Before adjourning for the summer, the U.S. Supreme Court agreed to hear an important sales and use tax case when it returns in the fall. This will actually be the second time the justices address a dispute between the Commissioner of the Alabama Department of Revenue and CSX Transportation, one of the nation’s largest railroad companies. In 2011, the Court reinstated CSX’s lawsuit challenging Alabama’s policy of charging the railroad, but not its competitors, a 4% sales and use tax on diesel fuel. CSX subsequently won its challenge before the lower courts, so now Alabama has asked the Supreme Court to reverse in its favor.
Although sales and use taxes are normally a state matter, the federal Railroad Revitalization and Regulatory Reform Act of 1976 (known as the 4-R Act) preempts a state from imposing any “tax that discriminates against a rail carrier.” CSX’s complaint here is Alabama’s 4% sales and use tax does not apply to either interstate water carriers—who are exempt under a 1959 state law—or trucking companies that purchase fuel for road vehicles, which instead pay a 19¢-per-gallon tax on diesel fuel. CSX argues these exemptions amount to illegal discrimination under the 4-R Act.
The lower courts initially dismissed CSX’s lawsuit on the grounds the 4-R Act could not be used to challenge “exemptions” to a general sales tax law. Three years ago, the Supreme Court rejected that argument and said the lawsuit could proceed. A majority of the Court did not take a position on whether CSX proved Alabama’s rules were discriminatory. Two justices, Clarence Thomas and Ruth Bader Ginsburg, wrote in a separate opinion they believed Alabama’s rules did not violate the 4-R Act.
Thomas and Ginsburg said a tax discriminates only if it “targets or singles out railroads as compared to other commercial and industrial taxpayers.” Alabama endorses this approach. CSX argues a tax discriminates if it favors a “railroads’ competitors.” The 11th U.S. Circuit Court of Appeals adopted this view in its July 2013 ruling for CSX, which is now before the Supreme Court. The Obama Administration also weighed in, at the Court’s request, and said the justices should consider whether “other aspects of the state’s tax scheme” might justify the disparate tax treatment afforded railroads.
The Supreme Court will hear oral arguments from all parties when its new term begins this October. A final decision is expected by early 2015.
S.M. Oliva is a writer living in Charlottesville, Virginia. He edits the international legal blog Bonham’s Cases.
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