FEDERAL COURT OF AUSTRALIA Avon Products Pty Limited v Federal Commissioner of Taxation [2004] FCA 475 SALES TAX – application for refund of overpaid sales tax – regular prices set in excess of costs including sales tax but otherwise without regard to amount of sales tax – all products regularly discounted - regular sales campaigns target overall profit margin on sales – whether applicant satisfied onus of showing sales tax not passed on to purchasers. Sales Tax Assessment Act 1992 (Cth) s 51, Sch I Taxation Administration Act 1953 (Cth) s 14ZZ Amway Australia Pty Ltd v Federal Commissioner of Taxation (1999) 41 ATR 443 Otto Australia Pty Ltd v Federal Commissioner of Taxation (1991) 28 FCR 477 Otto Australia Pty Ltd v Federal Commissioner of Taxation (1990) 25 FCR 257 Case 45/95 (1995) ATC 395 AVON PRODUCTS PTY LIMITED v FEDERAL COMMISSIONER OF TAXATION N978 of 2002 HILL J 23 APRIL 2004 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N978 OF 2002 BETWEEN: AVON PRODUCTS PTY LIMITED APPLICANT AND: FEDERAL COMMISSIONER OF TAXATION RESPONDENT JUDGE: HILL J DATE OF ORDER: 23 APRIL 2004 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The application be dismissed. 2. The applicant pay the respondent's costs of the application. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N978 OF 2002 BETWEEN: AVON PRODUCTS PTY LIMITED APPLICANT AND: FEDERAL COMMISSIONER OF TAXATION RESPONDENT JUDGE: HILL J DATE: 23 APRIL 2004 PLACE: SYDNEY REASONS FOR JUDGMENT 1 This is an application under s 14ZZ of the Taxation Administration Act 1953 (Cth). In it the applicant appeals against an objection decision of the Respondent Commissioner of Taxation disallowing to the applicant a claim for a credit entitlement under s 51(1) of the Sales Tax Assessment Act 1992 (Cth) ("the Act") 2 The applicant claimed a refund of sales tax pursuant to Credit Ground CR1 of Table 3 to Schedule 1 of the Act for overpaid sales tax during the period 1 March 1993 to 31 August 1998 ("the relevant period"). Credit Ground CR1 applies where tax has been overpaid. The ground is detailed in column 3 of the Table to be "Claimant has paid an amount as tax that was not legally payable". The amount of the credit (column 4) is stated to be "the amount overpaid, to the extent that the claimant has not passed it on". 3 It is not in dispute that the applicant overpaid sales tax in the amount of $3,610,261 during the relevant period. For completeness I will set out under the heading "The Facts" how the overpayment arose. What is in dispute here is whether the applicant passed the amount of the overpaid tax on to its customers. The Facts 4 During the relevant period, the applicant carried on a business which involved selling by retail a variety of goods that can be largely divided into two categories, namely cosmetics, fragrances and toiletries ("CFT products") which accounted for approximately 60% of total sales; and jewellery, accessories, gifts, apparel and home items ("non CFT products") which accounted for approximately 40% of total sales. 5 The applicant conducted its business through a network of sales representatives who were independent contractors, and not employees. The sales representatives sold the applicant's products directly to the public through door-to-door sales. Those sales were "indirect marketing sales" within the meaning of s 20 of the Act. In consequence the taxable value for the purpose of sales tax was the notional wholesale selling price under assessable dealing AD2d or AD12d. 6 Until 1 December 1995, the applicant had paid sales tax upon its indirect marketing sales on the basis that the taxable value was determined by reference to "cost plus 35%". This was in accordance with sales tax ruling ST2424. From 1 December 1995, the applicant utilised the Australian Taxation Office's ("ATO") "safe harbour" ruling of "cost plus 15%" (see Exhibit CJS31 to the Affidavit of Christopher Stevens). On 5 February 1999, the ATO issued a Sales Tax Private Binding Ruling to the applicant which determined that the taxable value of its products should be the "store cost of the goods plus 11.63%". Accordingly, the applicant claimed a refund of sales tax from the ATO because it had during the relevant period remitted sales tax to the ATO upon the basis of taxable values in excess of the "store cost of the goods plus 11.63%". 7 The question whether sales tax has been passed on may be a difficult hurdle for taxpayers seeking a refund to overcome. Whether or not this is the case, there have been few cases where the Court has had occasion to discuss the principles involved. Perhaps the reason for this may lie in the fact that the question is really one of fact and not one of law. No doubt a taxpayer which has charged sales tax at one rate and has thereafter found that the tax properly payable was a lesser amount could, if it wished, refund the amount of the overpayment to customers to whom it had sold goods and in such a case the taxpayer would obviously be entitled to a refund. However, that seldom happens in the real world. Indeed, it may often be impractical as customers may well have gone out of existence or be incapable of being located. That will particularly be the case where sales have been made to the public. In some cases taxpayers may be able to demonstrate that while not having given refunds, they have priced products in such a way as, in effect, to refund amounts previously overpaid to customers by reducing the price at which future goods are sold. Whether a taxpayer in such a case would be successful would depend upon the evidence which is adduced. In other cases a taxpayer may seek to show that it has priced its goods at a price that has the consequence that it is the taxpayer, and not the purchaser from the taxpayer, who bears the sales tax. That is what the applicant seeks to do in the present case. Accordingly it is necessary to examine carefully the evidence, particularly as to the applicant's methodology for setting prices, and whether or not changes in sales tax affected this methodology. 