CSX Transportation, Inc. v. Alabama Department of Revenue

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[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
________________________
No. 12-14611
________________________
D.C. Docket No. 2:08-cv-00655-AKK
CSX TRANSPORTATION, INC.,
Plaintiff - Appellant,
versus
ALABAMA DEPARTMENT OF REVENUE,
COMMISSIONER, ALABAMA DEPARTMENT OF REVENUE,
Defendants - Appellees.
________________________
Appeal from the United States District Court
for the Northern District of Alabama
________________________
(July 1, 2013)
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Before WILSON and COX, Circuit Judges, and BOWEN, * District Judge.
WILSON, Circuit Judge:
The State of Alabama (State) imposes a 4% sales tax on the gross receipts of
retail businesses, and a 4% use tax on the storage, use, or consumption of tangible
personal property. See Ala. Code §§ 40-23-2(1), -61(a).1 Appellant CSX
Transportation, Inc. (CSX), an interstate rail carrier, pays the 4% sales tax
whenever it purchases diesel fuel in the State. CSX’s main competitors in the
State—interstate motor and water carriers—do not. In this appeal, we must decide
whether exempting CSX’s main competitors from the State’s sales tax is
discriminatory as to rail carriers in violation of the Railroad Revitalization and
Regulation Reform Act of 1976 (4-R Act), 49 U.S.C. § 11501(b)(4). We conclude
that the sales tax is indeed discriminatory and that the State has not offered a
“sufficient justification” for exempting CSX’s competitors. See CSX Transp., Inc.
v. Ala. Dep’t of Revenue (CSX II), ––– U.S. –––, 131 S. Ct. 1101, 1109 n.8 (2011)
(“Whether the railroad will prevail . . . depends on whether the State offers a
sufficient justification for declining to provide the exemption at issue to rail
carriers.”). Accordingly, we reverse.
*
Honorable Dudley H. Bowen, Jr., United States District Judge for the Southern District
of Georgia, sitting by designation.
1
For purposes of clarity, both taxes will be referred to as the “sales tax.”
2
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I. BACKGROUND
Rail carriers, motor carriers, and water carriers all compete for the shipment
of freight in interstate commerce. Although all three purchase diesel fuel toward
that end, the State taxes each competitor’s purchases differently: water carriers pay
no tax whatsoever on their diesel fuel purchases, see Ala. Code § 40-23-4(a)(10);
rail carriers pay the State’s 4% sales tax; and motor carriers pay an excise tax of
19¢ per gallon, see Alabama Terminal Excise Tax Act (fuel excise tax), 2011 Ala.
Act 565 (effective October 2012). 2
The State distributes the revenue from the fuel excise tax as follows: for
every gallon sold, 13¢ goes to the Alabama Department of Transportation for the
construction, repair, maintenance, and operation of public roads and bridges, and
the payment of principal and interest on highway bonds; the remaining 6¢ goes to
cities and counties for the construction and maintenance of roads and bridges, and
to the Department of Transportation for general highway purposes. Revenue from
the sales tax, on the other hand, goes toward a general revenue fund. See Ala.
Code §§ 40-23-35, 40-23-85.
2
During the majority of this litigation, the State codified its fuel excise tax at section 40-
17-2 of the Alabama Code. In October 2012, the State repealed that section and modified its
motor fuel tax scheme. See Alabama Terminal Excise Tax Act, 2011 Ala. Act 565 (effective
October 2012). The new statute changes the timing of the tax’s imposition, but the amount of
the excise tax (19¢/gallon of diesel fuel) remains the same, and it still exempts motor carriers
from paying the State’s sales tax on diesel-fuel purchases. For purposes of clarity, both taxes
will be referred to as the “fuel excise tax.”
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It is axiomatic that a state has broad discretion in the exercise of its taxing
power. See Lehnhausen v. Lake Shore Auto Parts Co., 410 U.S. 356, 359, 93
S. Ct. 1001, 1003 (1973); Weissinger v. White, 733 F.2d 802, 805 (11th Cir. 1984).
That discretion will be reined in, however, where it offends a “specific federal
right.” Lehnhausen, 410 U.S. at 359, 93 S. Ct. at 1003. At issue here are the
federal rights Congress has afforded rail carriers pursuant to the 4-R Act. That Act
provides that a state may not:
(1) Assess rail transportation property at a value that has a higher ratio
to the true market value of the rail transportation property than the
ratio that the assessed value of other commercial and industrial
property in the same assessment jurisdiction has to the true market
value of the other commercial and industrial property.
(2) Levy or collect a tax on an assessment that may not be made under
paragraph (1) of this subsection.
(3) Levy or collect an ad valorem property tax on rail transportation
property at a tax rate that exceeds the tax rate applicable to
commercial and industrial property in the same assessment
jurisdiction.
(4) Impose another tax that discriminates against a rail carrier
providing transportation subject to the jurisdiction of the Board under
this part.
