On December 9, the U.S. Supreme Court heard oral arguments in the last of three state and local tax cases that it accepted this term – Alabama Department of Revenue v. CSX Transportation, Inc. (CSX II), a case that had previously been before the Supreme Court. CSX Transportation, Inc. v. Alabama Department of Revenue, 562 U.S. 277 (2011) (CSX I). In CSX II, the Court was asked to determine whether Alabama’s taxation of railroads violated the Railroad Revitalization and Regulatory Reform Act of 1974 (4-R Act), 49 U.S.C. § 11501, by taxing railroads, but not their competitors, on their purchases or use of diesel fuel.
Background
Alabama imposes a 4% sales/use tax on railroads’ purchases or use of diesel fuel in the state; it does not charge the same sales/use tax on the diesel fuel purchases of motor carriers or water carriers. Ala. Code §§ 40-23-2(1); 40-17-325(B). However, motor carriers pay a $0.19 per gallon excise tax on their purchases of diesel fuel, a tax that rail carriers do not pay. Ala. Code § 40-17-141; 40-17-329(A)(3). Water carriers pay the same sales/use tax as railroads for diesel fuel used for intrastate transportation but pay no tax (sales/use or excise) for fuel used for intrastate transportation. Ala. Code § 40-23-4(a)(10).
In 2008, CSX Transportation, Inc. (CSX) sued the Alabama Department of Revenue (Department) claiming that its sales/use tax discriminated against railroads in violation of the 4-R Act. At issue in the case was subsection (b)(4) of the 4-R Act, the “catchall” provision, which prohibits a state from “impos[ing] another tax that discriminates against a rail carrier.” (Emphasis added). CSX argued that the sales/use tax was discriminatory because rail carriers were required to pay the tax on their purchases or use of diesel fuel while their competitors were exempt from the tax.
The first trip to the Supreme Court addressed whether the catchall provision could be used to challenge a sales tax exemption. In CSX I, Justice Elena Kagen authored the majority opinion holding that the catchall provision enables a railroad to challenge a sales tax exemption as discriminatory and remanding the case for a determination of whether discrimination existed under Alabama’s fuel taxing scheme. Justices Clarence Thomas and Ruth Bader Ginsburg dissented from that opinion on the grounds that a tax exemption scheme is discriminatory only if it targets or singles out railroads by comparison to other commercial and industrial taxpayers.
CSX II
On remand, the district court held a bench trial and the parties stipulated that the railroads’ principal competitors in the area of transportation of interstate commerce in Alabama are motor carriers and interstate water carriers. Using the stipulated comparison class, the district court found that the sales/use tax exemption did not amount to a discriminatory tax under subsection (b)(4). With respect to motor carriers, the court explained that motor carriers were subject to a comparable fuel excise tax because, during the tax years at issue (2007-2009), rail carriers and motor carriers paid “substantially similar” rates per gallon of diesel fuel. As for water carriers, the district court found no discrimination because, among other things, CSX had failed to prove a discriminatory effect.
The Eleventh Circuit reversed, holding that because CSX’s competitors do not pay the sales/use tax on their purchases or use of...