8 During the relevant period, the applicant sold all of its goods through marketing campaigns that were standardised across its 110 sales districts within Australia. There were 18 such campaigns during a calendar year and each had a duration of approximately three weeks. Although the applicant would set a "regular price" for each product sold, there was heavy discounting in each campaign. In fact, discounting was an integral part of the applicant's business, because 85% to 95% of its sales were made at a discounted price. Accordingly, to understand the applicant's methodology for price setting, it is necessary to look at how the applicant set both the regular price and the discount price for each of its products. To this end, I will first review the method for setting regular prices. 9 Prior to introducing a new product, the applicant would engage in "benchmarking" its prices against prices for comparable products charged by competitors. The benchmarked price became the regular price for the product. If there was not a directly comparable product, the applicant set its price at that of a similar product from within the Avon range, or if there was no such product, at the price which it thought the market could bear. 10 Evidence was given from Mr Christopher Stevens, who during the relevant period was initially Marketing Manager and later the applicant's Vice President of Sales. He explained the applicant's pricing of products by taking by way of example a range of bubble baths products available in 3 variants (Pink, Peach and Lavender). These products were introduced during the relevant period. 11 The first step in the pricing process was a product review meeting. For this meeting there was prepared for discussion a "Marketing Product Profile Sheet". On that sheet were recorded a proposed price ($9.95), a cost objective ($2.25) (ie an estimate of the amount which was the preferred maximum cost of the product), a gross profit margin based on the cost objective figure and the regular price net of the commission payable to sales representatives (67.7%). Sales tax was included in the "cost objective". It is said that the purpose of determining the objective cost of the product is so as to ensure that Avon achieved what to it was an acceptable profit margin on the sale of the product. It was not the case that Avon set prices specifically by adding a fixed profit margin to cost. 12 Next, the product profile was discussed at a New Product Development Meeting attended by a Product Manager with knowledge of costings from within the applicant's finance department and the representative from the purchasing and manufacturing area. This meeting would focus on matters such as the product design, quality, launch requirements and timing. Thereafter the representative from the purchasing and manufacturing area would send details of the product to a sample of vendors for a cost quote. 13 Once cost quote details were known, the Avon Finance department analysed the cost of the product. A cost sheet was prepared with a full breakdown of the estimated maximum cost of the product. The estimated cost could prove to be inaccurate as it might be affected by matters such as currency fluctuation, increase in supplier costs or other factors beyond the applicant's control. The cost sheet for the bubble bath products showed that each of the pink, peach and lavender varieties cost $2.137, $2.342 and $2.328 respectively. Sales tax of $0.489, $0.536 and $0.533 respectively were included in these figures. There was calculated a "net to Avon Price" which was the estimated retail price less the average sales representative's commission, which was approximately 30%. 14 There was then held a Cost Approval Meeting attended by the same people as attended the New Product Development Meeting. If the profit margin was below a minimum acceptable level the product was not introduced. If it was acceptable the product was considered for introduction. 15 In setting the regular retail price for the product, Mr Stephens said that the applicant considered both the prices of comparable products sold by its competitors and the price which it thought the market could bear. As noted earlier, the estimate of cost (which estimate included sales tax) was calculated to ensure that the ultimate sales of the product would produce an acceptable profit margin. 16 In cross-examination, Mr Stevens' agreed that cost was an important consideration to the applicant that was regularly reviewed. Consideration was given to reducing costs, for example by changing sourcing arrangements. It was accepted by him that the applicant always ensured that it covered its costs including sales tax. It was clear that Avon would not deliberately sell any product at a loss. 17 With non CFT products, the applicant conducted focus groups known as "Clinics". These groups involved the applicant's sales representatives. They were asked what price they expected to sell the product at and the quantity of the product they believed they would sell. The clinics assisted the applicant to determine the regular price where there was no comparable product already in the market. Otherwise the regular price for non CFT products was set by reference to the price of competitive products if there were any. 18 Regular prices were reviewed annually by the applicant's marketing department. Occasionally, this involved the applicant commissioning external market research companies to conduct confidential research among members of the public who purchased the applicant's products. 