Legislative Purpose — The Unwritten Criterion in Classifying Goods: A Case Study of Israel Law

1. Introduction

The International Convention on the Harmonized Commodity Description and Coding System (HS Convention), which seeks to establish uniform rules for the classification of products for customs and indirect tax purposes, is considered a resounding success, as noted by Shumba (2024, p. 114):

The International Convention on the Harmonized Commodity Description and Coding System (hereafter, HS Convention) represents a milestone achievement in the history of the WCO as it has successfully developed a uniform format of identifying and describing of commodities.

In Israel, a member of the World Customs Organization (WCO), the HS Convention has been incorporated into the Customs Tariff Order (CTO) as part of national law. The Israeli courts’ rulings on classification, however, use the ‘legislative purpose’ as an unwritten criterion that is not present in the HS Convention. Every country has its own legislative purpose for each piece of legislation, but in Israel the ‘legislative purpose’ has been used by courts as a criterion for tariff classification. The ‘legislative purpose’ is something that is unique to each country and is not global, since each country pursues different objectives when taxing or not taxing a specific product.

This paper provides an overview of the HS Convention and its implementation in Israel and reviews several past and ongoing/pending Israeli court cases in which the ‘legislative purpose’ was used by courts as a criterion for classifying goods. The paper also highlights the impact of the ‘legislative purpose’ criterion on customs brokers. The paper argues that the ‘legislative purpose’ criterion leads to a lack of uniformity in the classification method, undermining the principle underlying the HS Convention, and recommends minimising the application of this criterion.

2. Discussion

2.1. The HS Convention

The legal framework for the classification of goods for levying import duties is the HS Convention. The HS Convention explicitly states that its aim is to facilitate international trade and to reduce the expense incurred by redescribing, reclassifying and recoding goods as they move from one classification system to another (WCO, HS Convention, preamble).

The HS Convention divides goods into sections, chapters (2 digits), headings (4 digits) and subheadings (6 digits) and attempts to introduce a universal, worldwide language, and rules, for classifying goods (Grainger, 2024; Shumba, 2024; Weerth, 2008).

For example, a smartphone should be classified under the following HS Code in all member states: 8517.13 - Telephone sets, including smartphones and other telephones for cellular networks or for other wireless networks: Smartphones.

As an integral part of the convention, in addition to a standardised classification at the six-digit level, additional section and chapter rules are used to help with classification. For example, the heading which provides the most specific description shall be preferred to headings providing a more general description. In several cases, the goods are to be classified under the heading which occurs last in numerical order (General Interpretative Rule (GIR) 3(A), GIR 3(c), Attwater, 1996; Irish, 2016). Machines designed for the purpose of performing two or more functions are to be classified according to the principal function (WCO, 2022, rule 3 to section XVI).

In a recent article, Grainger (2024) noted that there should always be one correct HS Code for a given product, determined by a reference to the GIRs. The HS Convention only specifies the classification, that is, the correct definition of the imported goods within the meaning of the HS Code. Each country can determine the tax rate levied on the product under one HS Code or another, but countries are expected to maintain a standardised classification (Shumba, 2024). This is explained well by Shumba (2024), who argued that the determination of the applicable rates of customs duties in respect of tariff lines and the commodities is sovereign to the Contracting Parties and is not determined by the HS Convention nor the HS.

2.2. Implementation of the HS Convention in Israel

Israel introduced the HS into the CTO, which basically adopted the HS Convention at the six-digit level. The Israeli legislators added two more digits (7-8), which are referred to as ‘paragraphs’ or ‘articles’. (Israel Tax Authority, 2022; Wagner, 2023).

For example, the following subheading exists for motor vehicle parts and accessories in all member states: 8708.99 - Parts and accessories of the motor vehicles of headings 87.01 to 87.05 - other. The State of Israel has inserted articles (7-8 digits) in this subheading, as follows: 8708.99.80 - Parts and accessories of the motor vehicles of headings 87.01 to 87.05 – other - Parts for safety belts.

The classification of goods for customs purposes affects the tax rates that are or are not levied on them, as well as issues related to compliance and required government authorisations, statistical needs and free trade agreements (FTAs) (Israel Tax Authority, 2022), as noted by Grainger (2024, p. 3):

HS codes also serve as the starting point for preferential origin rules, quantitative restrictions, and tariff quotas. Often, HS-based customs codes are referenced in other regulatory domains, too. This might be in the collection of import Value-Added Tax (VAT) and Excise Duties.

