Generally, federal law prohibits states from imposing taxes that discriminate against a rail carrier under 49 U.S.C. § 11501(b)(4) a/k/a Railroad Revitalization and Regulation Reform Act of 1976 ("4-R Act").
Alabama's tax scheme imposed a general sales tax rate of 4%, which was used as the standard applicable tax to a railroad's purchase of diesel fuel. Alabama's tax however excluded trucking companies from the sales tax, but imposed a substitute per gallon fuel excise tax on diesel. At the same, water carriers were exempt from both the sales tax and the fuel excise tax.
CSX, a rail carrier and a stipulated competitor of trucking companies and water carriers, argued that the disparate tax treatment discriminated against it in violation of Section 11501(b)(4). Following the first of two appeals to the Eleventh Circuit, in 2011, the U.S. Supreme Court rejected Alabama's argument that a sales and use tax exemption cannot discriminate as the term is used under Section 11501(b)(4). CXS Transp., Inc. v. Alabama Dept. of Revenue, 562 U.S. 277 (2011). As such, a tax discriminates against a rail carrier where it treats "groups that are similarly situated differently without sufficient justification for the difference in treatment." Id.
On this second pass through the Eleventh Circuit, the U.S. Supreme Court again granted certiorari. This time, the Court pressed to define a proper "similarly situated" comparison class, and rejected a broad category of all commercial and industrial taxpayers under Section 1150(b)(4). Alabama Dept. of Revenue v. CSX Transp., Inc., 575 U.S. — (Mar. 4, 2015). While not definitively delineating the class, the Court accepted for purposes of this case that competitors of rail carriers were an appropriate class under Section 11501(b)(4) because the purpose of the 4-R Act is to "restore the financial stability of the railway system." Id. (internal quotations omitted).
Relying on negative Commerce Clause cases where an additional tax on other third-parties justify an otherwise discriminatory tax, the Court held that "[t]here is simply no discrimination when there are roughly comparable taxes." Thus, at least with the motor carrier exception, the Court remanded for further proceedings to determine whether Alabama's fuel excise tax is the rough equivalent of Alabama's sales tax as applied to diesel fuel; thereby, potentially justifying the motor carrier sales-tax exemption.
The same reasoning could not apply to the water carrier exemption since there was no alternate tax scheme imposed upon water carriers. While the State offered other justifications, because the Eleventh Circuit failed to examine the justifications, the Court remanded the question back to the Eleventh Circuit to consider the case for a third time.
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