19 It is clear from the evidence that Avon seldom sold its products at the "regular price", because it regularly discounted the price of its products. 20 Before discussing how discount prices were determined, it should be said that the applicant sold all its goods through marketing or sales campaigns of which there were 18 in each calendar year, each with a duration of approximately 3 weeks. A brochure was prepared for each campaign and that brochure set out details of the products available for the period of the campaign and the prices at which they would be available. 21 Discount prices were said to be determined through a lengthy review process having regard to a number of factors. First, an overall target gross profit margin for each campaign was set at the applicant's Annual Planning Conference. The Marketing Department and Product Managers then held a Quarterly Planning Conference nine months prior to the relevant quarter's campaigns to review and revisit the plans and targets set at the Annual Conference. Following this, the Product Managers would develop detailed category plans for each campaign in that quarter, and ultimately the information for each category for a particular campaign would be consolidated by the relevant Campaign Planning Manager into a "Leader List". The Leader List set out all of the products in the campaign, the regular price, the offer price, the cost estimate, estimated number of units that would be sold, the estimated net revenue to the applicant, the estimate gross profit and margin on each product, as well as the total estimated net sales to the applicant and total gross profit and profit margin. It was this information that would be utilised to 'tweak' the discount prices so that target margins would be achieved. 22 The actual discount prices themselves were suggested by Product Managers based upon their previous experience and knowledge of the market and the price points that customers found attractive. The depth of the discount was driven by information from previous sales history, and in particular the price elasticity of the product. The applicant usually required that each individual CFT product be discounted at least once per quarter and approximately 85% to 95% of sales of CFT products were made at discount prices. It would seem in fact that if not all, then almost all products were discounted from time to time whether they were CFT products or not. Non CFT products were often "limited life products" that is to say they were generally made available only for two consecutive campaign of 3 weeks each and then discontinued. Obviously discounting did not arise with limited life products. 23 So far as the evidence shows, prices were never set by Avon on the basis of cost plus profit. But on the other hand, clearly prices were never discounted below a figure where profit would become loss. Discounts might take the form of a price set lower than a regular price or by the process of offering two or more product items for the price normally payable for one. 24 Ultimately however, the evidence demonstrated that in view of the fact that each campaign had a particular gross margin target as well as sales targets, the discounts were largely calculated to achieve the targets which were set in advance. The overall philosophy of the Avon sales campaigns in the relevant period was to have a mix of Avon products which not only provided a pleasing range of purchase options for its customers, but which also contained products having profit margins which, when aggregated, produced the desired overall campaign profit margin, number of units sold and sales. 25 This point was elaborated upon in Mr Stevens' cross-examination where he explained that if the projected sales for a campaign were too low, it could be given more "energy" by discounting a high margin product. That is, by lowering the price of a high margin product, more units of that product would be sold, with the result that the overall gross margin for the campaign was increased. 26 The applicant asserted that its pricing did not take account of sales tax, and that its prices were not affected by changes in sales tax rates. That is true to the extent I have already noted, that is to say that cost did inform the prices at which Avon sold its products, although not in the sense that prices were fixed on the basis that a fixed margin was added to cost. In the relevant period the rate of sales tax on Avon products increased on 18 August 1993 from 20% to 21%, and further increased on 1 July 1995 from 21% to 22%. From 1 December 1995, the applicant switched from "cost plus 35%" to "cost plus 15%" for calculating the taxable value of its products, but it is said that during the relevant period the applicant did not change the prices of its products to reflect this decrease. There is, however, a question what is meant by saying that pricing did not reflect the change of sales tax in the relevant period. 27 As I have endeavoured to make clear the regular price of CFT products can be said not to have changed at all in the relevant period. However, the regular price was not really the price at which CFT products were sold in that they were regularly discounted. The quantum of the discount depended upon the overall profit margin which it was calculated should be achieved by the particular sales campaign during which goods were sold. 28 The applicant tendered summary documents for the prices of its products during campaigns 13 to 18 in 1993, campaigns 9 to 18 in 1995 and campaigns 1 to 9 in 1996. Using the example of the bubble bath, it appears that the regular price for this product remained at $9.95 for the period spanning 1993 and 1996, and that it was intermittently discounted throughout the period to prices of $6.95 and $7.95. It is difficult to determine whether the same was true for all of the applicant's products. 