EVs and excise: constitutional challenge to Victoria's electric vehicle road user charge

Federal-state taxation rights over the use and consumption of goods called into question 8 min read

A constitutional challenge to the Victorian electric vehicle (EV) road user charge has brought into sharp focus the balance of taxing rights as between the states and the Federal Government. The case may have broad-ranging implications for federal and state tax bases, including in relation to Australia's energy transition.

Key takeaways

• The Victorian EV road user charge is being challenged in the High Court.
• The plaintiffs, and the Federal Government, argue that the EV road user charge is an excise and therefore invalid because of section 90 of the Constitution.
• If the plaintiffs are successful, the decision may cast doubt on the validity of:
  • EV road user charges enacted in other jurisdictions (eg NSW, SA); and
  • taxes which are imposed by states on the use or consumption of goods after the point of sale.

The excise prohibition

Under Australia's constitutional framework, the Federal Government and the states are each empowered to make laws with respect to taxation. Section 90 of the Constitution, however, makes exclusive the power of the Federal Government to impose taxes which are duties of customs and excise. Any duty of custom or excise imposed by a state is therefore invalid.¹ Section 90 provides:

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…

The classic definition of an excise is that provided by Chief Justice Brennan, and Justices McHugh, Gummow and Kirby in Ha v NSW (1997) 189 CLR 465, as follows:

[A]n inland tax on a step in production, manufacture, sale or distribution of goods…

Excise duties are often imposed on articles of 'luxury' such as alcohol and tobacco, and primary products such as meat, milk and fuel. Courts have generally adopted a 'substance over form' approach in considering whether a tax constitutes an excise.²

An important boundary principle has been maintained by the case law on s90: a tax will be an excise only where it is imposed on goods up to the point of receipt by a consumer.³ Although the boundary is widely adopted by the case law, it has been described by Chief Justice Barwick as being compelled by 'no logical reason'.⁴

This boundary between taxes on goods up to and after reaching a consumer is raised by, and likely to be tested in, the challenge to the Victorian EV road user charge.

High Court challenge to the new ZLEV Charge in Victoria

The plaintiffs, Chris Vanderstock and Kathleen Davies, are Victorian registered owners of an electric vehicle and a plug-in hybrid vehicle respectively. The plaintiffs are challenging the Zero and Low Emission Vehicle Distance-Based Charge Act 2021 (Vic) (the ZLEV Act) in the High Court on the basis that it imposes an excise contrary to s90 of the Constitution. All governments (state, territory and federal) have made submissions in the case, with the Federal Government supporting the position of the plaintiffs.

The scheme of the ZLEV Act

The ZLEV Act requires the registered operator of an electric, plug-in hybrid electric or hydrogen vehicle (each, a ZLEV) to pay a charge (the ZLEV Charge) for the 'use' of the ZLEV on 'specified roads'.⁵ Registered operators must declare the total distance travelled by the ZLEV annually.⁶ The ZLEV Charge is calculated based on the kilometres travelled on specified roads during each financial year.⁷

The rate of the ZLEV Charge over the last financial year was 2.5 cents per kilometre for hydrogen vehicles or electric vehicles, and 2.0 cents per kilometre for plug-in hybrid electric vehicles.⁸

The ZLEV Act was introduced to ensure that registered operators of ZLEVs make a fair contribution to the funding of Victorian roads, noting that such drivers pay little or no fuel excise (the revenue from which is used for road funding) because their vehicles are primarily powered by electric or alternative fuel sources.

The plaintiffs' claim: a tax on the consumption of goods is an excise

The plaintiffs argue that the ZLEV Charge imposed by the ZLEV Act is invalid on the ground that it is a duty of excise within the meaning of s90 of the Constitution.⁹ Their case is founded on the proposition that the ZLEV charge is a tax on the 'consumption' of goods (namely, ZLEVs) and that such a tax is a duty of excise for the purpose of s90.¹⁰

The plaintiffs advance the following submissions in support of their case:

