It is already old news: the Labour Party has announced that if it wins the upcoming election, it will remove GST from fresh and frozen fruit and vegetables (through zero-rating).

Tax experts and economists have quickly and predictably rounded on the policy. The grounds for objection have considerable merit. The key points were put very succinctly by the Tax Working Group in its 2019 Final Report:

“GST exceptions are complex, poorly targeted for achieving distributional goals and generate significant compliance costs. Furthermore, it is not clear whether the benefit of specific GST exceptions are passed on to consumers”.

Finance Minister Grant Robertson might have had this characterisation in mind when he described GST exceptions of this nature as “an absolute boondoggle to get through” in March 2022. However, the Minister has more recently apparently embraced such exceptions on the basis that they have “proven to be possible overseas”.

Setting aside the tax policy and economic arguments, however, from a legal perspective of greatest interest are the complex definitional issues that will inevitably arise at the margins if the exception is implemented. It is illustrative and even amusing to look at overseas examples of boundary issues in relation to comestibles, in tax and other legal contexts.

A tomato is a vegetable

The oldest example appears to be an 1893 United States Supreme Court decision in which the Court held 9-0 that tomatoes should be classified as vegetables, not fruit, for tariff purposes. At the time, produce importers had to pay tax on imported vegetables, but not fruit. The Supreme Court decided that tomatoes should be classified as vegetables for customs purposes, because they were seen as vegetables and eaten as vegetables, despite botanically being classified as a fruit.

But a carrot is a fruit

By contrast, in 1988, the European Union changed the status of carrots from a vegetable to a fruit. This was a labelling matter rather than a VAT matter, because in the EU, jams can only be made from fruit. After Portugal joined the EU, there was concern about whether Portuguese carrot jam could still be labelled as jam. To allay concerns, the EU adopted a directive that specified that carrot would be classed as a fruit for jam-making purposes. In 2001, it extended this to cover cucumbers and pumpkins as well, although, unlike carrots, at least these are botanically fruit.

A fruit smoothie is not fruit

In 2007, a UK smoothie manufacturer argued that its “100% fruit juice” smoothies were a “liquefied fruit salad” (VAT-free) rather than a beverage (17.5% VAT). UK consumers do not pay VAT on “essential” food and drinks, but pay 17.5% VAT on “luxury” items, resulting in fruit smoothies attracting VAT while burgers and donuts are VAT-free. The Tribunal took the view that smoothies were not a fruit substitute, as half of each bottle was made from fruit juice and therefore “almost entirely lacks the fibre present in fruit”.

What are you doing with that pumpkin?

Several countries apply different VAT or sales tax rates to pumpkins, depending on whether they will be used for eating or decoration. In Italy, the VAT rate on ornamental pumpkins is 10%, but the rate on edible pumpkins is only 4%. Most US states tax pumpkins as a food ingredient unless they are sold pre-decorated or carved by the retailer, but some states, such as Alabama, zero-rate sales tax on pumpkins when sold by the grower, but not those sold by the retailer. Basic groceries, such as fruit and vegetables, dairy, eggs, meat, and breads and cereals are zero-rated in Canada, which means that pumpkins sold for eating are zero-rated but pumpkins sold for decorating attract GST.

Basic vs luxury groceries

Labour only proposes to remove GST from “unprocessed” fruit and vegetables. Countries that go a step further and remove sales tax from all basic or essential foods see even greater difficulties in determining what are essentials and luxuries. The classic case is the UK’s Jaffa Cake decision, where the Tribunal had to decide whether Jaffa Cakes were a chocolate-covered cake (VAT-free) or a chocolate-covered biscuit (17.5% VAT). The Tribunal assessed the product’s texture, size, supermarket-location, marketing, and reaction to going stale before concluding that, despite having characteristics of both cakes and biscuits, Jaffa Cakes should be considered a cake.

In 2020, the Irish Supreme Court ruled that the bread served at US sandwich chain, Subway, had too much sugar in it to be defined as bread and was therefore not exempt from VAT. The legislation exempting bread from VAT required that the amount of sugar in the bread not exceed 2% of the weight of the flour. Subway’s bread had a sugar content of 10%, so did not meet the definition.

Brace yourself for semantics

Boundary or classification issues of this nature would inevitably emerge under the Labour proposal. The devil will be in the detail of the legislative provisions as drafted. For example, as already noted Labour’s proposed exception is targeted at “unprocessed” fruit and vegetables. Prime Minister Hipkins acknowledged potential complexities involved in defining what is processed or unprocessed when making the policy announcement. Frozen fruit and vegetables, even if crushed or cut (but not pre-oiled for cooking), would not be considered processed, but dried fruit and vegetables would. Bags of prepared but undressed salad vegetables would apparently be considered unprocessed, but a dressed coleslaw would not. What about a bagged coleslaw mixture that is undressed but contains a sachet of optional mayonnaise? The mind boondoggles!

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