Supreme Court derails 4-R Act challenge to Alabama sales tax on diesel

Supreme Court derails 4-R Act challenge to Alabama sales tax on diesel

On March 4, 2015, the United States Supreme Court decided Alabama Department of Revenue v. CSX Transportation, Inc., No. 13-553, holding that a rail carrier can prove discrimination under the Railroad Revitalization and Regulation Reform Act (4-R Act), 49 U.S.C. § 11501(b)(4), which forbids states from imposing taxes that “discriminate against a rail carrier,” by showing that the rail carrier was subject to tax treatment different than that applied to its “similarly situated” competitors, but that such a tax disparity could be rendered nondiscriminatory if the competitors were subject to an alternative, “roughly equivalent” tax.

Alabama imposes a 4 percent tax on the purchase or use of property that applies to rail carriers’ purchases or use of diesel fuel.  Alabama exempts diesel fuel purchases made by trucking transport companies (motor carriers) and water transport companies (water carriers) from this tax.  Instead, motor carriers pay a 19-cent-per-gallon fuel excise tax on diesel, and water carriers pay no alternative tax.  CSX Transportation (CSX), a rail carrier, challenged this asymmetrical tax treatment as discriminatory under the 4-R Act and sought an injunction preventing Alabama from collecting sales tax on its diesel purchases.  The District Court and the Eleventh Circuit both initially rejected CSX’s claim.  In a prior decision, the Supreme Court reversed, rejecting Alabama’s argument that sales and use tax exemptions cannot “discriminate” within the meaning of the 4-R Act.  The Supreme Court also explained that a tax violates subsection (b)(4) of the 4-R Act when it “treats ‘groups [that] are similarly situated’ differently without sufficient justification for the difference in treatment.”  On remand, the District Court again denied CSX’s claim.  The Eleventh Circuit reversed, holding that a rail carrier could show discrimination within the meaning of the 4-R Act by showing that Alabama treated rail carriers differently than their competitors and rejecting Alabama’s argument that the alternative fuel excise taxes imposed on motor carriers offset the sales tax exemption.

The Supreme Court reversed.  The Court held that the Eleventh Circuit properly concluded that a state tax that treats rail carriers and their “similarly situated” competitors differently can constitute discrimination under the 4-R Act, rejecting Alabama’s argument that the only appropriate comparison class for a subsection (b)(4) claim is “all general and commercial industrial taxpayers.”  The Court explained that although the first three subsections of the 4-R Act require comparison “to commercial and industrial property in the same assessment jurisdiction,” subsection (b)(4) “contains no such limitation, leaving the comparison class to be determined as it is normally determined with respect to discrimination claims.”  Accordingly, the Court concluded that “[w]hen a railroad alleges that a tax disadvantages it compared to its competitors in the transportation industry, the railroad’s competitors in that jurisdiction are the comparison class.”  The Court also held a comparison class composed of a rail carrier’s competitors could qualify as “similarly situated,” because “discrimination in favor of that class most obviously frustrates the purpose of the 4-R Act, which was to ‘restore the financial stability of the railway system of the United States’ . . . while ‘foster[ing] competition among all carriers by railroad and other modes of transportation.'”

However, the Court overturned the Eleventh Circuit, holding that asymmetrical tax treatment of rail carriers and their similarly situated competitors could be rendered nondiscriminatory if the competitors were subject to an alternative, “roughly equivalent” tax.  The Court explained that “[i]t does not accord with ordinary English usage to say that a tax discriminates against a rail carrier if a rival who is exempt from that tax must pay another comparable tax from which the rail carrier is exempt.  If that were true, both competitors could claim to be disfavored—discriminated against—relative to each other.”  The Court also rejected CSX’s argument that, because section (b)(4) refers to a “tax” in the singular, the inquiry is only whether the challenged “tax” discriminates, explaining that a tax “does not discriminate unless it treats railroads differently from other similarly situated taxpayers without sufficient justification.”  In other words, “[t]here is simply no discrimination when there are roughly comparable taxes.”  The Supreme Court remanded for the Eleventh Circuit to consider whether “Alabama’s fuel-excise tax is the rough equivalent of Alabama’s sales tax as applied to diesel fuel, and therefore justifies the motor carrier sales-tax exemption.”  The Supreme Court also instructed the Eleventh Circuit to consider Alabama’s alternative justifications for the sales tax exemption for water carriers, which pay neither the sales tax nor the fuel excise tax on their purchases of diesel.

Justice Scalia delivered the opinion of the Court.  Justice Thomas filed a dissenting opinion, in which Justice Ginsburg joined.

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