In Israel, the classification also affects whether the goods are subject to ‘purchase tax’, a domestic Israeli tax, which is like excise tax in other countries. This purchase tax is also levied on the import and sale of goods manufactured in Israel (Wagner, 2022). Israel has adopted both the standardised six-digit classification and the rules in its internal law:

Classification of goods according to the First Addition shall be governed by the following provisions and in accordance with the Convention regarding the Harmonized System for the description and Coding of the goods. (Israel Tax Authority, 2022, Article 3)

2.3. Case law on customs classification in Israel

When a dispute arises between a citizen and the State over the classification of imported goods and the matter is brought before the courts, the courts should classify according to the uniform rules of the HS Convention as incorporated into Israeli law, that is, the HS six-digit level customs codes and the mandatory rules (Israel Tax Authority, 2022, Article 3). This is to uphold the overriding principle of the HS Convention, namely the uniformity of classification between member states in relation to these products:

A key principle of the HS is that there is always only one correct customs commodity code for a given product. (Grainger, 2024, p. 9)

However, as illustrated below, the Israeli courts resort to another, unwritten, consideration that lies outside the HS Convention, namely a decision based on the legislative purpose criterion. The Israeli courts thus examine the tax result of the two competing classifications, analyse the product in question, try to understand the legislative intention in taxing a particular product and decide whether, in their opinion, the taxation of the disputed product is justified (The State of Israel v Miron Hagalil Manufacturing Industries Ltd., 1997 (Miron Case)). Among other things, if the court believes they are dealing with a healthy product, which fulfils a social purpose, the court will prefer a duty-free classification.

In the Israeli Supreme Court’s leading decision on the classification of goods, it was determined that the classification of goods is also based on legislative purpose criterion:

The legal interpretation of the relevant customs HS codes must be clarified. Customs HS codes are interpreted based on the legislator’s intention to define the group of goods to which this or that customs HS Code applies. When interpreting a legal provision, attention must therefore be paid not only to the wording of the provision, but also to the purpose pursued by the legislator. (Miron Case, paragraph 8)

The interpretation of laws based on legislative purpose criterion is a well-known principle not only in customs law, but also in the interpretation of other tax laws in Israel:

With a tax law, as with any other law, one cannot be satisfied with the language alone. The statute must be interpreted according to the intent of the legislature. The judge will learn the purpose of tax legislation from any reliable source. For example, in tax law, the question of what error the legislature intended to correct and what the background was for enacting the tax law is of great importance. (Kibbutz Hatzor v ITA Collector, Rehovot, 1985, paragraph 4)

The using of an interpretative approach for HS classification was also noted in an excellent article by Irish (2008, p. 9):

For tariff classification, the choice of interpretive approaches is wider than the alternatives examined in the Hart-Fuller debate. Rejecting purposive interpretation for the HS does not lead to a formalist approach as the only alternative. It is not necessary to argue that concepts or objects generate their own pre-attached labels in order to maintain that words mean something. As well, the social context is not a matter to be addressed only after the words themselves have been found wanting.

The legislative purpose in the Income Tax Ordinance, the VAT Law, the Land Tax Law and the other tax laws is obviously a purpose created by the Israeli legislator. Contrary to this, the classification of goods should achieve the legislative purpose of the foreign legislator — the drafter of the HS Convention (Grainger, 2024). After all, the purpose of the HS Convention is to achieve uniform classification in all member countries of the WCO (Grainger, 2024).

Therefore, while the question of whether it is appropriate to levy customs duties on a product is important, it obviously goes beyond the purpose of the HS Convention and is not part of the classification rules.

Moreover, according to Israeli law, the customs classification also affects the purchase tax rate on the product, an Israeli domestic tax like excise duty (Israel Tax Authority, 2022). Therefore, considering the legislative purpose criterion to classify goods for purchase tax (whether the product should be taxable or not), deviates even further from the underlying logic of the HS Convention.

Several cases are discussed below in which the courts have used the ‘legislative purpose’ criterion when classifying goods. It should also be noted that most customs disputes in Israel end in compromise and settlement, so there are no court hearings involved. But, in customs-related cases that go to a decision, the ‘legislative purpose’ criterion is regularly used/applied — it is not sporadic.

