Taxation of Narcotics Trade with Value Added Tax

Facts

According to the commercial register entry, the purpose of [X. AG] is the trade in organically grown goods, particularly in legal hemp products. In 1998, it generated revenue of CHF 5,903,963.-- from the sale of so-called fragrance sachets or hemp pillows, on which it had only paid the reduced value added tax rate of 2%. The Federal Tax Administration (FTA) then demanded a subsequent payment of value added tax in the amount of CHF 244,571.-- applying the then applicable standard tax rate of 6.5%.

[X. AG] filed a complaint against this decision up to the Federal Supreme Court.

Considerations

The Federal Supreme Court decided that the narcotics trade is generally subject to value added tax. This corresponds to the principle of tax neutrality, according to which no distinction is made between permitted and prohibited transactions in tax law. The Court of Justice of the European Union has also confirmed this practice.

While the European Court of Justice has exceptionally exempted the trade in narcotics and counterfeit money from value added tax, as there is no competition between legal and illegal economic sectors in such cases, the Federal Supreme Court sees no grounds to apply this…