Let them eat cake … in their sandwiches – Wacky Tax Wednesday

When headlines last week screamed about Subway’s bread not being “bread,” I was delighted. Not because I have a beef with the bread — I don’t — I was simply pleased to see a wacky tax story get the attention it deserves.

In case you missed it: The Supreme Court of Ireland recently dismissed an appeal by an Irish Subway franchise seeking a refund from the Revenue Commissioners for value-added tax (VAT) payments made between January 2004 and December 2005. The franchise claimed the heated sandwiches and hot drinks it sold during that time should have been subject to a 0% VAT rate, rather than the composite rate it paid of 9.2%.

The case backfired. Instead of finding in favor of the 0% rate, the court determined the sales in question were subject to a 13.5% VAT rate.

VAT rates vary by country and by type of product or service. In Ireland, home of the forlorn franchise, the relevant rates are currently:

• 21% standard rate. Applies to most goods and services, including confectionary food (the rate was temporarily lowered from 23% on September 1, 2020, due to COVID-19)
• 13.5% reduced rate. Applies to certain food and drink, including hot takeaway food and heated drinks
• 0% rate. Applies to certain food and drink, including staples like bread

A weighty matter

For bread to qualify for the 0% rate under the Value Added Tax Act of 1972, fat and sugar cannot exceed 2% of the weight of the flour included in the dough. The bread used by the franchise in its heated sandwiches has a sugar content of 10% of the weight of the flour.

Because of the high sugar content, the Supreme Court ruled the bread “falls outside the definition of ‘bread’ for the purposes of the Act,” and “outside the 0% exemption.”

Responding to the ruling, Subway stated simply, “Subway’s bread is, of course, bread.”

In arguing its case, the franchise said excluding their bread from the category of bread subject to the 0% rate breached the principle of fiscal neutrality, “which prohibits the treatment of similar goods differently from a VAT perspective.”

The Supreme Court disagreed, explaining that to limit the 0% rate to bread, it’s necessary to define bread. Any definition must include some products and exclude others: “When a definition is laid down, … it is always possible to dispute the marginal cases on either side of the line. In every examination, there must always be a last candidate who passes with the lowest mark among those who passed, and a first candidate who fails with the highest mark among those who fail. The differences between the two candidates may well be marginal. But that … will not invalidate a distinction being made between them if the distinction has a valid basis, as this clearly has.”

Thus, heated sandwiches made from the bread are subject to the 13.5% VAT, the rate that applies to hot takeaway food.

The Supreme Court’s ruling is an entertaining read, if you like that sort of thing. It references “pedantic” and “punctilious” schoolteachers who “might point out” that the language of the VAT Act “could be expressed more clearly and precisely.” It expresses “some sympathy for the beleaguered draftspersons and for the tortured language to which they sometimes have to resort in order to carry into effect a reasonable statutory policy.” Good stuff.

Then again, you could just wait for the next Wacky Tax Wednesday on the Avalara blog.