2.3.1. Vehicle locks - Auto-Part Ltd v The State of Israel, 2000 (Auto-Part Case)

In the Auto-Part Case, the court had to decide on the customs classification of a fuel tank lock. The importer applied for classification under the following HS Code, exempted from purchase tax: 8301.20 - Locks of a kind used for motor vehicles. The customs authority requested classification under the following HS Code, subjected to purchase tax: 8708.99 - Parts and accessories of the motor vehicles of headings 87.01 to 87.05 - other. The appeal was heard by a panel of three judges, with the majority opinion siding in favour of the importer, while the minority opinion sided with the customs authority.

As a car is an expensive product, the majority opinion found that there is an intention to encourage the use of locks to protect it from theft, including theft of fuel, and this encouragement is provided by granting a tax exemption for the locks and classifying them under HS Code 83.01. The judges ruled:

A vehicle is an expensive asset of the citizen that is normally located in the public space. Against this background, it is only natural that it and its accessories require special protection. In our opinion, this is an overriding social interest. The purpose of the sublegislator to introduce a reduced tax rate for vehicle locks must be given special weight. Following this examination, it appears that the intention of the legislator is most effectively fulfilled if the goods are included in the exempt HS code. (Auto-Part Case, p. 297)

The dissenting opinion considered that the theft of fuel or setting fire to vehicles using the fuel tank is not common in Israel, so there is no point in granting a tax exemption for this lock, and ruled in favour of HS Code 87.08:

This case does not involve a ‘governmental scourge’ of fuel theft that needs to be addressed, nor does it involve numerous cases where vehicles have been set on fire by setting the fuel tank on fire…. In any case, the protection of the public interest may also be reflected in the fact that the consumption of a particular product, which has a high safety factor, is subsidised more than the existing product, or that another product is not subsidised by a reduction or increase in tax rates (Auto-Part Case, p. 288).

The majority opinion states that a vehicle is an expensive asset of the citizen, and its protection should be promoted, and this protection is achieved, among other things, by a tax concession for the fuel tank lock (Auto-Part Case, p. 297).

Apparently, the majority opinion forgot that the vehicle itself is subject to a very high purchase tax in Israel (Wagner, 2022). Thus, if the legislator has chosen to impose a high tax on the vehicle, it may be doubtful whether there is an objective to exempt vehicle accessories.

As is evident, the judges’ opinions were divided on the question of purpose. The dissenting opinion held that the tax exemption was not appropriate for the product, while the majority thought otherwise (Auto-Part Case, p. 288). This case somehow proves that the ‘legislative purpose’ criterion is a wholly subjective criterion; one judge finds a purpose, while another judge in the same case, finds a different purpose.

2.3.2. Vehicle immobiliser - E.D.Y. Stereo Systems et al. v The State of Israel (E.D.Y. Case) 2004 (1), 2009 (2), 2010 (3) – the same case in three jurisdictions

In the E.D.Y. Cases 1, 2 and 3, the court had to classify an immobiliser for cars, which interrupts the circuits and helps to prevent theft. The importer classified it under the following HS Code 83.01, which was tax-free: 8301.20 - Locks of a kind used for motor vehicles. The customs authority classified the goods under the following HS Code, which was taxable: 8536.20 - Electrical apparatus for switching or protecting electrical circuits. Automatic circuit breakers.

The Magistrate Court (first jurisdiction) supported the importer and found that an immobiliser protects a vehicle against theft and its use should be encouraged by granting a tax exemption in HS Code 83.01 (E.D.Y. Case 1).

Customs’ appeal was admitted by the District Court (second jurisdiction) and the result was overturned by a majority opinion, who considered that the legislator should expressly enshrine in law the tax exemption for vehicle accessories used to prevent vehicle theft. The court found that it could not replace the legislature, which is why the classification is set out in Heading 85.36 (E.D.Y. Case 2).

The dissenting opinion agreed with the judgement of the first jurisdiction regarding the justification of the tax exemption for this product, stating that:

Courts should favour a classification that promotes the protection of citizens’ property and adopt a classification interpretation that promotes the use of the means of protection. Preventing theft is primarily a social purpose. Classifying the immobiliser as a special lock is consistent with the purpose of the law to reduce the tax burden of purchasing security devices for a vehicle. (E.D.Y. Case 2, p. 10)

The Supreme Court, the third and final jurisdiction, agreed with the majority opinion of the District Court, however, it emphasised that ‘legislative purpose’ should be considered when classifying goods (E.D.Y. Case 3, paragraph 4).

