Alabama May Have Dodged A Bullet In 4-R Act Tax Discrimination Case

The U.S. District Court for the Northern District of Alabama issued an important ruling last Friday in the ongoing battle between the railroad companies and the State of Alabama regarding whether the differing taxes and exemptions applied to diesel fuel purchased by railroads versus interstate trucking companies and interstate water carriers violates the Railroad Revitalization and Regulatory Reform Act ("4-R Act"), 49 U.S.C. §11501. The district court ruled that they do not. CSX Transportation, Inc. v. Alabama Department of Revenue, No. 2:08-CV-655-AKK (N.D. Ala., Aug. 24, 2012). The ruling affects the entire Alabama business community—not just the railroads and their competitors.

Our readers may recall that the U.S. Supreme Court reversed the 11th Circuit Court of Appeals last year and held that "CSX may challenge Alabama's sales and use taxes as 'tax[es] that discriminate against ...rail carrier[s]' under §11501(b)(4)." CSX Transportation, Inc. v. Alabama Department of Revenue, 131 S.Ct. 1101, 1114 (Feb. 22, 2011) (Kagan, J.) However, the majority opinion did not address whether Alabama's tax structure in fact discriminates against railroads by exempting both interstate motor carriers and water carriers from state and local sales and use taxes on their diesel fuel purchases. The Supreme Court only determined that the interstate motor carrier and water carrier exemptions to Alabama's generally applicable sales and use tax could violate the 4-R Act's prohibition on discriminatory taxation.

On remand, the district court rejected a line of cases emanating from the 8th Circuit Court of Appeals that restricted a court's purview to only sales and use taxes. Judge Abdul Kallon determined that a broader review was required—one that takes into account other taxes levied on the railroad's competitors but not on the railroads, such as the 19 cents-per-gallon motor fuel excise tax levied on trucking companies.

What many observers believed to be the more likely flaw in the state's non-discrimination argument, i.e., the dual sales tax and motor fuel tax exemptions afforded interstate water carriers, turned out to be a non-issue with the court. First, the court reminded the parties that the burden of proof is on the plaintiff-railroads to prove discrimination under the 4-R Act. The court found that CSX "offered no evidence at trial regarding the purported discriminatory effects as it relates to water carriers." Id. at 31. Then, in a twist, the judge...