The U.S. Supreme Court has held that a railroad may, under the federal Railroad Revitalization and Regulatory Reform Act (4-R Act), challenge Alabama sales and use taxes that apply to rail carriers' purchases of diesel fuel, but exempt fuel purchases by rail competitors. Although Congress prohibited 4-R Act challenges based on property tax exemptions for non-railroad property, it did not prohibit challenges based on non-property tax exemptions. While the logic for this distinction "eludes" the Court, it is bound by the statute that Congress wrote. The Court remanded the case to the trial court to determine if Alabama actually had discriminated against the railroad as alleged, or whether it can offer a sufficient justification for declining to provide the exemption at issue to rail carriers.
Railroads pay Alabama sales and use tax on their purchase and use of diesel fuel. However, purchases of diesel fuel by interstate motor and water carriers are exempt from the tax, although motor carriers are subject to motor fuel excise and gasoline taxes. The railroad here challenged this taxing regime in federal court as a violation of the 4-R Act's prohibition on discrimination in taxation against rail carriers. The U.S. Court of Appeals for the Eleventh Circuit affirmed the district court's dismissal of the challenge, based on its prior decision in
Norfolk Southern Railway Co. v. Alabama Department of Revenue, 550 F.3d 1306 (11th Cir. 2008), which raised identical issues. In Norfolk Southern, the Court of Appeals held that the 4-R Act does not prevent a state from exempting other commercial entities from a generally applicable tax and leaving the tax on railroads in place, so long as the railroad is not targeted. The court relied on the decision in Oregon Department of Revenue v. ACF Industries, Inc., 510 U.S. 332 (1994), in which the U.S. Supreme Court held that a railroad could not challenge a generally applicable property tax on the basis that certain non-railroad property was exempt from the tax.
The U.S. Supreme Court accepted the railroad's request for review, and reversed the Court of Appeals.
High Court Opinion
Writing for the majority, Justice Elena Kagan held that the 4-R Act's prohibition on discriminatory taxes extends to sales and use taxes, and that prohibited discrimination can result from exempting competitors from a tax. The Act bars four forms of discriminatory taxation under the four subsections of §11501(b). The first three subsections, (b)(1)-(3), prohibit a state from imposing higher property tax rates or assessment ratios on railroads' property than on other commercial and industrial property. "Commercial and industrial property" includes only "property . . . subject to a property tax levy." The fourth subsection, (b)(4), is a catchall provision that prohibits "another tax that discriminates against a rail carrier."
The Court held that "another tax," as used in subsection (b)(4), refers to any tax a state might impose, except the taxes on property previously addressed in subsections (b)(1)-(3). It does not, as Alabama argued, apply only to gross receipts taxes that some states imposed in lieu of property taxes at the time of the 4-R Act's passage.
Furthermore, a state excise tax (such as Alabama's sales and use tax) that applies to railroads but exempts their competitors, whether the latter are interstate or local actors, is subject to challenge under subsection (b)(4) as a discriminatory tax. The Court's decision in ACF Industries was based on its conclusion that Congress intended to insulate property tax exemptions from challenge when it excluded property not "subject to a property tax levy" from the definition of "other commercial and industrial property" against which the taxation of railroads is measured under subsections (b)(1)-(3). However, Congress expressed no intent to insulate non-property tax exemptions like those at issue in this case from the Act's prohibition on discriminatory taxation. Subsection (b)(4) is drafted more broadly than the preceding subsections and does not contain their limitations.
Alabama argued that this result creates troubling inconsistencies, and that distinguishing between property tax exemptions and other tax exemptions is illogical. The Court did not disagree, and said that it was unaware of a satisfying reason for the distinction. However, the Court is bound by the language of the statute as it was drafted by Congress.
In dissent, Justice Clarence Thomas, joined by Justice Ruth Bader Ginsburg, would hold that, based on the structure and background of the 4-R Act, a tax exemption scheme must target or single out railroads by comparison to general commercial and industrial taxpayers in order to violate the Act. Under this test, the railroad's complaint was properly dismissed because it did not allege that Alabama's sales and use taxes targeted railroads compared to most taxpayers. Failure to define the appropriate comparison class and the type of differential treatment required to constitute discrimination will force states to give railroads every tax exemption that anyone else gets, or engage in open-ended litigation over what is sufficient justification for such distinctions. The dissenters do not understand the majority opinion as foreclosing the lower courts from utilizing the test the dissent proposes.
CSX Transportation, Inc. v. Alabama Department of Revenue, U.S. Supreme Court, Dkt. 09-520, February 22, 2011, ¶201-537
Explanations at ¶60-740