This proceeding, which lasted six years in the three jurisdictions, perfectly illustrates how the legislative purpose criterion presents considerable difficulties that change several times, even under the same factual background (E.D.Y. Cases 1, 2, 3). In the Magistrate’s and the District Courts’ dissenting opinions, a purpose for the product’s tax exemption was established. However, in the majority opinion of the District Court and the Supreme Court, this purpose was rejected (E.D.Y. Cases 1, 2, 3).

This case is also different from the previous case involving auto parts, in which the majority opinion found a purpose to protect against theft of vehicles/and their accessories, while this purpose was rejected in the E.D.Y. Cases.

2.3.3. Relaxation product - Pharma Gury Ltd. v The State of Israel, 2011 (Pharma Gury Case)

In the Pharma Gury Case, the classification of a dropper/pipette product was considered. The product consists mainly of water, then alcohol and a small concentration of Bach flower essences. The product is sold in pharmacies without a doctor’s prescription, is used to calm stressful situations, and is known as ‘Rescue Remedy’.

The importer requested classification under this HS Code, exempt from tax: 2106.90 - Food preparations not elsewhere specified or included. The customs authority requested classification under this HS Code, subjected to purchase tax: 2208.90 - Undenatured ethyl alcohol of an alcoholic strength by volume of less than 80 per cent vol.; spirits, liqueurs and other spirituous beverages - other. The customs authority also referred to a classification decision of the WCO for flower extracts in HS Code 22.08, among others (WCO, 1995).

The court ruled that classification in HS Code 21.06 takes precedence as the product has no negative effects typical of alcohol, such as car accidents, drink driving or violence, but is a semi-drug, and in the words of the court:

In my opinion, the product is much closer to the HS codes, which are exempt from tax. The considerations that apply to the taxation of alcoholic products, namely “the internalisation of negative externalities that are not part of the production costs but cause various damages to the economy and society”, are not fulfilled in the case of this product. (Pharma Gury Case, paragraph 46)

Therefore, the court ruled that the taxation of this product under HS Code 22.08 is not justified and classification under HS Code 21.06 will be established (Pharma Gury Case, paragraphs 14, 48, 50).

This case shows that, in the court’s view, when the ‘legislative purpose’ criterion competes with the WCO’s classification decision (which is intended to harmonise classification), the first criterion prevails. It should not be forgotten that although a classification decision by the WCO is not legally binding, it should serve as a reference for the decision.

By way of comparison, a similar product was classified in Brazil under subheading 22.08, as the customs authority claimed in this case (Brazil Tax Authority, 2019).

2.3.4. Pulse watch - Agentek (1987) Ltd. v The State of Israel (Agentek Case) 2015, 2016 – two jurisdictions of the same case

The product at issue in the Agentek Case dispute is a pulse watch for athletes or sports enthusiasts who wear it on their wrist while exercising. The importer classified the product under this HS Code, which was duty-free: 9031.80.20 - Measuring or checking instruments, appliances and machines - whose function is based on a variable electrical phenomenon. The customs authority classified the goods under this HS Code, which was taxable: 9031.80.90 - Measuring or checking instruments, appliances and machines - other.

The court ruled that the taxation was not justified, as it was a ‘semi-medical’ product, which encourages people to exercise and maintain their health. This product, according to the court, should be accessible and available to the public, by granting this tax incentive (Agentek Case, paragraphs 59-61). Furthermore, there is no local production of such watches in Israel, so there is no local industry to protect by imposing duties. The court even criticised the customs authority for ignoring the legislative purpose when determining the classification, and ruled for a duty-free classification, as claimed by the importer:

The customs authority does not address the allegation about the legislative purpose. The defendant did not claim this, and the legislative purpose was not a parameter for its decision to classify the goods. Finally, in the absence of an Israeli manufacturer, the legislative purpose is an important factor that will affect the classification of the goods…. The quality of the product should be examined, does the state have an interest in restricting consumption? Is it a luxury product for which there is no reason to grant a tax exemption? It has been clarified that these watches are “semi-medical” products that encourage people who practice sports as a hobby to continue and safely pursue their activities and improve their performance. Therefore, both the purpose that there is no domestic manufacturer and the promotion of the use of the goods by consumers speak in favour of the duty-free HS code. (Agentek Case, paragraphs 54, 58-61)

This case illustrates that, in the court’s opinion, regardless of the classification rules of the HS Convention, the customs authority is obliged to justify the purpose of imposing a tax on a product and, if it fails to do so, it is even reprimanded (Agentek Case, paragraphs 54, 58). In fact, it is possible to doubt the legislative purpose determined by the court in this case, since customs duty is imposed not only to protect a local industry but has a wide variety of other objectives.

