Oral argument: Nov. 10, 2010
Appealed from: United States Court of Appeals for the Eleventh Circuit (Sep. 1, 2009)
RAILROADS, DISCRIMINATION, RAILROAD REVITALIZATION AND REGULATORY REFORM ACT, STATE TAXATION
Due to findings of tax discrimination against interstate railroads, Congress enacted the Railroad Revitalization and Regulatory Reform Act of 1976 (“4-R Act”). The 4-R Act describes four forbidden taxation schemes, the last of which acts as a catch-all for discriminatory statutes not prohibited by the first three categories. Under this catch-all provision, CSX Transportation challenges an Alabama tax that applies to interstate railroads but exempts its motor and water-carrier competitors. CSX Transportation argues that the plain meaning of the 4-R Act and Congress's clear intention to protect railroads permits its challenge. In contrast, the Alabama Department of Revenue argues that the plain meaning of the statute as well as Supreme Court precedent preclude challenges to tax exemptions under the 4-R Act. The circuit courts are currently split on the issue. In this case, the Supreme Court will resolve the circuit split, address issues of federalism, consider the impacts of the decision on Alabama's public schools, and ultimately determine if non-property tax exemptions may be challenged as discriminatory under the 4-R Act.
Whether a State’s exemptions of rail carrier competitors, but not rail carriers, from generally applicable sales and use taxes on fuel subject the taxes to challenge under 49 U.S.C. § 11501(b)(4) as “another tax that discriminates against a rail carrier.”
May a state tax a railroad, but exempt the railroad’s competitors—such as road and water carriers—from the tax, despite a federal prohibition on any tax that discriminates against railroads?
The parties in this action have agreed to the relevant facts. At issue in this case is a provision of the Railroad Revitalization and Regulatory Reform Act of 1976 (“4-R Act”). The 4-R Act prevents states from enacting taxes that unreasonably burden and discriminate against interstate commerce. It expressly forbids four taxation schemes; the first three schemes concern property taxes and are not at issue in this case. The fourth taxation scheme, Section 11501(b)(4), forbids states from imposing “another tax that discriminates against a rail carrier.”
CSX Transportation (“CSXT”) is an interstate carrier railroad that operates in the State of Alabama (“the State”) and is subject to State taxation. The State imposes a 4% sales and use tax on “railroads’ purchase, consumption, or use of diesel fuel.” Motor carriers and water carriers, however, are exempt from the State’s sales and use tax on diesel fuel.
CSXT sued the Alabama Department of Revenue (“Alabama”) alleging that the 4-R Act prohibits Alabama from imposing the diesel fuel sales and use tax on railroads, while exempting motor carriers and water carriers. The United States District Court for the Northern District of Alabama granted a preliminary injunction, stopping Alabama from levying this tax against CSXT, after finding that the tax violated Section 11501(b)(4) of the 4-R Act.
Several months after the Northern District of Alabama’s decision, the Eleventh Circuit Court of Appeals decided Norfolk Southern Railway v. Alabama Department of Revenue, a case that considered both the same Alabama tax and the grounds on which CSXT challenges the tax in this case. In Norfolk Southern, the Eleventh Circuit held that exemptions from a “generally applicable non-property tax” are not discriminatory and do not violate Section 11501(b)(4) of the 4-R Act. The Eleventh Circuit noted that its interpretation of the 4-R Act was consistent with the Ninth Circuit’s interpretation, but inconsistent with a ruling of the Eighth Circuit.
As a result of the Eleventh Circuit’s decision in Norfolk, the district court in this action vacated the preliminary injunction and dismissed CSXT’s complaint. CSXT appealed the decision and requested an en banc hearing. The Eleventh Circuit denied the request for an en banc hearing and, as a panel, affirmed the district court’s decision to vacate the preliminary injunction pursuant to the holding in Norfolk. The Supreme Court granted certiorari to decide if the 4-R Act permits challenges to allegedly discriminatory non-property tax exemptions.
After finding that certain state taxes discriminated against interstate railroads, Congress enacted the Railroad Revitalization and Regulatory Reform Act of 1976 (“4-R Act”) to protect railroads from discriminatory taxation schemes. Petitioner CSX Transportation (“CSXT”) argues that if the Supreme Court rules for Respondent Alabama Department of Revenue (“Alabama”) it will undermine the purpose of the 4-R Act and subject railroads to tax discrimination. Alabama counters that a ruling for CSXT will cause confusion among the lower courts and detrimental impacts on Alabama’s public school system. Both parties also address the federalism concerns that will impact the Court’s decision.
The Association of American Railroads (“AAR”) argues that the Court will undermine the 4-R Act’s purpose if it rules for Alabama and holds that the Act does not bar non-property tax exemptions. In creating the 4-R Act, Congress reasoned that tax schemes often targeted railroads due to their interstate nature. Accordingly, AAR argues, if the Court allows states to tax railroads but exempt their competitors, it will perpetuate the tax discrimination that the 4-R Act intended to prevent, especially given falling state revenues in the current economy.
