Friday, May 16, 2008

$6.9 Million Teacake Dispute

Recently, popular UK retailer Marks & Spencer fought against the British Customs and Excise Department (their equivalent of the IRS) in EU's European Court of Justice (rough equivalent of The Supreme Court) for $3.5 million pounds ($6.9 million) in court over one of their treats, chocolate-covered teacakes, which had been misclassified (and over-taxed) as biscuits (cookies) for over 20 years.* Who knew that a little sweet could cause such a big fuss? From Yahoo News before the verdict:

"In a case dating back to the to the early 1970s, the Marks & Spencer retail chain is seeking a refund for sales tax it paid for 21 years on chocolate-covered 'teacakes,' which British authorities wrongly classified as cookies instead of cakes. Britain taxes sales of chocolate-covered cookies, but not chocolate-covered cakes...

British tax authorities acknowledged their teacake mistake in 1994 and reclassified the milk-chocolate-swathed domes of marshmallow and biscuit as tax-exempted cakes.

However, they refused to pay back the full 3.5 million pounds that the retailer says it paid on the products since Britain introduced Value Added Tax in 1973.

Instead, the Customs and Excise department offered just 88,440 pounds."

Of course, it was the CUSTOMERS who paid the tax, not the company. According to BBC News, The VAT (Value-Added Tax) and Duties Tribunal (like The US Tax Court) argued that any more than 10% compensation would be an "unjust enrichment" to Marks & Spencer. (Be sure to check out their article's chart on the giant headache that divides British sweets into taxable and untaxable categories. Example: Gingerbread cookies with only two dots for eyes for decoration are untaxed. Any more decoration, even a little icing smile, means a 17.5% tax.)

Drama, drama!

In the end, the court decided to award Marks & Spencer the full $6.9 million. According to The International Herald Tribune:

"Tax experts said that the ruling ended a situation in which the government could claim unjust enrichment for not refunding wrongly paid VAT but a taxpayer could not.

'The court is setting aside some of the unjust enrichment argument put forward by a member state,' said Chas Roy-Chowdhury of the Association of Chartered Certified Accountants.

'It makes it less of a one-way street and much more of an evenly handed approach to incorrectly applied VAT, as before the odds were stacked against the taxpayer,' he said."

Let me reiterate that in this case the tax payer was NOT Marks & Spencer, but the end consumer. I never paid the tax-added price, so I feel no qualms about buying a box of these argument-inducing "cakes" the next time I hop the pond. However, I can only hope that Marks and Spencer will offer a lower price on these treats for some period of time to at least symbolically offset the customers' overpayment. After all, the most loyal customers end up feeling the most resentment over this kind of thing, and no one wants another iPhone rage incident.

*Personally, I think they look like tiny bits of cookie inside chocolate-covered marshmallows, which I wouldn't classify as a cake OR a cookie/biscuit given the choice. If I absolutely had to pick one, I'd say cookie/biscuit. Then again, I am part British only by blood and never ate a crumpet until I was a teen, so my opinion on the semantics of British foods' terminologies doesn't really matter.

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