49 U.S.C. § 11501(b) (emphasis added).
Enacted to “restore the financial stability of the railway system of the United
States,” the 4-R Act “target[s] state and local taxation schemes that discriminate
against rail carriers.” CSX II, 131 S. Ct. at 1105 (internal quotation marks
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omitted). CSX contends that the State’s sales tax discriminates against it in
violation of § 11501(b)(4) because CSX’s main competitors do not pay the sales
tax when they purchase diesel fuel, giving them a competitive advantage over
CSX.
CSX filed this lawsuit against Alabama’s Department of Revenue and its
Commissioner in 2008. After the district court dismissed the complaint, we
affirmed the dismissal based on our precedent in Norfolk Southern Railroad Co. v.
Alabama Department of Revenue, 550 F.3d 1306, 1316 (11th Cir. 2008), which
established the rule that a railroad could not challenge its competitors’ exemptions
from a sales tax as discriminatory under the 4-R Act. See CSX Transp., Inc. v. Ala.
Dep’t of Revenue (CSX I), 350 F. App’x 318, 319 (11th Cir. 2009) (per curiam).
CSX appealed, and the Supreme Court granted certiorari, overruled our decision in
Norfolk, and held that “CSX may challenge Alabama’s sales and use taxes as
tax[es] that discriminat[e] against rail carrier[s] under § 11501(b)(4).” CSX II, 131
S. Ct. at 1114 (alterations in original) (internal quotation marks omitted). The
Court appeared to impliedly assume that the State’s exemptions for CSX’s
competitors would be discriminatory unless “the State offers a sufficient
justification for declining to provide the exemption at issue to rail carriers.” Id. at
1109 n.8.
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After we remanded the case back to the district court, the court conducted a
bench trial and issued an order holding that the State’s sales tax did not
discriminate against CSX in violation of § 11501(b)(4). See CSX Transp. Inc. v.
Ala. Dep’t of Revenue (CSX III), 892 F. Supp. 2d 1300, 1317 (N.D. Ala. 2012).
The district court reasoned that because the State’s motor carriers paid a roughly
equivalent amount in taxes pursuant to the State’s fuel excise tax, the motor
carriers’ exemption from the sales tax was not discriminatory. Id. at 1313 (finding
that “the tax rate imposed per gallon of diesel fuel for rail carriers and motor
carriers is essentially the same”). As to the water carriers, the district court held
that CSX had offered “no evidence regarding the purported discriminatory effect as
it relates to water carriers.” Id. at 1316. The district court dismissed the matter,
and this appeal followed.
II. ANALYSIS
We review the district court’s application of the 4-R Act de novo, see
Alphamed, Inc. v. B. Braun Med., Inc., 367 F.3d 1280, 1285 (11th Cir. 2004),
taking special heed of the guidance provided by the Supreme Court in CSX II.
“‘Discrimination,’” the Court wrote, “‘is the failure to treat all persons equally
when no reasonable distinction can be found between those favored and those not
favored.’” CSX II, 131 S. Ct. at 1108 (quoting Black’s Law Dictionary 534 (9th
ed. 2009)). For example, “[t]o charge one group of taxpayers a 2% rate and
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another group a 4% rate, if the groups are the same in all relevant respects, is to
discriminate against the latter.” Id. A tax exemption is analogous because the
“State takes the favored group’s rate down to 0%.” Id. Therefore, CSX II’s
holding suggests that a tax exemption disfavoring a rail carrier creates a rebuttable
presumption of discrimination, unless the State can “offer[] a sufficient
justification for declining to provide the exemption at issue to rail carriers.” Id. at
1110 n.8.
A. Comparison Class
Before we address whether the exemption at issue is discriminatory, there
remains a first-order question that the Court left untouched and has yet to be
answered in this circuit: against what do we compare the railroads? The matter is
one of scope, as any model of discrimination requires a fixed set of participants. If
we compare CSX to all of the State’s taxpayers, it is no worse off because most
taxpayers pay the sales tax when they purchase diesel fuel. On the other hand, if
we compare CSX to motor and water carriers, questions of favorable treatment
arise because they do not pay the sales tax. Among our sister circuits there are
essentially two camps: the functional approach and the competitive approach.
We acknowledge that the question of the proper comparison class has not
been the central inquiry of this appeal. In the proceedings below, the district court
and the parties adopted the competitive approach, assuming that CSX must be
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compared with only motor and water carriers. Although we ultimately conclude
that the competitive approach is appropriate in this circumstance, we are obliged to
say a few words concerning the diversity of opinions on this matter.
Employing the functional approach, the Seventh and Ninth Circuits have
compared the rail carriers to other “commercial and industrial” taxpayers based on
§ 11501(b)(4)’s three preceding subsections, which all contain the phrase
“commercial and industrial.” See Kansas City S. Ry. Co. v. Koeller, 653 F.3d 496,
508 (7th Cir.), cert. denied, 132 S. Ct. 855 (2011); Atchison, Topeka & Santa Fe
Ry. Co. v. Arizona, 78 F.3d 438, 441 (9th Cir. 1999). For example, in Koeller the
Seventh Circuit considered whether an Illinois subdivision’s method of calculating
taxes discriminated against railroads in violation of § 11501(b)(4). Seven hundred
taxpayers comprised the tax base of the subdivision: eight of the 700 taxpayers
were railroads, pipelines, and utilities (RPU properties). Koeller, 653 F.3d at 500.
