Yes, if I open/unzip the zip file everything proceeds normally. Everything gets tagged, music files get added to Music, the empty folder gets thrown away… Likewise, if I drag the offending zip out of Downloads and then back in, everything gets processed normally.
The "Newly Added Items" rule is simply:
if Date Added is in the last 1 week then
Set color label "Blue"
Continue matching rules
If I disable that rule, everything works normally:
Hazel(5).log