In other cases in Israel, the court has noted that the collection of customs duties has additional objectives, such as tax considerations, uniformity in classification and relations between Israel and the countries with which it intends to sign FTAs (Doron Rubin v The State of Israel, 2014 (Doron Rubin Case); Afcon Control and Automation Ltd. v The State of Israel, 2014 (Afcon Case)).

Second, even if the pulse watch is a semi-medical product that promotes health, it seems to be an irrelevant consideration for international classification, since customs duties are not only imposed on harmful products but have many purposes (Doron Rubin Case; Afcon Case). For example, food products such as milk and whey are subject to very high customs duties (40 per cent) in Israel (Israel Tax Authority, 2022):

0401.20 - Milk and cream, not concentrated nor containing added sugar or other sweetening matter - Of a fat content, by weight, exceeding 1 per cent but not exceeding 6 per cent. 0404.10.90 - Whey and modified whey, whether or not concentrated or containing added sugar or other sweetening matter – other.

While it may be true that the aim is to protect Israeli industry, if these are products that promote health as indicated by the court’s position in this case, then there is no reason to impose a customs duty on them (Agentek Case, paragraph 61).

Back to the pulse watch: it is doubtful that a relatively low tax (12 per cent) makes the difference between availability and unavailability to the public. The court’s conclusion based on the ‘legislative purpose’ criterion was therefore ambiguous.

2.3.5. Integrated communication device - Hot Telecom limited partnership v The State of Israel, 2021 (Hot Telecom Case)

In the Hot Telecom Case, the court had to classify an integrated communication device, which allows three main functions to be carried out in a single assembly: a converter box for watching cable TV, a modem and router for surfing the Internet and a home telephone.

The importer classified it under the following HS Code as duty-free: 8517.62 - Machines for the reception, conversion and transmission or regeneration of voice, images or other data, including switching and routing apparatus. The customs authority referred to a WCO classification decision on a similar product (WCO, 2006), and classified it under the following HS Code, subject to a 10 per cent duty: 8528.71.40 - Reception apparatus for television, whether or not incorporating radio-broadcast receivers or sound or video - recording or reproducing apparatus - Not designed to incorporate a video display or screen - Others, special for reception from satellite or from terrestrial cables.

An interesting aspect of the judgement is that the court also examined, for classification purposes, another World Trade Organization (WTO) Agreement to which Israel is a contracting party, the Ministerial Declaration on Trade in Information Technology Products (Information Technology Agreement) (ITA) (WTO, 1996).

The ITA includes a list of products for which countries agreed not to apply duties. The court accepted the importer’s argument that the product in question is included in the ITA list and therefore Israel cannot classify it under a taxable HS Code (Hot Telecom Case, paragraph 20), as the court ruled:

It follows from the foregoing that, when the State classified the Set top box (STB) under the dutiable HS code 85.28, which is different from the HS code declared by the State of Israel to the WTO, the State allegedly violated its obligation under the ITA agreement…. It follows that, apparently, also according to the ITA, the goods in question should have been exempt from import duties. (Hot Telecom Case, paragraph 20)

In other words, the court determined classification in accordance with not only the HS Convention, but also analysed legislative purpose, in this case stemming from another international convention to which the country is a contracting party (Hot Telecom Case, paragraph 20). As illustrated in the case of the ‘Rescue Remedy’, in this case too, the consideration of whether it is appropriate to tax the product prevails over the WCO’s classification decision (Hot Telecom Case, paragraph 12).

This raises the following question: even if Israel violated an international treaty prohibiting taxation of the product, perhaps this argument should not prevail over the classification rules of the HS Convention, which are supposed to lead to uniform classification?

It should be noted that in many countries in the world, a product like the product that is the subject of the claim is classified under HS Code 85.28-71, as the customs authority claims here, but it appears to be duty-free in those countries (EU Court of Justice, 2011; Nordin, 2011).

2.4. The use of the legislative purpose criterion in determining customs classification

As shown above, in court cases concerning customs classification, the courts return again and again to the question of whether it is appropriate to tax the product in question, what the legislative purpose is, and is this a significant criterion in determining classification.

