On March 4, the U.S. Supreme Court ruled that the Eleventh Circuit Court of Appeals properly concluded that a taxpayer's transportation industry competitors were an appropriate comparison class for the taxpayer's claim that the sales and use taxes imposed on railroads were discriminatory under the Railroad Revitalization and Regulation Reform Act of 1976 (4-R Act).1 However, the Court reversed the Eleventh Circuit's decision and remanded the case for further consideration of whether Alabama discriminated against the taxpayer and other railroad carriers by exempting motor and water carriers from its sales and use taxes, and instead subjecting motor carriers to an alternative fuel-excise tax, while not imposing any comparable alternative tax on water carriers.


The taxpayer, CSX, is a common carrier railroad engaged in interstate commerce. The taxpayer filed suit against the Alabama Department of Revenue, alleging that the imposition of Alabama sales and use taxes on its purchase or consumption of diesel fuel violated the 4-R Act, which prohibits a state or political subdivision from imposing "another tax" that discriminates against a rail carrier.2 In the original lawsuit, the taxpayer sought an injunction prohibiting the Department from collecting the Alabama sales and use taxes on the taxpayer's purchase or consumption of diesel fuel within the state. The taxpayer also sought declaratory judgment that the imposition of these taxes violated the 4-R Act. The U.S. District Court for the Northern District of Alabama dismissed the case subsequent to the Eleventh Circuit's holding, in a different case, that a tax exemption cannot be deemed a discriminatory tax which is prohibited by the 4-R Act.3

The taxpayer appealed the dismissal to the Eleventh Circuit, which affirmed,4 and to the U.S. Supreme Court, which reversed and held that a tax "discriminates" under the applicable terms of the 4-R Act when it treats "groups [that] are similarly situated" differently without sufficient "justification for the difference in treatment."5 Finding that the taxpayer was thus permitted to challenge Alabama's sales and use taxes under the 4-R Act, the Supreme Court remanded the case for further proceedings on the merits.6

On remand, the U.S. District Court determined that the imposition of Alabama sales and use taxes on the purchase of diesel fuel by rail carriers did not constitute discriminatory taxes that are specifically prohibited under the 4-R Act.7 The District Court reasoned that when taking into account the excise tax applicable to motor carriers, and not rail carriers, motor carriers paid a "substantially similar" rate of tax, and that the taxpayer failed to show any discriminatory effect with respect to the tax treatment of water carriers.

The taxpayer appealed this decision and the Eleventh Circuit reversed, ruling in the taxpayer's favor that the sales tax was discriminatory under the 4-R Act.8 Specifically, the Eleventh Circuit held that the taxpayer could establish discrimination by showing that Alabama taxed rail carriers differently than its transportation industry competitors (including both motor and water carriers). The Eleventh Circuit refused to consider any aspects of Alabama's taxing scheme other than the challenged provision and wholly rejected the Department's argument that the fuel-excise taxes imposed on motor carriers offset the sales taxes charged to railroads. The Department appealed this decision and the U.S. Supreme Court agreed to consider the case for a second time.

Alabama's Imposition of Taxes

Under Alabama law, all businesses including railroads are generally subject to a 4 percent state-level sales and use tax on their purchases of diesel fuel in the state.9 Purchases of diesel fuel by other carriers, motor carriers or interstate water carriers, however, are exempt from sales and use tax. Instead, motor carriers are subject to a special motor fuels excise tax of 19 cents per gallon on their purchases of diesel fuel10 and water carriers are exempt on their purchase of diesel fuel used for interstate or foreign commerce.11 The central issue in this case was whether this disparate treatment of railroads and other common carriers constituted discrimination under the 4-R Act.

U.S. Supreme Court Decision

The Supreme Court held that the Eleventh Circuit correctly concluded that the taxpayer's competitors are an appropriate comparison class for its claim of discrimination under the 4-R Act. However, the Court ruled that the Eleventh Circuit erred in failing to consider whether Alabama was justified in subjecting motor carriers to a fuel-excise tax instead of the sales and use taxes imposed upon railroads. On remand, the Court also directed that consideration be given to whether similar justification applied to defend the sales and use tax exemptions applicable to water carriers.

