U.S. Supreme Court Remands Discriminatory Challenge To Alabama’s Fuel Excise Tax

On March 4, the U.S. Supreme Court ruled that the Eleventh Circuit Court of Appeals properly concluded that a taxpayer's transportation industry competitors were an appropriate comparison class for the taxpayer's claim that the sales and use taxes imposed on railroads were discriminatory under the Railroad Revitalization and Regulation Reform Act of 1976 (4-R Act).1 However, the Court reversed the Eleventh Circuit's decision and remanded the case for further consideration of whether Alabama discriminated against the taxpayer and other railroad carriers by exempting motor and water carriers from its sales and use taxes, and instead subjecting motor carriers to an alternative fuel-excise tax, while not imposing any comparable alternative tax on water carriers.

Background

The taxpayer, CSX, is a common carrier railroad engaged in interstate commerce. The taxpayer filed suit against the Alabama Department of Revenue, alleging that the imposition of Alabama sales and use taxes on its purchase or consumption of diesel fuel violated the 4-R Act, which prohibits a state or political subdivision from imposing "another tax" that discriminates against a rail carrier.2 In the original lawsuit, 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.3

The taxpayer appealed the dismissal to the Eleventh Circuit, which affirmed,4 and to the U.S. Supreme Court, which reversed and held that a tax "discriminates" under the applicable terms of the 4-R Act when it treats "groups [that] are similarly situated" differently without sufficient "justification for the difference in treatment."5 Finding that the taxpayer was thus permitted to challenge Alabama's sales and use taxes under the 4-R Act, the Supreme Court remanded the case for further proceedings on the merits.6

On remand, the U.S. District Court 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 4-R Act.7 The District 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.

The taxpayer appealed this decision and the Eleventh Circuit reversed, ruling in the taxpayer's favor that the sales tax was discriminatory under the 4-R Act.8 Specifically, the Eleventh Circuit held that the taxpayer could establish discrimination by showing that Alabama taxed rail carriers differently than its transportation industry competitors (including both motor and water carriers). The Eleventh Circuit refused to consider any aspects of Alabama's taxing scheme other than the challenged provision and wholly rejected the Department's...