Alabama Department of Revenue v. CSX Transportation, Inc.

Issues 

Does a state discriminate against railroads when competing forms of commercial transportation are exempt from a diesel fuel tax that remains applicable to rail-based carriers?

Oral argument: 
December 9, 2014

This case presents the Supreme Court with an opportunity to resolve whether federal legislation to promote interstate commerce would override a state’s right to determine how to tax competing industries. The Alabama Department of Revenue (“ADR”) argues that state taxation is entitled to deference from the courts, so long as a state provides a justification for why its taxing plan for one industry differs from that of a competing industry. CSX Transportation, on the other hand, argues that the ADR’s differentiated tax plan is discriminatory when applied to its direct competitors, and that the tax plan therefore inhibits interstate commerce. This case will ultimately decide the extent of state discretion in designing state tax codes pertaining to different industries.

Questions as Framed for the Court by the Parties 

Whether a State “discriminates against a rail carrier” in violation of 49 U.S.C. §11501(b)(4) when the State generally requires commercial and industrial businesses, including rail carriers, to pay a sales-and-use tax but grants exemptions from the tax to the railroads' competitors.

IN ADDITION TO THE QUESTION PRESENTED BY THE PETITION, THE PARTIES ARE DIRECTED TO BRIEF AND ARGUE THE FOLLOWING QUESTION: “Whether, in resolving a claim of unlawful tax discrimination under 49 U.S.C. §11501(b)(4), a court should consider other aspects of the State’s tax scheme rather than focusing solely on the challenged tax provision.”

Facts 

In 1976, Congress enacted the Railroad Revitalization and Regulatory Reform Act, known as the 4-R Act. This act makes it illegal for a state to “impose a tax that discriminates against a rail carrier.”

CSX Transportation, Inc. (“CSX”) is a rail carrier that ships freight throughout the United States. Under Alabama’s tax scheme, all rail carriers, including CSX, pay a four percent sales tax each time they purchase diesel fuel in Alabama. However, rather than paying a four percent tax, motor carriers pay an excise tax of nineteen cents per gallon of diesel fuel, and water carriers are not subject to a tax on their diesel fuel purchases. CSX is challenging this tax, claiming that because water carriers and motor carriers are not subject to this tax, the tax is discriminatory in violation of the 4-R Act.

Respondent CSX first filed this suit against Petitioner Alabama Department of Revenue (“ADR”) in 2008. The U.S. District Court for the Northern District of Alabama (“district court”) dismissed the suit, relying on precedent and holding that a railroad could not sue to challenge a competitor’s tax exemption as discriminatory under the 4-R Act. On appeal, the U.S. Court of Appeals for the Eleventh Circuit (“Eleventh Circuit”) agreed and affirmed the dismissal. However, in 2010 the Supreme Court granted certiorari and ultimately held that CSX did in fact have a right to challenge this sales tax as discriminatory under the 4-R Act.

The case was remanded to the district court. Following a bench trial, the district court held that the tax was not discriminatory and dismissed the matter. CSX appealed. On appeal, the Eleventh Circuit reversed the district court, holding that CSX made a prima facie showing that the tax was discriminatory under the 4-R Act, and that the ADR could not provide a “sufficient justification” for the exemptions.

Subsequently, the ADR appealed to the Supreme Court. The Supreme Court granted the ADR’s writ of certiorari on July 1, 2014. In addition to the questions presented by the parties, the Supreme Court directed the parties to consider whether, when determining if a tax is discriminatory under the 4-R Act, a court should focus solely on the challenged tax provision, or should instead consider other aspects of the state’s tax scheme.

Analysis 

The parties in this case disagree over whether the ADR’s fuel tax exemptions for motor carriers and interstate water carriers discriminate against railroads, in violation of the Railroad Revitalization and Regulatory Reform Act of 1976 (“4-R Act”).

The ADR contends that its tax exemptions are not discriminatory against railroads because the fuel tax is generally applicable across all industrial and commercial parties in the state. Moreover, the ADR argues, the exempted industries face a complementary tax, which means that those industries end up paying the same amount.

However, CSX argues that the 4-R Act requires a narrow tax comparison between railroads and its direct competitors. CSX contends that the 4-R Act looks only to whether railroads are taxed differently from competing industries, and therefore looking to any “complementary” taxes—different taxes that impose separate but similar costs against separate industries—is inappropriate.

ASSESSING DISCRIMINATORY TAX TREATMENT UNDER THE 4-R ACT

The central issue underlying this case is whether Alabama is discriminating against railroads by exempting road- and water-based carriers from paying certain diesel fuel taxes. To identify whether there is discrimination, the ADR and CSX take different approaches in identifying the appropriate comparison group, and therefore, whether railroads are treated differently.

