The U.S. Supreme Court reversed a U.S. Court of Appeals in holding that a railroad may bring suit to challenge the validity of a discriminatory Alabama sales tax exemption. CSX Transp., Inc. v. Ala. Dep’t of Revenue, No. 09-520, 2011 WL 588790 (U.S. Feb. 22, 2011). Alabama imposes its sales and use tax on the use of diesel fuel for off-road use, including fuel used by railroads, but provides exemptions for fuel used by railroads’ direct competitors, commercial truckers and interstate water carriers. CSX sued to challenge the discriminatory scheme under the Railroad Revitalization and Regulatory Reform Act of 1976 (4-R Act).
In a 7-2 decision penned by Justice Elena Kagan, the Court resolved a circuit split by holding that CSX was entitled to bring suit under a 4-R Act provision, which forbids a state to “[i]mpose another tax that discriminates against a rail carrier.” 49 U.S.C. § 11501(b) (4). The lower courts had relied on a narrow reading of the Court’s 1994 decision in Dep’t of Revenue of Ore. v. ACF Indus., Inc., 510 U.S. 332, which held that railroads could not challenge a discriminatory property tax exemption under the 4-R Act. However, the Court distinguished this case holding that, unlike property tax, sales and use tax is “another tax” within the meaning of the statute and that exemptions from sales and use tax can impermissibly “discriminate” against a rail carrier. Oddly, the Court declined to revisit its holding in ACF Industries, resulting in a regime where discriminatory property tax exemptions cannot be challenged under the federal statute, while other discriminatory tax exemptions are subject to challenge.
CSX has won the battle but must continue the war on remand in federal district court, where CSX must now prove that the sales tax exemptions at issue discriminate against the railroads. The majority opinion was clear that it was ruling only on the jurisdiction issue—that the 4-R Act allowed the railroad to challenge the sales tax exemption in federal court—and that it was not addressing the substantive merits. In fact, the majority does not paint an optimistic picture for CSX’s discrimination arguments: “[d]iscrimination cases . . . raise knotty questions about whether and when dissimilar treatment is adequately justified.” Dissenting Justices Thomas and Ginsburg did not find discrimination. The next phase of this litigation should prove interesting as to the 4-R Act’s breadth of protection.