In support of CSXT, the Council on State Taxation (“COST”) contends that a ruling for Alabama will create confusion and litigation over statutes that ban discriminatory taxes for other interstate industries, such as the airline, internet, and telecommunications industries. Accordingly, if the Court allows this taxation scheme to be applied to railroads, COST argues that these similar statutory tax bans will become subject to litigation and potential abuse.
In contrast, Alabama maintains that if the Court rules for CSXT, and allows the 4-R Act to bar non-property tax exemptions, it will cause confusion among the lower courts in determining what constitutes a “discriminatory” exemption or if exemptions are per se discriminatory. To avoid confusion, Alabama contends that the Court should adopt the same bright-line rule for property taxes, non-property taxes, and tax exemptions: a generally applicable tax cannot be discriminatory or subject to challenge under the 4-R Act unless the tax singles out interstate railroads.
The Alabama Education Association (“AEA”) argues that a ruling for CSXT could have significant detrimental effects on Alabama’s public education system. The revenue created by sales and income taxes, including the tax at issue, largely funds Alabama’s education programs. AEA contends that Alabama’s public schools could lose over $60 million, causing Alabama to fire 250 teachers or 1,400 support employees, which could devastate Alabama’s public school system.
A group of 19 states argues that principles of federalism require the Court to construe the 4-R Act narrowly, restricting the states’ taxation power as little as possible. If the Court rules against Alabama, the Multistate Tax Commission, an organization working “to preserve federalism,” argues that this will expand the reach of federal courts into an area traditionally reserved for the states.
In contrast, the United States contends that federalism concerns are minimal in this case because the federal government is not overreaching into the states’ power of taxation. Because the 4-R Act’s purpose is to preemptively prohibit taxes that discriminate against interstate railroads, the United States and AAR argue, Congress weighed the federalism concerns and curtailed the States’ taxation power when it adopted the 4-R Act. Additionally, the United States points to Congress’s minimally intrusive remedy under the 4-R Act, which allows Congress to only prohibit the levying of the tax against railroads.
In deciding this case, the Supreme Court will have to weigh the purpose of the 4-R Act and the potential for discriminatory taxation of interstate railroads against the impact on Alabama’s public school system. The Court will also have to consider possible confusion in the lower courts and federalism concerns.
The Railroad Revitalization and Regulatory Reform Act of 1976 (“4-R Act”) prohibits four discriminatory taxation schemes, the last of which acts as a “catch-all” to prohibit “another tax that discriminates against a rail carrier.” CSX Transportation (“CSXT”), a rail carrier, argues that the catch-all provision in Section 11501(b)(4) permits it to challenge its payment of a sales and use tax from which its road and water-carrier competitors are exempt. The Alabama Department of Revenue (“Alabama”) argues, in contrast, that the catch-all provision may not be used to challenge such a sales and use tax exemption because Section 11501(b)(4) applies only to taxes, not to tax exemptions. Accordingly, this case involves three competing legal arguments: (1) principles of statutory construction as they relate to the 4-R Act; (2) Congress’s intent in passing the 4-R Act; and (3) the precedential value of Dep’t of Revenue of Oregon v. ACF Industries, Inc., in which the Supreme Court previously interpreted Section 11501(b)(4) to exclude challenges to property tax exemptions.
Does the plain language of Section 11501(b)(4) of the 4-R Act permit challenges to tax exemptions?
In interpreting any statute, a court must begin with the plain language. . In Norfolk Southern Railway v. Alabama Dep't of Revenue, the Eleventh Circuit held that under the plain language of Section 11501(b)(4) of the 4-R Act, states are free to exempt particular transactions or entities from “generally applicable” sales and use taxes, so long as such taxes do not target railroads for discrimination. Accordingly, the court held that non-property tax exemptions are not subject to challenge under Section 11501(b)(4) because this section prohibits “another tax” and not another tax exemption.
CSXT argues that the Eleventh Circuit erred in construing Section 11501(b)(4) so narrowly. CSXT argues that Section 11501(b)(4) is a broad and inclusive provision whose plain language encompasses any tax that discriminates against railroads. Under such plain language, then, CSXT claims that if it must pay a tax—while its road and water carrier competitors receive an exemption from that tax—such payment is discriminatory under Section 11501(b)(4).
Alabama responds that Section 11501(b)(4) cannot be read in isolation. Instead, Alabama contends that Section 11501(b)(4) must be read in light of Sections 11501(b)(1)–(3), which specifically identifies the discriminatory taxes that a state may not levy against a rail carrier. Alabama argues Section 11501(b)(4)’s prohibition of “another tax” can only mean another discriminatory tax. Since a generally applicable sales and use tax cannot, by its very nature, be discriminatory, Alabama contends that Section 11501(b)(4) does not permit CSXT to challenge its payment of the tax.
