. 4. (1977) 136 C.L.R., at p. 491. 5. (1977) 136 C.L.R., at p. 496. 6. (1977) 136 C.L.R., at p. 503. 7. (1977) 136 C.L.R., at p. 526.

Again I think that H.C. Sleigh is only an authority for the proposition that legislation of the kind there involved does not impose a duty of excise. That is the precise effect of the reasoning of Barwick C.J. and Mason J. Murphy J. decided the case on the basis that excise duties are limited to taxes on production or manufacture. Only the judgments of Gibbs and Stephen JJ. are capable of supporting a wider proposition.

It was also suggested in argument that H.C. Sleigh expressly decided that legislation requiring a producer to pay a licence fee is not an excise when the fee is calculated by reference to past sales of the producer. I cannot accept that submission. As I have pointed out, I do not think that H.C. Sleigh decided anything more than that the legislation in that case did not impose a duty of excise. It is true that in H.C. Sleigh the plaintiff sought to allege that it was a producer and fell within the authority of the decision in M.G. Kailis where a levy upon a producer was held to be an excise. But I think that the judgments in H.C. Sleigh show that the Court treated the plaintiff as a seller only and not as a producer who was a seller. Accordingly, I do not think that the decision can be taken as assimilating the position of a producer who is required to pay a licence fee quantified by reference to past sales with that of a retailer. Moreover, it would be astonishing if Mason J. was intending, sub silentio, to overrule the distinction which he made in M.G. Kailis between the position of a manufacturer or producer and a seller of goods. Indeed, in H.C. Sleigh, his Honour expressly referred to M.G. Kailis and pointed out [15] that "although I accepted Dennis Hotels as an authoritative decision in relation to a licence fee having similar characteristics, I did not regard the majority judgments as expressing a principle that would necessarily govern all cases, in particular cases where a licence similarly calculated was imposed on the manufacture or production of goods". No doubt it is true that in M.G. Kailis the licence fee was calculated by reference to a step in production or manufacture and not by reference to the sales of the producer. But it would be absurd to suppose that there is any constitutional difference between the licence fee of a producer quantified by reference to a step in production (say the value of goods produced) and the licence fee of a producer quantified by reference to his sales. In Gosford Meats [16] , Mason and Deane JJ. said that, although Dennis Hotels had been allowed to stand as an authoritative decision on its own facts, "it would fly in the face of both principle and authority to accept it as establishing a general proposition that can be applied to a tax made payable, in the form of a licence fee, by a manufacturer or producer of goods". The same comment can be made in respect of H.C. Sleigh.

1. (1977) 136 C.L.R., at p. 500. 2. (1985) 155 C.L.R., at p. 385.

In my opinion the decisions in the franchise cases do not require the conclusion that no duty of excise is levied by legislation which prohibits a manufacturer from selling his products except upon payment of a licence fee quantified by reference to his sales in a past period of business. In so far as the Act prohibits P.M.L. from selling the tobacco products which it manufactures except upon payment of a licence fee, the Act is an invalid attempt to levy a duty of excise on it.

Moreover, there is in my opinion a substantial difference between the legislation in the present case and the legislation considered in the franchise cases. That difference is more than one of degree. It reinforces the conclusion that the franchise cases are not authority for the proposition that fees levied upon P.M.L. in respect of the sale of products manufactured by it are not duties of excise. But more importantly, it leads to the conclusion that the decisions in the franchise cases do not require a finding that the fees calculated by reference to the sales by P.M.L. and the second plaintiff of products which they do not manufacture are not duties of excise.

In Dennis Hotels and in Dickenson's Arcade the licences were annual licences calculated by reference to annual periods which expired six months before the commencement of the licence periods. In H.C. Sleigh the first licence was for a six-month period and the second licence was for a three-month period which coincided with the termination of the legislation. In the case of the first licence period, the licence fee was calculated by reference to an annual period which ended nine months before the licensed period commenced. In respect of the second licensed period, the licence fee was calculated by reference to an annual period which ended three months before the second licence commenced. In these three cases the length of the licence period, the smallness of the fee, and the length of time between the commencement of the licence period and the end of the period by which the licence fee was calculated gave rise to a respectable, if not necessarily correct, argument that the licence fees were for the privilege of carrying on the business. By way of contrast in the present case, the licences are monthly licences. They are calculated by reference to the sales for a one-month period in the immediately preceding month but one from the period for which the licence is granted. The proportion of the fee to sales in the present case is much higher than in the franchise cases. The fee is more likely to be passed on to the consumer than the fees in the franchise cases.

The proximity of the calculation period to the licence period, the shortness of the duration of each period, the size of the tax, and the indication that it is to be collected but once in the chain of distribution overwhelmingly indicate that what is being directly taxed by s. 10 is the step of selling tobacco in the course of the business. The licence fee in the present case, therefore, is not an exaction for the privilege of carrying on a business but a tax on the sale of tobacco. The legislation and the decisions in the franchise cases furnish no reason, analogy or authority for reaching a different conclusion. If there is no constitutional difference between the licence and calculation periods in the present case and those in the franchise cases, it is difficult to see how there would be any constitutional difference if the licence was for a weekly or daily period quantified by reference to sales in the immediate preceding week or day but one. I doubt that the franchise cases were correctly decided. But they should be followed in the circumstances and for the reasons to which I earlier referred. That does not mean, however, that the Court should hold that legislation, which imposes a higher rate of tax or selects quite different licence and calculation periods from those involved in the franchise cases, does not levy a duty of excise.

In my opinion the Act imposed and imposes duties of excise on the plaintiffs. I would answer the questions submitted in the case stated:

1. Yes, except for the fixed amounts prescribed by s. 10 of the Business Franchise (Tobacco) Act 1974 Vict..

2. Yes, but only as to those parts of the several paragraphs of s. 10(1) of the Business Franchise (Tobacco) Act 1974 Vict. which commence with the words "together with".

3. Sections 7 and 10 are invalid in so far as they apply to a person in the position of the plaintiff to the extent stated in the answer to question 2.