It can be difficult to see the forest from the trees as you zip across the country in a train and as you contemplate the Supreme Court’s decision in Alabama Department of Revenue v. CSX Transportation. In the big picture, the law at issue in this case gives railroads favorable tax treatment (at the expense of states and local governments). In this case, CSX was asking the Supreme Court to interpret the law to its advantage by comparing the taxation of railroads to a small class of other taxpayers and refusing to compare all the state taxes railroads and their competitors pay. Interestingly, the unusual pair of Justices Thomas and Ginsburg weren’t buying any of CSX’s arguments, but the majority of the Court agreed with CXS that railroads only must be compared to the narrow class of their competitors.
Specifically, in Alabama Department of Revenue v. CSX Transportation the Supreme Court held 7-2 that railroads can be compared to their competitors when determining whether a tax is discriminatory in violation of the Railroad Revitalization and Regulatory Reform Act (4-R Act). Different taxes paid by railroads and their competitors must be compared with determining whether a tax railroads pay is discriminatory. The State and Local Legal Center (SLLC) filed an amicus brief in this case disagreeing with the Court’s first holding and agreeing with its second holding.
The 4-R Act prohibits state and local governments from imposing taxes that discriminate against rail carriers (railroads). Railroads in Alabama pay a four percent sales tax on diesel fuel as do other commercial and industrial purchasers. Motor carriers (trucks) pay an excise tax of 19-cents per gallon and no sales tax. Water carriers pay no sales or excise tax on diesel fuel.
CSX sued Alabama alleging that it violated the 4-R Act by requiring railroads to pay a sales tax on diesel fuel and exempting its competitors. Since CSX filed its complaint, railroads paid less in sales tax than trucks paid in excise tax. The lower court ruled in favor CSX comparing railroads to their competitors only and refusing to consider the excise tax paid by trucks.
According to the Court, the comparison class depends on the theory of discrimination alleged. Here, CSX argued that a tax disadvantaged it compared to its competitors so competitors are the comparison class. But the comparison class also must be “similar situated” to the railroad. Competitors could be a “similarly situated” class “since discrimination in favor of that class most obviously frustrates the purpose of the 4-R Act,” including restoring financial stability to railroads and fostering competition between railroads and other modes of transportation. The Court also concluded “[t]here is simply no discrimination when there are roughly comparable taxes.” So the lower court must compare the sales tax railroads pay and the excise tax trucks pay even if comparing different taxes is difficult. Finally, the Court instructed the lower court to examine the justifications Alabama offered for why water carriers don’t pay any tax on diesel fuel when determining if railroads have been discriminated against.
The SLLC brief argued that given state’s traditional power to tax the Court should interpret 4-R narrowly by comparing railroads to all commercial and industrial taxpayers, ignoring the labels of sales and excise tax and comparing total taxes paid, and taking into account relevant differences between railroads and their competitors.
Forty-two states exempt trucks from sales tax on diesel fuel. While a ruling that the proper comparison class in this case is all commercial and industrial taxpayers would have been even better, the Court’s ruling that lower courts must look at total taxes paid, and justifications for why particular competitors don’t pay particular taxes, will mean that 4-R Act discrimination cases may be less likely to succeed. Some local governments in Alabama add additional sales tax to diesel fuel which CSX has also challenged.
All of the Big Seven joined the SLLC brief along with SLLC associate members the International Municipal Lawyers Association and the Government Finance Officers Association. Sarah Shalf of the Emory Law School Supreme Court Advocacy Project wrote the SLLC brief.