CSXT, however, asserts that to interpret Section 11501(b)(4) so narrowly would defeat the “catch-all” nature of the provision—a point both the Eleventh Circuit and the Supreme Court have upheld. CSXT argues that precedent demands that “another tax” must carry “a broad meaning.” Accordingly, CSXT argues that because Congress did not limit the scope of “another tax that discriminates,” the Court must interpret it to include discriminatory non-property tax exemptions.
Did Congress intend to protect rail carriers against discriminatory non-property state tax exemptions?
CSXT contends that both legislative history and congressional intent support its interpretation of Section 11501(b)(4). It argues that Section 11501(b)(4) ensures that the 4-R Act will fulfill its broader purpose, which is to protect rail carriers from discriminatory taxation schemes. Without this catch-all provision, CSXT argues that the 4-R Act would be limited to the “particular variants of tax discrimination” laid out in Sections 11501(b)(1)–(3). Rather, Congress intended that Section 11501(b)(4) sweep broadly to prohibit any “taxation schemes that discriminate against railroads.”
Like the Eleventh Circuit in Norfolk Southern, Alabama replies that Congress did not intend to protect rail carriers against discriminatory non-property state tax exemptions. Even though such exemptions were prevalent when Section 11501(b)(4) was added to the 4-R Act, Alabama argues Congress clearly intended to target in lieu gross receipts taxes. Alabama asserts that it never mentioned that tax exemptions would be subject to challenge. Moreover, Alabama argues the Supreme Court has held that if “Congress intends to alter the usual constitutional balance between the States and the Federal Government, it must make its intention to do so unmistakably clear in the language of the statute.” Accordingly, Alabama asserts that because Section 11501(b)(4) is not unmistakably clear, its silence must be interpreted to allow States to leave their exemptions in place.
CSXT responds that the clear meaning rule does not apply to its tax exemption challenge under Section 11501(b)(4) because Congress already altered the taxation power balance by passing the 4-R Act in 1976. Thus, CSXT argues, because it is not seeking to alter the balance between the states and the federal government, there is no threat to federalism by continuing to enforce Congress’s express intent in passing the 4-R Act. It argues that Congress could not have intended to prevent non-property tax exemptions challenges simply because they are a less direct method of discrimination against railroads.
Does the Supreme Court’s holding in ACF Industries apply to non-property tax exemptions?
The Supreme Court previously addressed Section 11501(b)(4) in ACF Industries. There, the Court found that Section 11501(b)(4) does not permit a railroad to challenge a generally applicable ad valorem property tax on the ground that it pays the tax while other commercial and industrial property do not. Because the specific prohibitions of Sections 11501(b)(1)–(3) exclude property tax exemptions, the Court reasoned, it was illogical to think that Congress intended to include them in Section 11501(b)(4).
CSXT seeks to distinguish ACF Industries from the case currently before the Court. CSXT argues that the Court’s holding in ACF Industries is limited to property tax exemptions. CSXT explains that this case is about non-property tax exemptions. Specifically, because Sections 11501(b)(1)–(3) do not exclude non-property tax exemptions, it is logical to include them in Section 11501(b)(4). Unlike the property tax exemptions at issue in ACF Industries, CSXT argues that permitting it to challenge non-property tax exemptions would not create a statutory contradiction.
Moreover, CSXT contends the Court in ACF Industries specifically stated that tax exemptions could, under certain conditions, be discriminatory, particularly if railroads end up being the only taxed entities. CSXT thus argues that ACF Industries does not exclude its challenge to its competitors’ exemptions from Alabama’s sales and use tax.
In contrast, Alabama argues that the Court’s interpretation of Section 11501(b)(4) in ACF Industries does extend to non-property tax exemptions, and therefore precludes CSXT’s challenge to those exemptions. Alabama contends that to limit the Court’s holding in ACF Industries to only property tax exemptions would create inconsistent, “bipolar,” and “morphing” applications of Section 11501(b)(4)—one application that denies challenges to property tax exemptions and another that permits challenges to non-property tax exemptions.The ACF Industries Court, Alabama asserts, wished to avoid such “structural oddities.”
Congress passed the 4-R Act to protect railroads from tax discrimination by the states. CSXT asserts that the plain language of the Act’s catch-all provision permits challenges to a sales and use tax that railroads pay, but that their road and water-carrier competitors do not pay. The Alabama Department of Revenue argues that the catch-all provision may not be used to challenge such a tax exemption because the catch-all applies to taxes, not to tax exemptions. To decide this case, the Supreme Court will likely address issues of statutory construction, federalism, and consider the impacts of its decision on the current beneficiaries of CSXT’s tax payments.
Edited by: Kate Hajjar
· American Presidency Project: Gerald Ford, Statement on the 4-R Act (Feb. 5, 1976)
· Wex: State Taxation Statutes
· U.S. Dep’t of Transportation: Federal Railroad Administration