A day after issuing its decision in Direct Marketing Ass’n v. Brohl, the U.S. Supreme Court decided Alabama Department of Revenue v. CSX Transportation, Inc.1 The Court held that a rail carrier can show discrimination under subsection (b)(4) (“catchall provision”) of the Railroad Revitalization and Regulatory Reform Act of 1976 (4-R Act)2 by demonstrating that it is subject to differential tax treatment compared to its competitors, but that the tax disparity is permissible if the competitors are subject to another comparable tax or if the state offers another sufficient justification.


Alabama imposes a 4% sales/use tax on railroads’ purchases or use of diesel fuel in the state.3 It does not charge the same sales/use tax on the diesel fuel purchases of motor carriers and water carriers.4 Rather, motor carriers pay a 19-cent-per-gallon excise tax on the purchase of diesel fuel.5 Water carriers pay the same sales/use tax as railroads for diesel fuel used for intrastate transportation but pay neither the sales/use tax nor the excise tax for fuel used for interstate transportation.6

In 2008, CSX Transportation, Inc. (CSX) challenged Alabama’s sales/use tax arguing that it discriminated against rail carriers in violation of the 4-R Act because rail carriers were required to pay the tax on their purchases or use of diesel fuel while their competitors were exempt from the same tax.

The District Court and the Court of Appeals Decisions

This is the parties’ second trip to the U.S. Supreme Court. The first trip determined that the catchall provision of the 4-R Act could be used to challenge a sales tax exemption.7 On remand, and after the parties stipulated that railroads’ principal competitors are motor carriers and interstate water carriers, the district court found no 4-R Act discrimination because motor carriers were subject to a comparable tax and CSX failed to provide a discriminatory effect with respect to water carriers.

On appeal, the U.S. Court of Appeals for the Eleventh Circuit reversed, holding that Alabama’s sales/use tax exemption amounted to a prima facie case of discrimination that could not be justified by the fuel excise tax. The appellate court further declined to undertake the “Sisyphean burden” of evaluating the fairness of Alabama’s tax scheme.8 The court explained that the evaluation of discrimination under the catchall provision should focus on examining only the challenged tax without taking into account the other aspects of the state’s taxing scheme.  

Majority Holding

Comparison Class

The majority opinion, authored by Justice Antonin Scalia, concludes that while all general and commercial taxpayers may be an appropriate comparison class for a (b)(4) discrimination claim, CSX’s competitors are the appropriate comparison class in this case. The Court explained that for purposes of the catchall provision, the class must be determined based on the theory of discrimination alleged in the claim. Therefore, the Court found that when a railroad claims that it is subject to a differential tax treatment compared to its competitors in the transportation industry, the railroad’s competitors that are “similarly situated” to the claimant – such as motor carriers and water carriers – comprise the comparison class.

Sutherland Observation: The Court’s opinion appears to resolve the circuit split on the issue of the composition of the comparison class for purposes of the catchall provision by concluding that the identification of the comparison class may vary depending on the alleged claim.


The Court held, however, that the Eleventh Circuit erred in refusing to consider whether Alabama should be allowed to offer sufficient justification for treating rail carriers differently than their competitors. The Court explained that, consistent with its dormant Commerce Clause jurisprudence, a tax on a rail carrier will be rendered non-discriminatory if its competitors pay another “roughly comparable” tax from which the rail carrier is exempt.10 While the majority appeared to agree with CSX that federal courts are ill-equipped to conduct the comparability analysis endorsed by the district court, it held that “Congress assigned this task to the courts by drafting an antidiscrimination command in such sweeping terms. There is simply no discrimination when there are roughly comparable taxes.”11

Sutherland Observation: The majority’s consideration of the Court’s dormant Commerce Clause jurisprudence in assessing the discrimination issue appears to depart from the Court’s and other courts’ precedent in the context of other federal non-discrimination statutes similar to the 4-R Act, which have refused to consider the cumulative effect of taxes imposed by distinct taxing entities within a state, other than the challenged tax, as justification for facially discriminatory taxes.See, e.g., Arizona Pub. Service Com. v. Snead, 441 U.S. 141 (1979) (considering the Electricity Act, 15 U.S.C. § 391); ABF Freight System, Inc. v. Tax Div. of Arkansas Pub. Serv. Comm’n., 787 F.2d 292, 298 (8th Cir. 1986) (considering the Motor Carriers Act, 49 U.S.C. § 14502); Performance Marketing Ass’n v. Hamer, 998 N.E.2d 54 (Ill. 2013) (considering the Internet Tax Freedom Act, 47 U.S.C. § 151 note).

The Court further noted that the Eleventh Circuit failed to consider whether Alabama’s justification for the water carrier exemption – that such an exemption is compelled by federal law – was sufficient to justify the alleged discrimination.

Next Steps

The Court remanded the case to the Eleventh Circuit to determine whether Alabama’s sales tax on diesel fuel (a percentage-based tax) is roughly equivalent to Alabama’s diesel fuel excise tax (a set-amount-per-gallon tax) to justify the sales/use tax exemption for motor carriers. The Court also instructed the appellate court to consider Alabama’s alternative justifications for the sales/use tax exemption for water carriers.

Sutherland Observation: The Eleventh Circuit is now charged with the very “Sisyphean” task it previously declined to undertake. The appellate court will likely be required to undertake complex and burdensome inquiries into the labyrinth of Alabama’s state and local tax regimes, comparing a wide variety of state and local taxes, imposed on different taxpayers, on different tax bases, and at different rates. While this case’s second trip to the U.S. Supreme Court is in the books, a third trip is possible as Justice Stephen Breyer alluded to during oral arguments: “We’re going to have to tell them [the Eleventh Circuit] just what to do, which that sounds worse to me, and – and, moreover, it may come back here again.”