29 Some reliance was placed by the applicant on the fact that two of the applicant's 110 sales districts comprised Norfolk Island and Christmas Island respectively. It is common ground that notwithstanding the fact that no sales tax was payable in either of those jurisdictions, the applicant did not alter its prices for products sold on those particular islands during the relevant period and that the prices prevailing there were the same as the prices prevailing in other sales territories where sales tax was in fact paid. The applicant argued that this was evidence of the fact that it did not pass on the overpaid sales tax to its customers in its prices because its prices were not set having regard to the amount of sales tax payable. 30 However for each campaign, the applicant prepared a brochure setting out details of the products available for purchase. Some 500,000 to 1,000,000 brochures were printed each campaign. Indeed printing costs were approximately $200,000 each campaign. Separate brochures were not printed for Norfolk Island and Christmas Island. Hence it was more a matter of convenience than any other factor which caused there to be no real difference between the prices applicable in either Norfolk Island or Christmas Island on the one hand and the prices applicable to other sales districts adjacent to those territories on the other. 31 Ultimately it was conceded, properly by Mr Stevens and, quite properly, that sales in Norfolk Island and Christmas Island were so small as to be insignificant to the applicant. I would therefore place no significance upon the circumstance that the prices in Norfolk Island and Christmas Island where no sales tax was payable were the same as those prevailing elsewhere in Australia. Summary of the evidence as to pricing 32 Although, as appears above, there was detailed evidence about the way Avon products, particularly CFT products, were priced from the time and how they were introduced as a product line, that evidence may be condensed to a few simple propositions: 1) The lowest figure which Avon would price products at was cost, where cost included sales tax. Avon did not sell products at a loss. In other words to that extent at least, pricing included consideration of the sales tax payable as a cost component, notwithstanding that sales tax represented only a small amount of the price of a product. 2) The highest figure Avon could price products at was the price charged by competitors for comparable products or the price it presently charged for comparable products. 3) Between those two extremes Avon set its price to maximise its profits and achieve over each sales period a desired profit margin averaged over a range of products and a desired volume of sales. 4) Although Avon set what it called a "regular price" for a product, in fact that price was regularly discounted with the result that prices appeared to rise and fall. 5) Avon retained its pricing policy notwithstanding changes in either the rate of sales tax or the method of calculation of sales tax in the relevant period. In other words, it can be said that the regular price advertised remained constant, but as a result of discounting, the prices actually charged went up and down. The pricing of products thus did not specifically depend upon the amount of sales tax payable except so far as at all times it was ensured that Avon would sell its products at a figure which exceeded costs of production plus sales tax. The Statutory Provisions – a historical survey 33 Senior Counsel for Avon took the Court through an historical survey of the legislative provisions submitting that the history cast light upon the interpretation to be adopted as to the meaning of the requirement that the overpaid tax not have been passed on. It is for that reason that I set the provisions out here in their historical order. However, I do not find any real assistance from the history other than that the legislature was clearly alert to the problem that the grant to a taxpayer of a right to claim a refund, where tax had been overpaid, might create a windfall gain to the taxpayer where in truth the tax refunded had been borne by some person other than the taxpayer. 34 When sales tax was first introduced, s 26(1) of the Sales Tax Assessment Act (No 1) 1930 (Cth) ("the No 1 Act") provided for a right to a refund of sales tax found to be overpaid. There was no requirement to show that the overpaid tax had not been passed on. In 1931 the No 1 Act was amended by the insertion of ss 70A, 70B and 70C. The first two of the sections concerned the right of a taxpayer to recover additional sales tax from the other party to a contract of sale where there was an alteration in the rate of sales tax. Section 70C provided that, in the case of a sale of goods by wholesale the taxpayer was required to deliver an invoice to the purchaser setting out the amount of sales tax payable in respect of the sale. According to the then Prime Minister in the course of his Second Reading Speech to the Bill which became the Sales Tax Assessment Act (No 1) 1931 this provision was inserted at the request of the great majority of traders, to empower vendors to recover the tax from purchasers. It presumably facilitated proof of the sales tax paid in recovery proceedings. 