Comparison Class

In determining whether discrimination existed, the Court explained that it was first required to determine the appropriate "comparison class." The 4-R Act was found to be an "asymmetrical statute" wherein subsections (b)(1) through (b)(3) of the statute specifically address the comparison of railroad property to commercial and industrial property in the same jurisdiction, but subsection (b)(4) contains no similar limitation with respect to comparison class. Refusing to apply a limitation to the comparison class which was not directly specified, the Court rejected the Department's argument that the only appropriate comparison class for railroads is all general commercial and industrial taxpayers. Instead, the Court further scrutinized the language included in subsection (b)(4) requiring the finding of discrimination against a rail carrier. Noting that no such proof of discrimination is required to sustain a challenge to the provisions in subsections (b)(1) through (b)(3), the Court concluded that the concept of "similarly situated" must simply be applied in determining an appropriate comparison class.

Recognizing both the wide latitude typically allowed state legislatures regarding disparate treatment of taxpayers engaged in different lines of business12 and the narrow interpretation accorded the term "similarly situated" under the Equal Protection Clause,13 the Court noted that "the concept of 'similarly situated' individuals cannot be so narrow here. That would deprive subsection (b)(4) of all real-world effect, providing protection that the Equal Protection Clause already provides." Thus, the Court found that competitors of railroads such as motor carriers and water carriers can be another similarly situated comparison class. Accordingly, the Court upheld the Eleventh Circuit decision that a comparison class consisting of motor carriers and water carriers was appropriate, and differential treatment of railroads versus that class would constitute discrimination.

Consideration of Entire Tax Scheme

To determine whether the requisite discrimination was present, the Court found it necessary to examine differences in treatment between similarly situated taxpayers. While the Eleventh Circuit found that motor carriers and water carriers were similarly situated taxpayers to railroads, it declined to consider whether the converse imposition of fuelexcise taxes upon motor carriers but not railroads eliminated the potential for discrimination from imposing sales tax on fuel purchases by railroads. Specifically, the Eleventh Circuit refrained from this analysis as a result of its decision to consider only the specific tax statute upon which discrimination was alleged, rather than the overall taxes imposed upon the motor carriers.

Motor Carriers

In contrast, the Court cited a negative Commerce Clause decision to support the proposition that an additional tax on third parties may justify an otherwise discriminatory tax scheme.14 Precisely, the Court determined that an alternative, roughly equivalent tax is "one possible justification that renders a tax disparity non-discriminatory." The taxpayer made a case against consideration of such other taxes, noting that the statutory language regarding discrimination makes reference to a "tax" (singular) versus the tax code as a whole. Finding that the nature of the language included in the statute necessarily places the burden of determining whether taxes upon similarly situated taxpayers are discriminatory solely upon the courts, the Court remanded the case to the Eleventh Circuit for further consideration. Specifically, the Court requested consideration as to whether Alabama's fuel-excise tax imposed upon motor carriers is the rough equivalent of Alabama's sales tax as applied to the diesel fuel, rendering the sales tax non-discriminatory.

Water Carriers

Comparing the taxpayer to water carriers, the Court noted that water carriers pay neither the general sales tax on diesel fuel charged to railroads nor the fuel-excise tax paid by motor carriers. However, Alabama offered other justifications for this disparate treatment which were not considered by the Eleventh Circuit. Thus, the Court remanded the issue back to the Eleventh Circuit for further consideration.

Dissenting Opinion

Justice Thomas filed a dissenting opinion and was joined by Justice Ginsburg.15 Specifically, Justice Thomas, as expressed in his dissent in the original case, would have found that in order to violate subsection (b)(4) of the 4-R Act, "a tax exemption scheme must target or single out railroads by comparison to general commercial and industrial taxpayers." Based on this divergent opinion regarding the first portion of the decision, Justice Thomas necessarily disagreed with the final conclusion. Instead of treating subsection (b)(4) as a separate clause, Justice Thomas would have treated it as a residual clause. Thus, the statutory structure would have only been indicative of a discriminatory tax against a rail carrier only if it singled out railroads for unfavorable treatment as compared to the general class of commercial and industrial taxpayers.

Also in support of his reasoning, Justice Thomas noted that there is no law preventing railroad carriers from buying the same diesel fuel used by motor carriers and claiming the same tax exemption enjoyed by that group. Similarly, the same general sales and use tax as applied to railroads also applies to all commercial and industrial taxpayers. Based at least partially on these facts, Justice Thomas would have found no discrimination evident.


