Once again, Alabama's antiquated tax system has been called into question as being discriminatory and once again, Alabama's future budgets are placed at risk.
The United States Supreme Court, in a 7-2 decision rendered today, ruled that CSX Transportation, Inc. ("CSX") may indeed challenge Alabama's sales and use tax statutes as being discriminatory in violation of the Railroad Revitalization and Regulatory Reform Act of 1976 (commonly known as the "4-R Act").
Alleging that Alabama’s sales and use tax scheme discriminates against railroads in violation of the 4–R Act, CSX sued the Alabama Department of Revenue and its Commissioner in Federal District Court. Alabama
imposes sales and use taxes on railroads when they purchase or consume diesel fuel, but exempts their main competitors—interstate motor and water carriers. CSX complained that the State could not legally do so.
The 4-R Act bars four forms of discriminatory taxation. Three of the prohibitions deal with property taxes, and the fourth is a catch-all provision that forbids a State to “[i]mpose another tax that discriminates against a rail carrier.”
The Federal District Court initially dismissed CSX’s suit holding that its claim was not cognizable under the 4–R Act on the basis that the Act only prohibits discrimination in the imposition of taxes, not in providing exemptions from those taxes. The Eleventh Circuit Court of Appeals affirmed that decision and CSX petitioned the Supreme Court on Writ of Certiorari. Although the U.S. Supreme Court rarely accepts cases involving state tax disputes, it granted CSX's petition.
The U.S. Supreme Court held that the key question is whether a tax might be said to "discriminate" against a railroad under the 4-R Act where the State has granted exemptions from the tax to other entities (here, CSX’s competitors). In the present case, the Court clearly held that discrimination can occur by means of exemption, as well as by imposition of taxes. It is important to note, however, that the Court made it clear that it was not deciding in this case if the exemptions in question actually do discriminate against CSX. That will be left to be determined on remand by the trial court. At that point, Alabama will have to offer a sufficient justification for declining to provide the exemption at issue to rail carriers in order to successfully defend its current tax structure.
While the case has been remanded for further proceedings to determine if the exemptions did discriminate against CSX, it is clear that a negative end result in that review could be harmful to Alabama's already anemic state budgets in the future. It remains to be seen the ultimate impact this decision will have and it is likely that any final resolution is years away. Stay tuned....
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