35 In 1933 s 70D was introduced by the Sales Tax Assessment Act (No 1) 1933. The new section prohibited a vendor from demanding or seeking to receive a sum of money upon the sale of goods in excess of the sales tax payable on the pretence that the sum was payable by the vendor as sales tax. At the same time s 26(d) of the No 1 Act was repealed and there was substituted a new subsection which provided: "Where the Commissioner finds in any case that tax has been overpaid and is satisfied that the tax has not been passed on by the taxpayer to some other person, or if passed on to some other person, has been refunded to that other person by the taxpayer, the Commissioner may refund the amount of tax found to be overpaid." 36 Similar changes were made to the comparable sections of the other Assessment Acts so that in all cases where liability to sales tax might arise there was a requirement that the Commissioner be satisfied that overpaid sales tax had been "passed on". 37 In the Second Reading Speech to the amendments to the various Sales Tax Assessment Acts in 1933 the Assistant Treasurer, the Hon. Mr Casey said, inter alia: "There is provision with regard to refunds of sales tax overpaid; such refunds are not to be made to a vendor who has passed on the overpaid tax to his purchasers, unless he first credits those purchasers with the tax overpaid" 38 The Assistant Treasurer also noted that there were: "provisions guarding against the fraudulent passing on of tax in excess of liability; that is to say, against profiteering in sales tax.". 39 The only other significant amendment came in 1992 when in the Sales Tax Assessment Act 1992, which substantially rewrote the sales tax law, the discretion of the Commissioner was eliminated and the question whether tax was not passed on became objective. Obviously it was not intended otherwise to change the meaning of the words "passed on". 40 It is submitted by Senior Counsel for Avon that it is a hallmark of an indirect tax that the economic burden of it is passed on to the ultimate consumer. That may readily be accepted: Bank of Toronto v Lambe (1887) 12 App Cas 575 at 582-3; Roxborough v Rothmans of Pall Mall Australia Limited (2001) 208 CLR 516; but if taken at face value may lead to the conclusion that sales tax is always passed on to purchasers in the price for which the goods are sold. While that will ordinarily be the case it is implicit in the provisions with which we are here concerned that there will be circumstances where the sales tax will not have been passed on to the purchaser. 41 Avon's written submissions assert that sales tax is passed on where the amount charged to the buyer is calculated to include a component to recoup the sales tax payable by the vendor. The submission in that form appears in the context of the legislative history which I had discussed. It is not clear to me whether this submission is supposed to be derived from the historical survey or whether it is intended to suggest that it is derived from the concept of indirect tax. Whichever may be the case, I would prefer the formulation relevant to the present context as informed by the legislative history to be that sales tax will be passed on where it is shown that the price at which the goods are sold includes sales tax either expressly or, if not expressly, where that price is calculated in such a way that the burden of sales tax will be borne by the purchaser. There may or may not be any real difference in these formulations. The submissions 42 It was submitted on behalf of Avon that it had not passed on the amount of overpaid sales tax to its customers. It is submitted that this follows from the evidence as to pricing and particularly from the fact that Avon did not change its prices so as to reflect the change in sales tax. Whether it is true that Avon did not change the prices for its product is not something that can be seen from the above summary, without question. Taking the example of the bubble bath product both before and after the change of sales tax, it is true that the regular price of the product, whatever that meant, remained at $9.95. Certainly the product was advertised as having that regular price. However, the actual price at which the product was sold varied from one sales campaign to another. In one period it was $9.95; in another $6.50. These changes in price arose because the product was regularly discounted. The actual prices at which the goods were sold were not arrived at specifically in a way which took account of sales tax as would clearly be the case where the mechanism for setting prices started with costs, added sales tax and then added a profit margin on top. Rather the prices were fixed so as to at least make an acceptable profit or perhaps sometimes the price was set just below that of a competing product. However, prices were always fixed so that the price charged exceeded cost plus sales tax. 43 Underlying the above submission is the proposition that the question whether or not the overpaid tax has been passed on turns upon the question whether, if the amount of sales tax had not been overpaid the buyer would have given less (in which case the tax will have been passed on to the buyer), or the seller would still have charged the same price (in which case there will have been no passing on of the overpaid sales tax). Put another way, the submission is that there will be no passing on of the overpaid sales tax if the buyer is no worse off as a result of the overpayment and the seller has made no windfall gain. It is said that that is the present case. With respect to the submission I do not think that the question can be answered so simply or, for that matter, that the evidence enables a conclusion favourable to the applicant even if the question is posed in that way. 44 Without regard to case law it is clear that overpaid sales tax will be shown to have been passed on in at least one class of case where there has been no change in the price before and after the change in sales tax. So, for example, consider