Law & Courts

Justices Weigh Railroad Tax That Aids Alabama Schools

By Mark Walsh — November 10, 2010 3 min read
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In a case with implications for Alabama public schools, the U.S. Supreme Court on Wednesday considered whether a railroad could challenge a state sales and use tax on diesel fuel that rail carriers must pay, while motor and water carriers are exempt.

Alabama education groups filed a friend-of-the-court brief on the side of the state, arguing that the tax on railroads is critical because it helps fund the state’s Education Trust Fund.

“The amount of [railroad tax] refund claims that could be resurrected by this case is potentially devastating to Alabama’s public schools,” says the brief filed by the Alabama Education Association, the Alabama Association of School Boards, and other groups.

In CSX Transportation Inc. v. Alabama Department of Revenue (Case No. 09-520), the Jacksonville, Fla.-based railroad is seeking to challenge the state’s exemptions for motor and water carriers under a 1976 federal law called the Railroad Revitalization and Regulatory Reform Act, or 4-R Act.

Congress found that railroads were often subject to disparate state and local tax treatment because they were non-voting, non-resident businesses which couldn’t easily pick up and leave a state. 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.”

“You can’t have this kind of a tax on us and not tax the motor carriers the same way,” Carter G. Phillips, the lawyer representing CSX, told the high court. The specific question before the court is whether the railroad can challenge the exemptions under the 4-R Act.

CSX paid some $3 million to $4 million is sales and use tax on diesel fuel to Alabama before winning an injunction in 2008 that has barred the taxes. The school groups estimate that all railroads operating in the state pay about $20 million per year in such taxes, but several are seeking to invalidate the tax and win refunds.

The education groups say that a ruling for the railroad could end funding for 250 teachers or 1,400 support workers.

Corey L. Maze, Alabama’s solicitor general, told the justices that the federal law’s reference to “another law that discriminates” means “a tax that singles out railroads as compared to the general mass of taxpayers,” which is not what the state is doing.

“We know that Congress didn’t intend to make railroads the most favored taxpayers in any way,” Maze said. “The intent was simply to put them on equal footing.”

“Now one of the problems I see that the court has is this fear that the states are going to take a generally applicable tax and then all of a sudden start exempting everyone” except railroads, Maze said. “It’s not going to happen for a very simple reason. Our sales and use tax funds our schools.”

“At the moment we start exempting every single business, our schools don’t have any money,” Maze continued. “We are not going to pick on the railroads by exempting, exempting, exempting, exempting. The railroads, quite honestly, can’t fund our schools. We are having a hard enough time funding them as it is, and we are not going to just target railroads by exemption.”

Nineteen states filed a joint friend-of-the-court brief on Alabama’s side, saying that a ruling for CSX could lead many other rail carriers to challenge sales and use taxes wherever some taxpayers benefit from exemptions.

“This court should require Congress to speak with considerably more clarity and precision if it intends to interfere with the states’ fundamental power to impose taxes,” the states’ brief said.

A decision in the case is expected by next June.

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