The ADR notes that the Supreme Court, in the first CSX Transportation v. Alabama Department of Revenue (“CSX I”), declined to identify the relevant comparison group in order to address the discrimination question. Identifying the appropriate comparison group is critical, the ADR argues, because unfavorable treatment requires that railroads are “single[d] out” for unfavorable tax treatment. In this case, the ADR notes, the appropriate comparison group consists of “general commercial and industrial taxpayers.” Taking a general comparison group is appropriate, the ADR continues, because the 4-R Act’s language is modeled on the Interstate Commerce Act, suggesting that the tax exemptions must be a burden on interstate commerce. Therefore, the ADR argues, its tax exemptions could only be “discriminating” if it is preferential to all of the in-state industries compared to out-of-state industries. The ADR asserts that, because the on-road and off-road diesel usage taxes are applicable to all commercial and industrial users within the state, there is no discrimination against railroads.

CSX counters that the 4-R Act’s text gives courts latitude to compare differential treatment between a railroad and its direct competitors to find discriminatory effects. First, CSX argues, comparing differentiated tax treatment between railroads and their direct competitors would align with the definition of “discrimination” used by the Court in CSX I. Moreover, CSX notes, the structure of the 4-R Act does not mandate the use of a single comparison class—that is, “commercial and industrial” entities. CSX argues that Congress explicitly eliminated any reference to “commercial and industrial” parties when it drafted the language prohibiting tax discrimination against railroads. Finally, CSX argues that the legislative history of the 4-R Act confirms that the anti-discrimination provisions were intended to protect railroads vis-à-vis their competitors. Therefore, CSX concludes, the comparison class must be limited to motor and water-based carriers.

DETERMINING WHETHER “COMPLEMENTARY” TAXES SHOULD BE CONSIDERED

The ADR argues that the 4-R Act only disallows the imposition of additional taxes by a state against a railway carrier. Absent the imposition of another tax, the ADR reasons, the railway was not discriminatorily treated. Therefore, the ADR argues, because the railroads are only subject to a generally applicable tax imposed on other in-state businesses, the Court requires more than dissimilar treatment to find discriminatory treatment. Specifically, the ADR argues that the Court should look at the entire tax scheme to demonstrate “complementary” treatment, and the ADR invokes three different constitutional law principles to support its position. Under the Equal Protection Clause, the Dormant Commerce Clause, and the Supremacy Clause, the ADR notes, a state is subject to rational basis review by courts to explain the reasons for dissimilar treatment.

Here, the ADR continues, Alabama already subjects motor carriers to a separate excise tax, which has the effect of costing the on-road motor industry the same amount as the off-road diesel tax for which railroads are not exempt. Therefore, the ADR continues, the effect of this “complementary tax” is that it results in a similar cost, if not at times greater cost, for motor carriers as railroads are charged for off-road diesel. As such, the ADR concludes, to require motor carriers to pay the same diesel tax as the railroad would result in double taxation. As for water-based carriers, the ADR argues, the Dormant Commerce Clause prevents water-based carriers from being subject to Alabama taxes because they remain in waterways subject to federal control. Therefore, the ADR argues, water-based carriers are necessarily barred from the off-road diesel tax that applies to railroads. Based upon these justifications, the ADR concludes, a state is justified in having differential, but not discriminatory, treatment of railroads by exempting motor and water-based carriers.

In opposition, CSX argues that courts should not engage in a complementary tax analysis. CSX asserts that previous 4-R Act decisions refused to consider other elements of a state’s tax scheme in finding discriminatory impact against railroads. To support this position, CSX argues that the statutory language only speaks of “another tax”—this means that the entire tax code cannot be considered. In addition, CSX argues that engaging in a complementary tax analysis would prove too cumbersome for courts. Citing a number of law review articles, CSX urges that engaging in a complementary tax analysis is typically difficult and inaccurate. Therefore, CSX asserts, to engage in this form of analysis would result in a judicial error, and such judicial errors would undermine the railroads’ protections intended under the 4-R Act.

Within this case, CSX argues, the complementary tax analysis is flawed because the ADR attempted to equate a flat excise tax imposed on on-road motor carriers with the variable off-road diesel tax charged to railways. Instead, CSX continues, the off-road diesel tax to which railroads are subject operates independently of the excise tax imposed on motor carriers. Therefore, CSX argues that the excise tax does not compensate for the diesel tax imposed on the railways. Moreover, CSX argues that Alabama’s double taxation claim is flawed, because the taxes are intended to cover different expenses each industry incurs. CSX points out that the fuel taxes imposed on motor carriers go towards maintaining Alabama’s roads, while the CSX is forced to pay the diesel fuel tax and maintain its own railways. Therefore, CSX contends, if double taxation were truly a concern, the ADR should eliminate taxes for both on- and off-road diesel.

