Supreme Court Weighs Alabama Diesel Tax That Hits Railroad, Aids Schools

By Mark Walsh — December 10, 2014 3 min read
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The U.S. Supreme Court on Tuesday took up a railroad’s challenge to an Alabama sales and use tax on diesel fuel that goes primarily to public education in the state.

The issue is whether Alabama discriminates against CSX Transportation Inc., by charging the railroad the sales and use tax on diesel fuel while exempting motor and water carriers from the tax.

When the case was before the Supreme Court for the first time, in 2010, school groups filed a brief estimating that at least $20 million was at stake in potential refunds of the state sales and use tax to all railroads operating in the state if CSX prevails.

That time, the question before the justices was whether CSX could even pursue its claim of disparate tax treatment under a 1976 federal law called the Railroad Revitalization and Regulatory Reform Act, or 4-R Act. The law prohibited tax discrimination against railroads, particularly on property taxes, but also included a catch-all provision that bars states from “imposing another tax that discriminates against a rail carrier.”

The high court ruled in 2011 that CSX could pursue its suit. On remand, a federal district court upheld the state’s tax treatment of railroads, but the U.S. Court of Appeals for the 11th Circuit, in Atlanta, struck down the state’s approach as discriminatory.

During the Dec. 9 oral argument in Alabama Department of Revenue v. CSX Transportation Inc., the state argued that it should be able to offer justifications for treating railroads differently under its tax scheme, such as that motor carriers pay a separate fuel tax that roughly comes out even with what they would pay if they weren’t exempt from the sales tax.

“That money ... that we’re collecting by the sales tax goes primarily for education, which is something that the railroads benefit from just like everyone else in the state,” Alabama Solicitor General Andrew L. Brasher told the justices.

Carter G. Phillips, representing CSX, said the railroad was “entitled to the protections under the 4-R Act, which is designed, candidly, to ensure ... our financial stability, which means that we ought to always be in a position where we can approach all of our business decisions in the most efficient way and hopefully put ourselves in a position in order to compete against the motor carriers and the water carriers.”

The argument addressed the complexities of state tax systems, evoking both the older heydays of railroads and river barges and modern challenges such as taxing Internet purchases. (It also came during the same week in which the high court heard a case about state taxation of Web retailers.)

Chief Justice John G. Roberts Jr. noted that the 1819 federal statute that admitted Alabama to the Union (“the first time,” Roberts added) included the condition that all navigable waters within the state shall “forever remain public highways ... without any tax, duty, impost, or toll.” He asked Brasher how that squared with Alabama’s taxation of barges on their intrastate movements.”

“Fortunately, we haven’t had that litigation,” Brasher said.

For the justices, the case was a bit of a long train ride that seems as if it may never reach a final destination.

Justice Stephen G. Breyer noted that, in general, “state taxes are so complex.” He worried that the high court may return the case to the appeals court for reconsideration of certain issues, “and it may come back here again.”

Roberts expressed a similar concern. “I don’t want the case up here a third time,” he said.

In their friend-of-the-court brief on the state’s side four years ago, Alabama education groups—which included the Alabama Education Association and the Alabama Association of School Boards—said “the amount of [railroad tax] refund claims that could be resurrected by this case is potentially devastating to Alabama’s public schools.”

Whether they were less troubled by the issue upon its return to the Supreme Court, or simply less organized, the education groups did not file a brief this time around.

A decision in the case is expected by next June.

A version of this news article first appeared in The School Law Blog.