the case where the product was priced at a figure which did not change. The rate of sales tax was, let it be assumed, 20%. Let it be assumed that the tax rate dropped to 10% but that the taxpayer continued to charge the same price and continued, perhaps by mistake to pay the same rate of sales tax, thereby overpaying the sales tax.. Clearly in that case the sales tax overpaid will have been passed on to the consumer whatever may have been the case before the initial drop in sales tax rate. 45 The converse case will be where the rate of sales tax is initially increased from an original 10 % to, say, 20%. The price of the product still remains the same. From this fact it may be deduced that if nothing else changes, the taxpayer has absorbed the sales tax increase and not passed it on to the customer. The rate then drops back to 15% but, the company continues not to change the price of the product and continues to pay the sales tax at the 20% rate. It can be inferred that the sales tax overpaid was not then passed on to the customer. It continued to be borne by the vendor taxpayer. But even that conclusion will depend upon whether over the period there was any change in other relevant factors such as, for example, the vendor's costs. 46 What these examples illustrate is that the fact that the price of the goods remains constant during the time the sales tax is overpaid tells nothing on its own as to whether the tax was passed on to the purchaser. It is necessary to know first whether prior to the change in sales tax rate it was the purchaser or the vendor who was bearing the sales tax. That it was the vendor and not the purchaser who bore the incidence of the tax in the second example arises because it is demonstrated that the initial sales tax increase was, absent any other change, borne out of the profit of the taxpayer. If, however, the vendor had at the time when the sales tax rate originally increased from 10% to 20% likewise increased the price of the goods by the amount of the increased sales tax, thereafter it could be said that it was the customer who was bearing the sales tax. If the rate then dropped back to 15% but the taxpayer continued not to change the price of the product and overpaid the sales tax, then the fact that there was no change in prices would tell nothing of itself as to whether the overpaid sales tax had been passed on. The conclusion would be that it was, but not because prices did not change. Rather it is because the overpaid tax was being borne by the purchaser. 47 In the present case the goods were, as I have indicated, always priced at a figure which exceeded cost plus sales tax and ensured a profit to the taxpayer. The fact that some benchmark price was used to determine the price to be adopted does not exclude the implication that sales tax was included in the price. It could be said either that the incidence of sales tax was borne by the customer or that the taxpayer did not show that the incidence of the sales tax was borne by it. It is perhaps immaterial which of these alternatives is adopted. 48 It is now necessary to turn to the case law to determine whether what I have said is in any way affected by authority. The case law 49 The Full Federal Court has considered the meaning of the phrase "passed on" on only two occasions, namely in Otto Australia Pty Limited v Federal Commissioner of Taxation (1991) 28 FCR 477 and in Amway Australia Pty Ltd v Commonwealth of Australia & Anor (1999) 41 ATR 443. 50 Otto Australia had entered into contracts with municipal councils for the collection of garbage for which it received payment by the councils. It claimed a refund for overpaid sales tax on bins on the basis that it had acquired the bins for use by a "municipal, shire or district council". If it had, then the consequence was that no sales tax would be payable. The Commissioner of Taxation refused the refund on two bases. The first was whether the bins were for use by the council so as to make the exemption item applicable. The second, which arose only if the exemption item was applicable, was whether the sales tax, which had been paid in fact by Otto, had been passed on. Both at first instance (see Otto Australia Pty Limited v Federal Commissioner of Taxation (1990) 25 FCR 257) per Lockhart J and on appeal, it was decided that the exemption item did not apply because the bins were acquired by Otto for its own use in carrying out its contractual obligation to collect garbage with the consequence that the exemption item did not apply. Accordingly, it was unnecessary for the Court to consider whether the tax had been passed on. At first instance, however, Lockhart J expressed the view that it had been passed on. 51 On appeal, Sheppard J (with whom Burchett J agreed) considered whether the overpaid sales tax had been passed on by Otto. The submission, put on behalf of Otto was that there was no passing on unless: "there has been passed to the purchaser an amount equal to the sales tax overpaid which can be shown to be an identifiable increase in the price of the articles in question. Only then can it be said that amount of the tax had been passed on." The submission, which would have meant that it would be necessary to separately invoice the sales tax (ie to identify it) and so show that it was or was not passed on was rejected. His Honour said (at 480): "Once it is conceded, as it has been, that the charge for each bin was computed by reference to costs which included sales tax, that cost was passed on. The fact that the sales tax was not passed on in an identifiable form is not in my opinion of relevance." The Court (Beaumont J expressing no view) was of the opinion that the Commissioner could not have been satisfied in the circumstances that the sales tax was not passed on. 52 Amway Australia Pty Ltd v Commonwealth of Australia was decided upon facts not greatly different from those in the present case. Prior to 1 June 1988, Amway had calculated a taxable value as being "cost plus 20%" upon which it paid sales tax. However from 1 June 1988, at the insistence of the Commissioner, Amway was forced to utilise a taxable value of "cost plus 35%". Amway applied to the Court for a refund on the basis that the correct basis for calculation of taxable value was "cost plus 20%". The Commissioner resisted the Amway basis for calculation of taxable value and additionally argued that Amway was not entitled to a refund because it had passed on the overpaid tax to its customers. 