Finally, CSX argues that the Dormant Commerce Clause concerns for imposing taxes upon interstate water-based carriers are antiquated and were foreclosed by the Supreme Court’s decision in Complete Auto Transit, Inc. v. Brady. In Brady, the Court affirmed a tax imposed on interstate business so long as it was not discriminatorily applied to interstate businesses, but was applied for “the privilege of . . . doing business” within the state. Regardless, CSX argues, that even if the water-based carriers exemption existed due to constitutional concerns, it does not follow that railroads can be subject to the same tax under the 4-R Act. Therefore, CSX submits that railroads must be subject to the same tax exemptions as the water-based carriers.

Discussion 

In this case, the Supreme Court (“Court”) will determine whether a state discriminates against railroads, in violation of the 4-R Act, when it requires commercial and industrial businesses, including railroads, to pay a sales and use tax, but gives an exemption to the railroad’s competitors. The Court will also determine whether courts should look to other aspects of a state’s tax scheme in determining whether a particular tax is discriminatory under the 4-R Act. CSX argues that a state discriminates against a railroad if it gives the railroad’s competitors an exemption to a tax the railroads must pay because the purpose of the 4-R Act is to ensure the financial stability of railroads, and this purpose is undermined when a railroad’s competitor is granted an exemption. The Alabama Department of Revenue (“ADR”), in opposition, argues that if a state is not entitled to give a railroad’s competitors a tax exemption, and if a court may not look to other aspects of the state’s tax scheme when determining whether a tax is discriminatory, railroads will be given “most favored taxpayer status,” which was not the purpose of the 4-R Act. This case will have important implications for all rail and motor carriers, and will possibly impact states’ ability to raise revenue.

IMPLICATIONS FOR MOTOR CARRIERS

In support of the ADR, the American Truckers Association (“ATA”) argues that if the Court rules in favor of CSX, motor carriers will be subjected to double taxation. ATA points out that all fifty states and the federal government subject motor carriers to an on-road motor fuels excise tax. ATA argues that states have chosen to grant sales and use tax exemptions to motor carriers in order to avoid double taxing them, and that if the Court rules in favor of CSX, it would put motor carriers at a serious economic disadvantage.

In opposition, CSX argues that the excise tax paid by motor carriers is used to fund the construction and repair of highways and bridges, which motor carriers rely on. CSX argues that the sales and use tax, however, is general revenue, from which both motor carriers and rail carriers benefit. CSX contends that motor carriers are not currently being treated equally, but are being given preferential treatment because motor carriers are not asked to contribute to the general revenue of the state in the way rail carriers are.

IMPACT ON STATE REVENUE

In support of the ADR, various state and local government organizations (“government organizations”) argue that if the Eleventh Circuit’s ruling is upheld, Alabama will lose millions of dollars in taxes, threatening state revenue. This loss in revenue will spread to other states, the government organizations argue, because rail carriers will sue for tax refunds in every state that collects a sales tax from railroads when they purchase diesel fuel. Further, the government organizations assert, local governments will lose revenue as well, compounding the problems caused by loss of state revenue. The government organizations contend that two million dollars, the amount CSX claimed for 2007, is enough to pay fifty-five new teachers in Alabama. This is particularly troublesome, they claim, since general sales taxes accounted for over thirty percent of state tax collection in 2013, and the current recession has already put financial pressure on state government.

CSX counters that the railroad is not looking for a “windfall,” but rather, that it should be treated on an equal playing field with its competitors in order to guarantee its survival, in accordance with the purpose of the 4-R Act. CSX argues that if the Court affirms the decision below, railroads would not have a favored taxpayer status because they would only be able to successfully challenge a tax exemption if they can prove that the state is discriminatory in granting it. Therefore, CSX asserts, railroads would only be given relief if the state does not have a sufficient justification for the tax, so the decision would not have the dramatic impact on state revenue that the ADR and its amici predict.

Conclusion 

In this case, the Court will determine when a tax is discriminatory under the 4-R Act and, in particular, whether Alabama’s scheme tax is discriminatory. The Alabama Department of Revenue argues that state taxation is entitled to deference from the courts, so long as the state provides a justification for why its taxing plan for one industry differs from that of a competing industry. CSX Transportation, on the other hand, contends that federal law prohibits differentiated taxing and that Alabama’s tax plan would discriminate against railroads. This case will likely have important implications for freight carriers as well as state revenue.

Additional Resources