Today, the Supreme Court issued one decision, described below, of interest to the business community.

Railroad Revitalization and Regulatory Reform Act—Discriminatory State Taxation

Alabama Department of Revenue v. CSX Transportation, Inc., No. 13-553 (previously described in the July 1, 2014, Docket Report)

The Railroad Revitalization and Regulatory Reform Act of 1976 (the "4-R Act") prohibits States from imposing any "tax that discriminates against a rail carrier." 49 U.S.C. § 11501(b)(4). Today, in Alabama Department of Revenue v. CSX Transportation, Inc., No. 13-553, the Supreme Court held that a State may potentially violate this prohibition by taxing fuel purchases made by a rail carrier while exempting similar purchases made by its competitors. The Court further clarified that a tax is discriminatory only if the State cannot sufficiently justify differences in treatment between similarly situated taxpayers.

CSX, an interstate rail carrier, is subject to Alabama's sales tax for its purchases of diesel fuel. Under separate statutory provisions, CSX's competitors in the State—motor and water carriers—are exempt from paying the sales tax for their diesel-fuel purchases. Motor carriers pay an alternative fuel-excise tax on diesel, but water carriers pay neither the sales tax nor the excise tax. CSX sought to enjoin Alabama officers from collecting sales tax on its diesel-fuel purchases, claiming that the State's tax treatment violated § 11501(b)(4).

After the lower courts rejected CSX's claim, the case reached the Supreme Court for the first time. The Court reversed, holding that a tax "discriminates" under subsection (b)(4) when it treats "groups [that] are similarly situated" differently without sufficient "justification for the difference in treatment." CSX Transp. v. Ala. Dept. of Revenue, 562 U.S. 277, 287 (2011). On remand, the Eleventh Circuit held that CSX could establish discrimination by showing that Alabama treated rail carriers differently from their competitors. The Eleventh Circuit rejected Alabama's argument that its sales-tax exemption did not unlawfully discriminate against rail carriers because motor carriers (but not rail carriers) had to pay an excise tax on their fuel.

Today, the Supreme Court again reversed and remanded. The Court upheld the Eleventh Circuit's conclusion that CSX's competitors, including motor carriers and water carriers, were an appropriate comparison class for its discrimination claim. The proper comparison class, the Court explained, depends on the theory of discrimination alleged in the claim and must consist of individuals situated similarly to the claimant.

The Court also held, however, that the Eleventh Circuit had erred in refusing to consider whether Alabama could justify its exemption of motor carriers from the sales tax because motor carriers, and not rail carriers, are subject to the excise tax. The Court held that a comparable tax levied on a competitor may justify exempting that competitor from a general tax applicable to a rail carrier. Thus, the Court remanded the case for the Eleventh Circuit to decide whether the excise tax is "the rough equivalent" of the sales tax imposed on CSX. Recognizing that water carriers are exempt from both the state tax and the excise tax, the Court also remanded for the Eleventh Circuit to examine the State's other proffered justifications for exempting water carriers from the sales tax.

Justice Thomas, joined by Justice Ginsburg, dissented. The dissenters believed that a State's tax-exemption scheme does not violate § 11501(b)(4) unless it "target[s] or single[s] out railroads by comparison to general commercial and industrial taxpayers," not merely by comparison to similarly situated competitors.

Please visit us at www.appellate.net

Visit us at mayerbrown.com

Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© Copyright 2015. The Mayer Brown Practices. All rights reserved.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.