United States: Alabama Department Of Revenue Gets A Second Chance To Justify Diesel Fuel Sales Tax Against Rail Carriers

Last Updated: March 13 2015
Article by Bruce P. Ely and Patricia Head Moskal

In the State of Alabama's and CSX Transportation's second trip to the U.S. Supreme Court, the Court held in a 7-2 decision on March 4 that Alabama's sales tax on diesel fuel purchased and used by rail carriers—where motor and water carriers are exempt from the tax—discriminates against rail carriers only if Alabama cannot justify the differences in tax treatment between those similarly situated taxpayers. Alabama Dep't of Rev. v. CSX Transp., Inc., No. 13-553. The Court remanded the case to the Eleventh Circuit, directing it to consider Alabama's justifications for the differential tax treatment of rail carriers, motor carriers, and water carriers.

Alabama imposes sales tax on diesel fuel purchased and used by rail carriers, but exempts motor carriers and water carriers from this tax. Motor carriers, however, are subject to Alabama's alternative per gallon diesel fuel-excise tax; water carriers are exempt from both taxes. CSX is a rail carrier in Alabama and other states and filed suit challenging the sales tax on diesel fuel imposed against it as a discriminatory tax in violation of the Railroad Revitalization and Regulation Reform Act of 1976 (the 4-R Act). Under section 11501(b)(4) of the 4-R Act, a state is prohibited from imposing a "tax that discriminates against a rail carrier" that is subject to the provisions of the Act. Importantly, the parties stipulated that rail carriers, motor carriers, and water carriers are competitors.

On the first trip to the U.S. Supreme Court, the Justices unanimously rejected Alabama's position that sales and use tax exemptions cannot "discriminate" within the meaning of subsection (b)(4) of the 4-R Act, and remanded the case for further proceedings (CSX I).

On remand, the district court found that CSX failed to prove discrimination under subsection (b)(4). But, the Eleventh Circuit reversed. It agreed that CSX could establish discrimination by showing that Alabama taxed rail carriers differently from their competitors, and rejected Alabama's position that the diesel fuel-excise tax on motor carriers is the substantial equivalent to the sales tax on rail carriers. Even though Alabama imposes diesel fuel-excise tax on motor carriers but not rail carriers, the Eleventh Circuit found that Alabama was not justified in imposing sales tax on diesel fuel purchased by rail carriers but not by motor carriers.

On the second trip to the U.S. Supreme Court (CSX II), the Court addressed two issues: (1) are motor and water carriers properly regarded as an appropriate comparison class for CSX's claim of discrimination under subsection (b)(4); and (2) should a court, when resolving a claim of unlawful tax discrimination, consider aspects of a state's tax scheme apart from the challenged provision.

On the first issue, Justice Scalia, writing for the Court, found that picking an appropriate comparison class is "extraordinarily easy," and consists of the rail carrier's competitors. Subsection (b)(4) of the 4-R Act, however, demands a more precise analysis than just identifying a comparison class. In order to make a showing of "discrimination," the members of the comparison class must be individuals "similarly situated" to the claimant. The Court rejected Alabama's argument that the comparison class should consist of all commercial and industrial taxpayers, and held that the Eleventh Circuit properly concluded that the appropriate comparison class—i.e., those that are "similarly situated" in light of CSX's complaint and the parties' stipulation—consists of motor and water carriers and that the differential treatment of members of that class constituted discrimination.

On the second issue, the Court held that a state tax "discriminates only where the State cannot sufficiently justify differences in tax treatment between similarly situated taxpayers." The Court further held that in deciding whether sufficient justification has been shown, other aspects of a state's tax scheme may be considered. The latter holding could be crucial to the state's case on remand.

For purposes of CSX II, Alabama may be able to justify its decision to exempt motor carriers from the diesel fuel sales tax by its alternative decision to subject only motor carriers to the diesel fuel-excise tax. In short, the Court concluded that there is no discrimination where there are "roughly comparable taxes," and remanded the case to the Eleventh Circuit to consider whether Alabama's diesel fuel-excise tax on motor carriers is the rough equivalent to the diesel fuel sales tax on rail carriers. In the case of water carriers, the Court commented that Alabama offered no similar justification because water carriers are not subject to either tax; but noted that Alabama had argued that there are other justifications for the water carrier exemptions. The Court remanded the case for consideration of the alternative rationale for water carriers as well.

Justice Thomas, joined by Justice Ginsburg, dissented, criticizing the majority's interpretation of the requirement of discrimination under subsection (b)(4) and prolongation of the litigation of "a baseless claim of discrimination that should have been dismissed long ago."

Former BABC attorney Luther Strange is the current Alabama Attorney General, and former BABC attorney Andrew Brasher is the current Alabama Solicitor General who presented oral argument for the State in CSX II. Bruce Ely and Sims Rhyne, attorneys in BABC's Birmingham office, attended oral argument.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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