U.S. Supreme Court Holds That 4-R Act Challenges Can be Based on Exemptions

The U.S. Supreme Court has held that a railroad may challenge Alabama sales and use taxes that apply to rail carrier’s purchases of diesel fuel but exempt those purchases by rail competitors such as interstate motor and water carriers, under the federal Railroad Revitalization and Regulatory Reform (4-R) Act. While Congress prohibited 4-R Act challenges based on property tax exemptions for non-railroad property, it did not prohibit challenges based on non-property tax exemptions. The Court is bound by the statute that Congress wrote. The case was remanded to trial court to determine if Alabama had discriminated against the railroad or whether it can offer sufficient justification for declining to provide the exemption to rail carriers. Railroads are required to pay Alabama sales and use tax on purchases of diesel fuel, but interstate motor and water carriers can purchase diesel fuel tax-exempt. The railroad challenged this taxing scheme as a violation of the 4-R Act’s prohibition on taxation discrimination against rail carriers. A U.S. Court of Appeals had dismissed the challenge, based on a prior court decision which held that the 4-R Act does not prevent a state from exempting other commercial entities from a generally applicable tax and leaving the tax on railroads in place, so long as the railroad is not targeted. The Court relied on another decision, in which the U.S. Supreme Court held that a railroad could not challenge a generally applicable property tax on the basis that certain non-railroad property was exempt from the tax. The U.S. Supreme Court accepted the railroad’s request for review and reversed the Court of Appeals’ decision. The Court held that the 4-R Act’s prohibition on tax discrimination includes sales and use taxes, and that prohibited discrimination can arise from exempting competitors from a tax. The 4-R Act bars four forms of discriminatory taxation. The first three forms are related to property tax. The fourth is a catchall that prohibits “another tax that discriminates against a rail carrier.” The court held that “another tax” refers to any tax a state can impose, except the taxes that fall under the other three subsections. It does not apply only to gross receipts taxes that some states imposed in lieu of property taxes, as Alabama argued. A state excise tax, such as sales and use taxes, that applies to railroads but is exempt for competitors, whether interstate or local, is subject to challenge as a discriminatory act under the fourth subsection of the 4-R Act. The Court’s decision in one of the previously referenced cases was based on property tax. Congress expressed no interest to insulate non-property tax exemptions from the 4-R Act’s prohibition on discriminatory taxation. The subsection pertaining to “another tax” is drafted more broadly than the other three subsections, and it does not contain their limitations. Alabama argued that distinguishing between property tax exemptions and other tax exemptions is illogical. The Court did not disagree, but the Court is bound by the language of the statute as drafted by Congress. Two Supreme Court justices who dissented held that, based on the structure of the 4-R Act, a tax exemption scheme must single out railroads by comparison to general commercial and industrial taxpayers in order to violate the act. Under this test, the railroad’s complaint was properly dismissed because it did not allege that Alabama sales and use tax targeted railroads. The dissenters did not understand the majority opinion.

(CSX Transportation, Inc. v. Alabama Department of Revenue, U.S. Supreme Court, Dkt. 09-520, February 22, 2011)

Posted on May 21, 2012