As mentioned before, the ‘legislative purpose’ criterion — classifying goods according to the tax outcome — is not included in the HS Convention and appears to be an invention of case law (Shumba, 2024).

Customs language poses many difficulties for the courts, as stated in one of the best-known customs judgments Eurocom Cellular Communication Ltd. v State of Israel, 2001 (Eurocom Case), which dealt with the issue of the classification of mobile phone batteries:

The question of import duties and purchase taxes is complicated because it depends on complex acts of classification and international conventions… Conflicts of interest are typical: exporting countries want their products to enter other countries tax-free, which is also the wish of importers and traders. On the other side is the importing country, which has many needs and therefore always needs revenue. As we shall see, classifying goods is as difficult as crossing the Red Sea. (Eurocom Case, p. 63)

If the court compares customs classification to the Bible story of crossing the red sea, it may be assumed that instead of dealing with this difficulty, courts search for alternative ways to decide, and one of them is the introduction of the legislative purpose criterion.

2.5. New cases that may be decided based on the legislative purpose criterion

So far, we have analysed cases that have been discussed and decided in case law, and now we will highlight new cases that are pending in Israel and will be decided in the future. Based on the facts and considerations of the dispute, it can be assumed that the ‘legislative purpose’ criterion will play a role in the resolution of these cases.

2.5.1. E-scooter parts

In Israel, e-scooters are classified under the following HS Code, which relates to motorcycles, and are exempted from purchase tax: 8711.60 - Motorcycles (including mopeds) and cycles fitted with an auxiliary motor, with or without side-cars; side-cars - With electric motor for propulsion.

Incidentally, one wonders how it is possible that there is no HS Code for ‘scooters’ when this is a vehicle that has become very common in recent years. This is an example of the customs legislator not keeping up with the progress of technology and not updating customs classifications as necessary (Wagner, 2024).

When scooter spare parts are imported separately, such as, steering wheel, handlebars, headlights and wheels, it appears that the spare parts are classified under HS Code 87.14, which refers to vehicle parts and accessories under HS Code 87.11.

The problem of classifying spare parts arises in Israel because the above-mentioned HS Code 87.14 is divided into subheadings, the first - motorcycles parts and accessories, with 20 per cent purchase tax: 8714.10 - Parts and accessories of vehicles of headings 87.11 to 87.13 - of motorcycles (including mopeds). The second, other parts, without the tax: 8714.90 - Parts and accessories of vehicles of headings 87.11 to 87.13 - Other.

In the classification of spare parts, there is no distinction between parts for electric (e-) scooters and those for motorbikes powered by a different engine, such as a petrol engine.

According to the customs authority’s position, e-scooter parts are classified as motorbike parts under HS Code 87.14-10, subject to a purchase tax of 20 per cent, an Israeli domestic tax like excise duty; for example, seats, in the following HS Code: 8714.10.10 - Parts and accessories of vehicles of headings 87.11 to 87.13 - Of motorcycles (including mopeds) - Saddles.

It is clear to anyone that the e-scooter has the potential to cause road accidents, injuries, drink driving and other devastating results. But, if the e-scooter is exempt from tax, apparently it does not make sense to tax its parts, as noted, for example, in Israeli Purchase Tax Law (Article 27(d)(1)):

The manager may refund the tax, in whole or in part, paid on goods or services, if one of these turns out to be the case: the goods were used for the production of goods that are not subject to tax.

In conclusion, it seems that imposing a purchase tax on e-scooter parts does not fulfil the legislative purpose, but rather goes against it.

2.5.2. E-vehicle charging stations

Passenger cars with petrol engines are subjected to a 83 per cent purchase tax in Israel, for example: 8703.23.90 - Motor cars and other motor vehicles principally designed for the transport of persons. Other vehicles, with only spark-ignition internal combustion - reciprocating piston engine - Of a cylinder capacity exceeding 1,500 cc but not exceeding 3,000 cc – other.

There are some reductions related to safety equipment and the air pollution rate, but the basic rate is 83 per cent. Electric vehicles (EVs) are subjected to a reduced purchase tax rate, currently 35 per cent. Formerly, until 1 January 2024, it was 20 per cent, and before 1 January 2023, it was 10 per cent, for example: 8703.80.90 - Motor cars and other motor vehicles principally designed for the transport of persons - Other vehicles, with only electric motor for propulsion – others.