• The ZLEV Charge is a tax imposed on the 'consumption' of the ZLEV. The plaintiffs point to the fact that the ZLEV Charge is imposed on the use of ZLEVs—a registered operator is not liable to pay the ZLEV Charge unless the ZLEV has been driven; the rate of the ZLEV Charge varies depending on the type of ZLEV; and the amount of the ZLEV Charge is linked to the distance travelled.¹¹
• A tax imposed on the consumption of goods is a tax 'upon goods', and therefore falls within the scope of s90. The plaintiffs argue that the phrase 'duties of customs and excise' in s90 of the Constitution covers the field of taxes on goods, such that there can be no taxes on goods that are not within the scope of s90.¹²
• The exclusion of consumption taxes from the scope of s90 would deny the Federal Parliament effective control over economic policy affecting the supply and price of goods throughout Australia, thereby undermining the purpose of s90.¹³ Just as a tax upon the production, manufacture, sale or distribution of goods is an excise because it tends to be passed on to the consumer and prejudice the demand for the goods burdened by the tax, a consumption tax increases the costs borne by the consumer in relation to the goods (albeit following the point of purchase) and diminishes demand for those goods.¹⁴

Victoria's response

Victoria's case, backed by all of the other states and territories, is that the ZLEV Charge is not an excise because:

• it is not a tax 'on goods', but rather a tax on the activity of driving a ZLEV on a 'specified road';¹⁵ or
• alternatively, it is not a tax on the production, manufacture or distribution of ZLEVs, but rather on their consumption, which is not a duty of excise.¹⁶

In support of the first proposition, Victoria argues that the ZLEV Charge is levied upon the activity of driving a ZLEV on 'specified roads', calculated according to the number of kilometres driven by the ZLEV on such roads annually.¹⁷ Victoria considers that a charge of this kind, imposed periodically after the point of sale and incurred only if a person engages in a specific activity, bears no resemblance to any charge previously considered to be a tax on goods, let alone an excise.¹⁸

If, contrary to that argument, the ZLEV Charge is characterised as a tax on goods, then Victoria submits that duties of excise should not be extended to include consumption taxes.

Implications from the case

Equivalent road user charges in other states

If the plaintiffs succeed in arguing that the ZLEV Charge is invalid as a duty of excise prohibited by s90 of the Constitution, it is likely that equivalent charges in other states are also invalid.

NSW and SA have introduced equivalent charges to the Victorian ZLEV Charge.¹⁹ Those charges, however, will not commence until 1 July 2027, unless the relevant state passes a threshold of 30% of new motor vehicle sales comprising battery electric vehicles. We note, however, that in South Australia the Labor government has introduced a bill to abolish the road user charge (which was introduced by the former Coalition government) in an attempt to remove barriers to South Australians adopting electric vehicles.²⁰ Western Australia has also announced plans to introduce a road user charge as part of a $60 million package to accelerate ZLEV use.²¹

Like the ZLEV Charge, the NSW and SA road user charges apply to all electric, plug-in hybrid and hydrogen vehicles and impose the road user charge based on the annual distance travelled at a rate of 2.5 cents per kilometre for hydrogen vehicles and electric vehicles, and 2.0 cents per kilometre for plug-in hybrid electric vehicles (the same rate as the ZLEV Charge).

If the plaintiffs succeed in arguing that the ZLEV Charge is invalid as a duty of excise prohibited by s90 of the Constitution, it is likely that equivalent charges in other states are also invalid.

State taxes on use or consumption of goods

If the High Court extends the kinds of taxes prohibited by s90 to taxes imposed on goods after the point of receipt of the relevant good by the consumer, this may call into question the validity of other taxes imposed by the states that might be characterised as taxes on the use or consumption of goods. This would represent a noteworthy shift in the vertical fiscal imbalance and in federal-state financial relations, with the Federal Government effectively having exclusive power to impose taxes on the use or consumption of goods after they reach consumers.

One example might be the possible invalidity of state stamp duties, such as the registration duty imposed on the transfer of new and second-hand motor vehicles, or the transfer duty imposed on the sale of goods together with land or businesses.

How the High Court challenge could affect you

If the plaintiffs are successful in their challenge to the ZLEV Charge:

• the ZLEV Charge would be invalid, with the effect that any annual charges levied on EV users under the ZLEV Act would be invalid (and should be refunded);
• EV road user charges in other states are likely to be invalid; and
• any state-imposed taxes (such as stamp duty) relating to the use or consumption of goods may be invalid.

If the plaintiffs are successful, however, there is a possibility the Federal Government would impose 'saving' legislation to ensure that tax collected under impugned legislation does not need to be refunded. Saving legislation was imposed, for example, after the successful challenge to the tobacco franchise levy in Ha,²² and after the successful challenge to the imposition of state taxes at Melbourne Airport in Allders International Pty Ltd v Commissioner of State Revenue (Vic) (1996) 186 CLR 630.²³