Alabama ~ Sales and Use Tax: Federal District Court Rejected Railroad Company’s Challenge to Tax Scheme

On remand from the U.S. Supreme Court, the U.S. District Court for the Northern District of Alabama held that the state’s rail carriers did not suffer discriminatory sales and use tax treatment under the federal Railroad Revitalization and Regulatory Reform Act (4-R Act). Since there was no violation of the 4-R Act, the court entered an order dismissing the taxpayer’s complaint with prejudice.

In Alabama, railroads pay a sales and use tax on their purchase and use of diesel fuel. However, purchases of diesel fuel by interstate motor and water carriers are exempt from the sales and use tax, although motor carriers are subject to motor fuel excise and gasoline taxes. Congress passed the 4-R Act to prevent states from taxing railroads disproportionately as out-of-state entities with little political power or recourse about where they operated. The 4-R Act prohibits states from imposing “another tax that discriminates against a rail carrier.”

Here, the taxpayer filed suit against the Alabama Department of Revenue in federal district court, alleging that the state’s sales and fuel tax scheme violated the 4-R Act because the railroad’s competitors, specifically motor carriers and interstate water carriers, were exempt from the sales and use tax on diesel fuel. The case was eventually heard by the U.S. Supreme Court, which held that the 4-R Act was not limited to property taxes and that the railroad could challenge Alabama’s sales and excise tax scheme under the “another tax” provision. The U.S. Supreme Court remanded the matter to the district court for a determination of whether Alabama’s tax scheme discriminated against the railroads.

On remand, the district court began its analysis by determining the appropriate comparison class and whether it could examine the state’s tax scheme as a whole, including taxes not paid by the railroads but paid by their competitors. The district court noted that several courts had declined to consider the impact of other taxes. However, the district court concluded this was improper because the case relied on by those courts in reaching this conclusion was decided because of the complexity and size of the necessary comparison and not because the comparison itself was improper. The district court also concluded that its decision was consistent with the U.S. Supreme Court’s opinion that suggested the necessity of reviewing the relative position of both groups and “inherently allows the party charged with discrimination to justify its differential treatment.”

Looking at Alabama’s tax system as a whole, the district court held that it was not discriminatory against rail carriers because the tax rate imposed per gallon on diesel fuel for rail carriers and motor carriers, even though different taxes, was essentially the same. In fact, the motor carriers actually paid a higher tax rate. In sum, the district court acknowledged that the tax rate paid on diesel fuel by rail carriers and motor carriers was not precisely the same. However, as the rates were substantially similar, the district court found any differences sufficiently justified, and, most importantly, the court found that these differences offered no favoritism to motor carriers as opposed to rail carriers. As such, the taxpayer failed to meet its burden of proof that it suffered from discrimination.

The district court also rejected the taxpayer’s assertion that the tax was discriminatory because its sales taxes went to the general fund but the motor carrier excise taxes were used to maintain an extensive road network that benefited the motor carriers directly. The taxpayer’s contention missed the mark because it pertained to discriminatory spending by a state, not a discriminatory tax as prohibited by the 4-R Act. Moreover, the comparison was inapt because the taxpayer’s rail network was a private network and was restricted from the general public. In contrast, motor carriers used public roads. As such, any benefit the motor carriers received from the well-maintained roads was due simply to the fact that the state had to maintain the roads for the general public. The district court noted that to find in favor of the taxpayer on this issue would “grant rail carriers unparalleled control over state spending, a result certainly not intended by Congress.”

Finally, the district court rejected the taxpayer’s claim that Alabama’s tax scheme was discriminatory because interstate water carriers paid neither the excise tax nor the sales tax. The district court concluded that the taxpayer failed to meet its evidentiary burden of proof because the taxpayer offered no evidence regarding the purported discriminatory effect as it related to water carriers and further noted that eliminating the exemption for interstate and foreign water carriers, as suggested by the taxpayer, would likely have commerce clause implications. Thus, absent any other evidence from the taxpayer to the contrary, there was a sufficient rational basis for the Alabama Legislature’s differential treatment of rail carriers and interstate/foreign water carriers.

In summary, the U.S. Supreme Court mandated that the taxpayer prove that the differential treatment rail carriers faced in Alabama’s sales and use tax scheme was, in fact, discriminatory. As the department sufficiently demonstrated that rail carriers were not unjustifiably disfavored as it related to the purchase and use of diesel fuel, the district court held that there was no discrimination under the 4-R Act and the taxpayer’s complaint was dismissed with prejudice.

CSX Transportation, Inc. v. Alabama Department of Revenue, U.S. District Court, N.D. Alabama, No. 2:08-cv-655-AKK, August 24, 2012.

 

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Wolters Kluwer Tax and Accounting

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