Charging stations for EVs are divided into two main types: a fast-charging station, of the type found in petrol stations, which allows full charging in about an hour — according to the position of the Israeli Customs, this is exempted from purchase tax, and classified here: 8504.40.91 - Electrical transformers, static converters (for example, rectifiers) and inductors - Static converters – others - External power supply units connected to device by external connections.

A slow-charging station, the kind found in homes, which allows charging in a few hours, according to the position of the Israeli customs, is subjected to 20 per cent purchase tax and classified here: 8537.10.72 - Boards, panels, consoles, desks, cabinets and other bases, equipped with two or more apparatus of heading 85.35 or 85.36, for electric control or the distribution of electricity - For a voltage not exceeding 1,000 V - Control Apparatus - Specially for motor vehicle.

There is a technical difference between the charging methods of the two stations, which we will not go into here, but you might wonder whether it makes sense to exempt one station from purchase tax and the other not. In addition, one could ask what sense it makes to levy the same tax on the slow-charging station as on the EV itself (until 1 January 2024) or more than on the vehicle itself (before 1 January 2023), since the vehicle clearly has the potential for a higher number of negative external effects (such as car accidents) than the charging station (Pharma Gury Case).

In short, it seems that imposing a purchase tax on slow-charging stations does not fulfil the legislative purpose but goes against it.

2.6. Implications on customs brokers’ activity

The classification of goods is one of the main services that customs brokers provide to their clients, as is also mentioned in Israeli legislation, Customs Brokers (Determination of Customs Action) Order, 1965):

Actions or contacts with the customs authority, from the time goods are imported until their delivery for consumption in Israel, which are required by law, or which may be made, in connection with the release of such goods from the supervision of the customs authority. (Article 1(1))

It is understood that customs brokers are obliged under the law to act reliably, loyally and honestly (Customs Brokers Act, 1964). The customs broker is a professional who holds a licence granted to them by the state and it is they who determine the classification, according to all the professional instruments at their disposal (Articles 1, 3A(a), 22(a)).

By way of comparison, a lawyer is also obliged to act towards their client with loyalty and dedication (Bar Associations Act, 1961). When a lawyer gives advice or an opinion to a client and, with hindsight, it turns out that the advice was incorrect, there seems to be a possibility that the client will sue them for professional negligence.

Similarly, accountants and tax advisers are also obliged to act fairly, carefully and honestly towards their clients (Accountants Regulations (Unreasonable Behaviour for the Profession), 1965; Act Governing the Representation of Tax Advisers, 2005). If they advise the client on tax liability in a particular transaction and the tax authority decides otherwise, there seems to be a possibility that the client will sue these service providers for professional negligence.

Returning to customs brokers, the courts repeatedly return to the question of the legislative purpose, whether it is appropriate to tax the product and consequently determine the classification. That issue makes you wonder whether a reasonable customs broker, who has by law a duty to act reliably, faithfully and honestly, is also obliged to take this criterion into account when classifying a product for their client (Customs Brokers Act, 1964, Article 20).

When a customs broker classifies only according to the WCO HS Convention on uniform classification, the six digits and the rules, without using the legislative purpose criterion, it can be argued that the broker is negligent, contrary to their duty by law (Customs Brokers Act, 1964, Article 20).

In Israel, the customs authority publishes the material needed to prepare for the customs broker exam and one of the main topics covered is ‘Rules regarding the classification of goods’ (Israel Tax Authority, 2019). One wonders whether these rules also include legislative purpose, especially when there is no legislative purpose book available for each of the HS Codes, basically because ‘legislative purpose’ is subjective (Irish, 2008).

These and other questions only illustrate the difficulty of using the legislative purpose criterion in customs classification.

3. The ‘legislative purpose’ criterion is subjective and changes as quickly as the weather

The discussion above demonstrates that the legislative purpose criterion, an external and unwritten consideration of the HS Convention, is considered by Israeli courts when classifying goods (Miron Case).

One gets the impression that the judges themselves are not sure of the correct way to analyse this criterion. Sometimes, this criterion is disputed in the process itself, as the judges in a majority opinion determine one purpose, and the dissenting opinion finds another purpose. Another example is that the first jurisdiction rules a certain purpose, and the appeal jurisdiction finds another purpose (E.D.Y. Case 1, 2, 3).

‘Legislative purpose’ is subjective, and there is no book or guidance for each HS Code to clarify whether it should be taxed or exempted.