53 In relation to the passing on issue, the Court (Hill, Lehane & Hely JJ) said (at 455): "The question of the incidence of particular types of tax is one upon which economists may differ. The generally accepted view, based on John Stuart Mill's "Principles of Political Economy" (1848) referred to by the Privy Council with approval in Atlantic Smoke Shops Ltd v Conlon (1943) AC 550 and Bank of Toronto v Lambe (1887) 12 AC 575, is that direct taxes, like income taxes, fall upon the person taxed (although income tax may in a general sense be passed on to customers), whereas indirect taxes, such as taxes on the sales of goods are passed on to the consumer…the phrase "passed on" and comparable variations, is not a technical expression. It says no more than that the tax is borne (although not paid) by the end consumer of the goods, who purchases them in a retail transaction." 54 The Court in Amway also discussed the decision in Otto, and said that it stood for the following three propositions, namely (at 456): "1. The question whether sales tax is passed on requires no separate identification of sales tax in the price. 2. Sales tax would clearly be passed on in circumstances where the evidence was that the price was calculated so as to include within it the sales tax component. 3. Where the evidence in the case falls short of (2) the finder of fact may be satisfied that the sales tax has been passed on unless satisfied that the sales tax was not in fact included in the price. Sales tax will not have been passed on where the tax payer bears the tax personally." 55 It was Amway's case that the increased sales tax had not been passed on because it maintained the same prices on the products that it continued to sell. However the Court noted, contrary to this argument, that in reality, for a number of goods, Amway's profit margin had remained the same despite the increased sales tax. This resulted from exchange variations on goods purchased overseas, which meant that Amway's cost base had fallen, "allowing sales tax to be absorbed in the cost reduction which ordinarily could be passed to the consumer" (at 458). Furthermore, in respect of the goods where this was not the case, it was noted that Amway simply ceased to sell the goods if the margin became unacceptable (at 458). Accordingly, it was held that it was open to conclude that the tax had been passed on. 56 Ultimately the question whether sales tax has been passed on to the consumer or is being borne by the producer is one of fact. 57 The question whether tax was passed on was considered by the Administrative Appeals Tribunal in Case 45/95 (1995) 95 ATC 395 in a quite different context. In that case a taxpayer sold wine at its cellar door. In setting its price it had to take into account both competing cellar door prices as well as hostility from retailers if prices were too low. The Tribunal accepted the taxpayer's evidence that in setting its prices the taxpayer did so by reference solely to retail prices and not by reference to the sales tax which was found to be overpaid. It was held that the tax had not been passed on. Mr Trouse, said (at 400): "The fact that prices did remain the same belies any suggestion that the amounts in question were factored into selling prices. The preferable view is that the applicants decided to bear the burden themselves rather than seek relief from their customers. It seems to me to be a classic example of the producer absorbing the extra tax himself in lieu of passing it on to others." 58 Mr Trouse was clearly not attempting in the passage I have cited to enunciate a rule of principle. Each case must depend upon its own circumstances. The fact that prices remain the same may, as I have already indicated, in some cases assist in reaching the conclusion that tax has not been passed on, but there will need to be more proven than merely that prices remained constant. In the cellar door case there was the inability of the wine company to increase its prices having regard to competing cellar vendors and retailers which led to a specific decision that the wine company would itself carry the burden of the sales tax. In my view the applicable principles may be expressed as follows: (1) The question whether overpaid tax has been passed on will raise the question whether it is the taxpayer or the purchaser from the taxpayer which bears the incidence of the sales tax. (2) Where the sales tax is separately identified in the price it will be the purchaser from the taxpayer who will bear the incidence of the sales tax. (3) Where the sales tax is not separately identified in the price it will be necessary for a taxpayer seeking to prove that the tax has not been passed on to show that the price charged is calculated without regard to the sales tax and that the proper conclusion is that it is the taxpayer who is bearing the sales tax. As the onus of proof lies on the taxpayer it will normally be difficult (although not impossible) for the taxpayer to satisfy the onus of showing that the