Federal District Court Holds Alabama's Imposition Of Sales And Use Taxes On Rail Carriers Does Not Violate 4-R Act

On August 24, the U.S. District Court for the Northern District of Alabama determined that the imposition of Alabama sales and use taxes on the purchase of diesel fuel by rail carriers did not constitute discriminatory taxes that are specifically prohibited under the Railroad Revitalization and Regulatory Reform Act (4-R Act).1 The Court rejected the taxpayer's argument that the diesel fuel sales and use tax exemptions available to motor carriers and water carriers made the sales and use taxes imposed on rail carriers "discriminatory." The Court reasoned that when taking into account the excise tax applicable to motor carriers, and not rail carriers, motor carriers paid a "substantially similar" rate of tax, and that the taxpayer failed to show any discriminatory effect with respect to the tax treatment of water carriers.

Background

The taxpayer, a common carrier railroad engaged in interstate commerce, filed suit against the Alabama Department of Revenue, alleging that the imposition of Alabama sales and use taxes on the taxpayer's purchase or consumption of diesel fuel violated the 4-R Act, which prohibits a state or political subdivision from imposing "another tax"2 that discriminates against a rail carrier.3 In the suit, the taxpayer sought an injunction prohibiting the Department from collecting the Alabama sales and use taxes on the taxpayer's purchase or consumption of diesel fuel within the state. The taxpayer also sought declaratory judgment that the imposition of these taxes violated the 4-R Act. The U.S. District Court for the Northern District of Alabama dismissed the case subsequent to the Eleventh Circuit's holding, in a different case, that a tax exemption cannot be deemed a discriminatory tax which is prohibited by the 4-R Act.4

The taxpayer appealed, but the Eleventh Circuit affirmed the dismissal. As a result, the taxpayer petitioned the U.S. Supreme Court for a writ of certiorari to determine whether a state's exemptions afforded to certain carriers (competitors of rail carriers) can serve as a basis to bring forth a claim that a state has violated the 4-R Act by imposing "another tax that discriminates against a rail carrier." After granting the petition, the Supreme Court reversed the Eleventh Circuit's decision and determined that the taxpayer was permitted to challenge Alabama's sales and use taxes under the 4-R Act.5 The Supreme Court remanded the case for further proceedings on the merits. The U.S. District Court...