The use of the legislative purpose criterion is like the situation where you first launch the arrow and then mark the target. In other words, the court first determines whether it is desirable to tax the product or not and, accordingly, determines the classification — which must be uniform, according to the HS Convention.

Import tax rates in different countries vary and there is no uniformity around the world (Shumba, 2024). Therefore, if each country uses the criterion of legislative purpose to determine classification, in one country one purpose will be found, in another country a different purpose will be found, and a different classification will be determined for the same product (Irish, 2008).

For example, trailers in Israel are duty-free, under HS Code 8716.80.90 - Trailers and semi-trailers; other vehicles – other, while in the Unites States, they bear a 3.2 per cent duty, under HS Code 8716.80.50 - Trailers and semi-trailers; other vehicles- other (United States Harmonised Tariff Schedule, 2024).

In addition, customs duty rates are dynamic and can change in the same country, sometimes several times for the same product with the same classification. For example, until 2017, smart phones in Israel were subject to a 15 per cent purchase tax and since 2017, they have been purchase tax-exempt (Ziv, 2017).

The classification of goods in Israel affects both customs duties and purchase tax rates. These are different taxes with different purposes (Wagner, 2022). Therefore, there is an inherent difficulty in determining the legislative purpose regarding a given product at a given time, both in Israel and abroad, as noted by Irish (2008, p. 12):

For tariff classification and the HS, interpretation should not be guided by the specific socioeconomic goals of any particular government. An awareness of the use of goods and the commercial understandings of trade participants must, however, be part of the interpretation if the system is to work effectively.

4. The ‘legislative purpose’ criterion jeopardises harmonised classification

As we all know, determining the classification is difficult even before adding the legislative objective, as was noted by Brigstock (2017, p. 25):

Tariff classification is an area of customs law which carries inherent difficulties of interpretation and application.

Grainger notes that governments are doing their best to ensure harmonised classification, and are also seeking expert training and technological tools:

But despite the significance of HS Codes in the administration of the cross-border trade and customs environment, determining the correct HS classification is often considered to be difficult. Expert training is usually considered to be necessary. Given such HS classification challenges, there is a strong case for policy makers to routinely make assistive technologies available to users, and thus help ease their classification burden. (Grainger, 2024, p. 4)

The use of the legislative purpose criterion in the classification of goods helps jurists because it allows room for legal debate and an attempt to determine a classification, different from the uniform classification rules of the HS Convention. Good examples for it were the classification of ‘Rescue Remedy’ in HS Code 2106, while the WCO classified a similar product in HS Code 2208 (Pharma Gury Case), and an integrated communication device classified in HS Code 8517, while the WCO classified a similar product in HS Code 8528 (Hot Telecom Case).

It seems that the unwritten criterion of legislative purpose jeopardises the uniformity of the classification method and undermines the overall objective behind the WCO HS Convention. We recall that the objective was:

Desiring to facilitate intentional trade,

Desiring to facilitate the collection, comparison and analysis of statistics, in particular those on international trade,

Desiring to reduce the expense incurred by re-describing, reclassifying and recoding goods as they move from one classification system to another in the course of international trade and to facilitate the standardization of trade documentation and the transmission of data. (HS Convention, preamble)

This jeopardy was also noted by Irish (2008, pp. 51–52):

The HS has been widely adopted as a customs and statistical nomenclature. In this global context, a purposive approach to statutory interpretation emphasising the socioeconomic goals behind implementation of the legislation is not suitable. There is no reason to believe that the purposes of the legislators of any particular country are those of the entire HS. It could not be expected that the classification of goods in the HS should depend on the wishes of domestic legislators to encourage specific sectors through the imposition or reduction of a customs duty.

Pre-HS Canadian end use cases gave special weight to legislative intent in favour of particular domestic economic sectors. This sort of direct inquiry into domestic policy is out of place in the interpretation of the HS. The general policy behind the HS favours developing consensus views on reliable tariff classification. This goal will not be met if interpretation looks to the domestic economic policy of each state that adopts the HS.

5. Conclusion

The use of the ‘legislative purpose’ criterion in the classification of goods is subjective and can change quickly, which affects the predictability of the results, so when the State of Israel uses the ‘legislative purpose’ criterion to classify goods, it damages the harmonised classification required by the HS Convention.

To ensure harmonised classification, it is desirable that Israeli courts show greater restraint and minimise the use of the subjective ‘legislative purpose’ criterion. Reversion to the traditional classification method is also recommended to achieve the objective of the HS Convention.