taxpayer bore the incidence of the sales tax where the taxpayer sells at a price above cost plus sales tax. (4) Where the price charged is calculated so as to exceed the cost (including sales tax) by a profit margin, it will be the customer who bears the incidence of the sales tax and not the vendor of the goods. (5) Where sales tax increases but prices remain the same there may be a prima facie case that the vendor bears the increased sales tax. However the vendor will still need to show that other factors such as decrease in costs, including exchange variations as in Amway, do not affect the conclusion. (6) Where there is a change in sales tax rate but prices remain the same it will generally be necessary to know who bore the sales tax before the sales tax change to determine who bears the sales tax thereafter. Conclusion 59 It was common ground between the parties that the applicant's regular prices for its products did not change in response to either increases in the sales tax rate (namely from 20% to 21% on 18 August 1993 and from 21% to 22% on 1 July 1995) or reductions in the taxable value for its goods (from "cost plus 35%" to "cost plus 15%" to "cost plus 11.63%"). In addition to this, counsel for the applicant argued that the applicant did not set its prices as a function of cost. The evidence that he relied upon was that relating to the applicant's methodology of setting regular prices (which was to have regard to the prices of competitors and what the market can bear, but not cost) and the fact that where sales tax was not payable (for example on Norfolk Island and Christmas Island), the regular price was not changed. 60 In my view the Norfolk Island and Christmas Island evidence is of little consequence for reasons I have already enunciated, because not only was it established in cross-examination that the applicant's amount of sales in these islands is insignificant, the evidence suggests that the real reason for not charging different prices there was that it would have been too expensive to print separate catalogues just for circulation in the islands. 61 I accept that the evidence as to the applicant's pricing methodology does establish that its regular prices are not calculated as a function of cost (other than to determine that it did not sell at a loss) and also that it did not go about changing its prices in response to changes in the amount of sales tax payable. Also, there is no evidence that its costs increased throughout the relevant period. 62 One difficulty for the applicant's case however, as counsel for the respondent submitted, is its system of discounting in each sales campaign, which was clearly important given that 85% - 95% of its goods were sold at a discount price. The evidence in this respect demonstrated that through various conferences and meetings, a gross profit margin target was set for each of the applicant's 18 sales campaigns during a 12 month period. Furthermore, the target was achieved by "tweaking" the discount price for the items that were being discounted in each campaign. That is, if it became apparent that the profit target was not likely to be achieved, a high margin product would be discounted, so as to drive more units of that product and therefore bolster the overall gross profit margin for the campaign. 63 Certainly it is true that the actual discount prices themselves were based upon information from previous sales history, and in particular the price elasticity of the product. However despite this, and despite the fact that the applicant did set its regular prices without much regard to cost, the fact is that the applicant targeted a profit margin for each sales campaign. It follows that the overall campaign objective and the extent of discounting was set to achieve an overall profit margin, that is to say an overall margin over cost including sales tax. In other words the extent of discounting was determined by reference to cost overall, even if not by reference to the individual cost of each item. It is difficult to see what the real difference is between ensuring a particular overall profit margin and pricing at cost plus a profit margin. One is only another way of saying the other. Accordingly, the applicant has failed to show that its prices were not set with regard to cost. They were. That being the case, the tax was passed on. It is certainly true that the discounting was worked out on an overall profit margin, rather than the profit margin applicable to particular goods, it might be the case that in respect of a particular good it could be that the sales tax was not passed on. For example, it could be possible that a particular item was so discounted that it was priced below cost. I am quite satisfied that that was not the case, but even if it were, the applicant would not have, in respect of any individual product, satisfied the burden of proof of showing with respect to it that it had no regard at all to cost or profit margin. 64 In my view the applicant has failed to show that the overpaid sales tax was not borne by customers in the relevant period. In the result, the applicant is not entitled to a refund. Conclusion 65 The applicant's application under s 14ZZ of the Taxation Administration Act 1953 (Cth) to set aside the objection decision and allow the objection in full is dismissed with costs. I certify that the preceding sixty five (65) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Hill. Associate: Dated: 23 April 2004 Counsel for the Applicant: S Gageler SC and M Richmond Solicitor for the Applicant: Ernst & Young Law Counsel for the Respondent: D McGovern SC and A J O'Brien Solicitor for the Respondent: Australian Government Solicitor Date of Hearing: 9 March 2004 Date of Judgment: 23 April 2004