This is a significant decision which provides guidance, albeit limited, for any taxpayers entertaining thoughts of asserting tax discrimination under an industry-specific statute. By referencing negative Commerce Clause authority allowing for the comparison of two statutorily different tax schemes to determine the presence of discrimination, the decision provides at least some insight into the analysis which could be applied by taxpayers asserting a similar injustice. This broad interpretation allowing comparison between different tax types to prove the existence of discrimination, rather than simply considering the provision claimed to be discriminatory, could result in an expectation of greater latitude at the state legislative and judicial levels. Of particular interest is how the Eleventh Circuit will deal with the issue of whether a 19 cent per gallon tax imposed on motor carriers can be treated as a tax that is roughly equivalent to a 4 percent tax on the value of the diesel fuel imposed on rail carriers. The measurement of these two taxes (flat fee per gallon of diesel fuel versus a percentage of the value of the diesel fuel) is completely different as the value of diesel fuel can vary substantially according to market conditions.

Transportation companies should pay considerable attention to the anticipated further developments in what has turned out to be a very lengthy judicial process, as the result could impact the Alabama sales and use tax structure imposed on rail carriers, as well as in other states. Many other jurisdictions generally impose sales taxes upon railroads in a manner similar to Alabama and allow exemptions for fuel used by motor carriers. While the final conclusion remains to be seen, the case conceivably could go back to the Supreme Court for a third time if the lower courts' view of discrimination under the 4-R Act is appealed by the aggrieved party, and the Supreme Court decides to take the case yet again.


1 Alabama Dep't. of Revenue v. CSX Transportation, Inc., U.S. Supreme Court, No. 13-553, March 4, 2015. Justice Scalia delivered the opinion of the Court and was joined in the decision by Justices Roberts, Kennedy, Breyer, Alito, Sotomayor, and Kagan. Justice Thomas filed a dissenting opinion, in which Justice Ginsburg joined. The Railroad Revitalization and Regulatory Reform Act is codified at 49 U.S.C. § 11501(b)(4).

2 49 U.S.C. § 11501(b)(4). For reference, the 4-R Act provides: "(b) the following acts unreasonably burden and discriminate against interstate commerce, and a State, subdivision of a State, or authority acting for a State or subdivision of a State may not do any of them: (1) assess rail transportation property at a value that has a higher ratio to the true market value of the rail transportation property than the ratio that the assessed value of other commercial and industrial property in the same assessment jurisdiction has to the true market value of the other commercial and industrial property; (2) levy or collect a tax that may not be made under paragraph (1) of this subdivision; (3) levy or collect an ad valorem property tax at a tax rate that exceeds the tax rate applicable to commercial and industrial property in the same assessment jurisdiction; or (4) impose another tax that discriminates against a rail carrier providing transportation subject to the jurisdiction of the Board under this part."

3 Norfolk S. Ry. Co. v. Alabama Department of Revenue, 550 F.3d 1306 (11th Cir. 2008).

4 CSX Transportation, Inc. v. Alabama Department of Revenue, 350 Fed. Appx. 318 (11th Cir. 2009).

5 CSX Transportation, Inc. v. Alabama Department of Revenue, 562 U.S. 277 (2011).

6 Id.

7 CSX Transportation, Inc. v. Alabama Department of Revenue, 892 F. Supp. 2d 1300 (N.D. Ala., 2012). For a discussion of this case, see GT SALT Alert: Federal District Court Holds Alabama's Imposition of Sales and Use Taxes on Rail Carriers Does Not Violate 4-R Act.

8 CSX Transportation, Inc. v. Alabama Department of Revenue, 720 F.3d 863 (11th Cir. 2013).

9 ALA. CODE §§ 40-23-2(1); 40-23-61(a).

10 ALA. CODE § 40-17-325(a)(2), (b).

11 ALA. CODE §§ 40-23-4(a)(10); 40-23-62(12).

12 Citing, for example, New York Rapid Transit Corp. v. City of New York, 303 U.S. 573, 579 (1938) and Southwestern Oil v. Texas, 217 U.S. 114, 121 (1910).

13 U.S. CONST. amend. XIV, § 1.

14 Gregg Dyeing Co. v. Query, 286 U.S. 472, 479-480 (1932).

15 Justice Thomas also filed a dissenting opinion in the initial Supreme Court CSX decision, CSX Transportation, Inc. v. Alabama Department of Revenue, 562 U.S. 277 (2011).

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