A day after issuing its decision in Direct Marketing Ass’n v. Brohl, the U.S. Supreme Court decided Alabama Department of Revenue v. CSX Transportation, Inc.1 The Court held that a rail carrier can show discrimination under subsection (b)(4) (“catchall provision”) of the Railroad Revitalization and Regulatory Reform Act of 1976 (4-R Act)2 by demonstrating that it is subject to differential tax treatment compared to its competitors, but that the tax disparity is permissible if the competitors are subject to another comparable tax or if the state offers another sufficient justification.
Background
Alabama imposes a 4% sales/use tax on railroads’ purchases or use of diesel fuel in the state.3 It does not charge the same sales/use tax on the diesel fuel purchases of motor carriers and water carriers.4 Rather, motor carriers pay a 19-cent-per-gallon excise tax on the purchase of diesel fuel.5 Water carriers pay the same sales/use tax as railroads for diesel fuel used for intrastate transportation but pay neither the sales/use tax nor the excise tax for fuel used for intrastate transportation.6
In 2008, CSX Transportation, Inc. (CSX) challenged Alabama’s sales/use tax arguing that it discriminated against rail carriers in violation of the 4-R Act because rail carriers were required to pay the tax on their purchases or use of diesel fuel while their competitors were exempt from the same tax.
The District Court and the Court of Appeals Decisions
This is the parties’ second trip to the U.S. Supreme Court. The first trip determined that the catchall provision of the 4-R Act could be used to challenge a sales tax exemption.7 On remand, and after the parties stipulated that railroads’ principal competitors are motor carriers and interstate water carriers, the district court found no 4-R Act discrimination because motor carriers were subject to a comparable tax and CSX failed to provide a discriminatory effect with respect to water carriers.
On appeal, the U.S. Court of Appeals for the Eleventh Circuit reversed, holding that Alabama’s sales/use tax exemption amounted to a prima facie case of discrimination that could not be justified by the fuel excise tax. The appellate court further declined to undertake the “Sisyphean burden” of evaluating the fairness of Alabama’s tax scheme.8 The court explained that the evaluation of discrimination under the catchall provision should focus on examining only the challenged tax without taking into account the other aspects of the state’s taxing scheme.
Majority Holding
Comparison Class
The majority opinion, authored by Justice Antonin Scalia, concludes that while all general and commercial taxpayers may be an appropriate comparison class for a (b)(4) discrimination claim, CSX’s competitors are the appropriate comparison class in this case. The Court explained that for purposes of the catchall provision, the class must be determined based on the theory of discrimination alleged in the claim. Therefore, the Court found that when a railroad claims that it is subject to a differential tax treatment compared to...