Of the remaining 692 taxpayers, 14 conducted commercial and industrial
operations, several were residents, and the vast majority used the land for
agricultural purposes. Id. After severe floods and an increase in the price of diesel
fuel sent the subdivision into a budgetary crisis, its commissioners increased the
annual maintenance assessment—which for all intents and purposes was a “tax.”
Id. Although the majority of the subdivision’s landowners saw modest hikes in
their annual assessments, the RPU properties saw “astronomical increase[s].” Id.
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at 502. Norfolk Southern’s assessment, for instance, jumped a whopping 8,300%
in one year, from $1,126 to $93,920. Id.
Before reaching the question of whether the tax was discriminatory, the
Seventh Circuit acknowledged the different comparison-class options at its
disposal. The court opted for the functional approach, in part because of “the need
to read subsection (b)(4) in light of the approach taken in the first three subsections
of the 4-R Act, which all directly or indirectly look to other commercial and
industrial property.” Id. at 509 (internal quotation marks omitted). Yet the
Seventh Circuit also recognized that “there are no competitors of the railroads—
motor carriers, air carriers, barges, [or] Great Lakes ships—that [the subdivision] is
trying to tax.” Id. (alteration in original) (emphasis in original) (internal quotation
marks omitted). Therefore, opting for the competitive approach in Koeller would
have yielded the bizarre result that a tax singularly raising a rail carrier’s tax rate
by 4,800% was not discriminatory. With that in mind, the court compared the rail
carriers with “the 14 additional commercial and industrial taxpayers” who did not
suffer such a dramatic increase in their tax obligations, and held that the tax was
discriminatory. Id. at 509–10.
Contrarily, the Eighth Circuit has endorsed the narrower “competitive
approach” model, at least when considering a state’s sales tax. See Union Pac.
R.R. Co. v. Minn. Dep’t of Revenue, 507 F.3d 693, 695 (8th Cir. 2007); Burlington
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N., Santa Fe Ry. Co. v. Lohman, 193 F.3d 984, 986 (8th Cir. 1999) (choosing the
competitive model, but acknowledging that “the comparison class should be
appropriate to the type of tax and discrimination challenged in a particular case”
(emphasis added)). In Lohman, the Eighth Circuit addressed a scenario identical to
the one before us: whether an exemption to Missouri’s sales tax caused the sales
tax to violate § 11501(b)(4). See Lohman, 193 F.3d at 984. In that case too, motor
carriers paid a fuel excise tax rather than a sales tax. Id. at 985. The court
ultimately held that “the proper comparison class for Missouri sales and use taxes
is the competitive mode.” Id. at 986. Paying homage to the 4-R Act’s broad
purpose of restoring the railroads’ financial stability, the court emphasized that
“[s]tability cannot be restored without making the railroads competitive.” Id.
Furthermore, the court continued, if Congress “had wanted [§ 11501(b)(4)] to have
the same comparison class as the property tax subsections, and none other, it would
have written it that way.” Id.; see also Atchison, 78 F.3d at 445 (Nielsen, J.,
dissenting) (“If Congress wanted [§ 11501(b)(4)] to share the same broad
comparison class as the three preceding subsections, and none other, it would have
said so. It did not.”). This result made sense, the court reasoned, because a broad
comparison class in that instance would have put the railroads “at a competitive
disadvantage.” Lohman, 193 F.3d at 986.
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We have carefully studied the different approaches available to us, and we
conclude that in light of the 4-R Act’s purpose of ensuring “financial stability” for
rail carriers, the competitive model best serves that goal in the context of a state’s
sales tax on diesel fuel. 3 Moreover, CSX and the State stipulated, and the district
court agreed, that the proper comparison class for this case was CSX’s
competitors.4 Having determined that the appropriate comparison class is CSX’s
competitors, we turn to the question of whether the sales tax is discriminatory.
B. Discrimination
As noted earlier, the Supreme Court held that tax exemptions can be
discriminatory under the 4-R Act. CSX II, 131 S. Ct. at 1114. Given that we have
opted for a competitive model in this case, and CSX’s competitors do not pay the
State’s sales tax, we hold that CSX has established a prima facie case of
3
We therefore decline to adopt Justices Thomas’s dissent in CSX II, which would have
held that the appropriate comparison class in all 4-R Act discrimination cases is all commercial
and industrial taxpayers. See CSX II, 131 S. Ct. at 1115 (Thomas, J., dissenting) (“I would hold
that, to violate § 11501(b)(4), a tax exemption scheme must target or single out railroads by
comparison to general commercial and industrial taxpayers.”). While this comparison class
might be appropriate in certain situations, like Koeller, it fails to address discriminatory taxes
that place rail carriers at a significant disadvantage vis-à-vis their competitors.
4
Our approach creates tension with the Seventh Circuit’s holding in Koeller only to the
extent that Koeller established a bright-line rule for § 11501(b)(4) cases. See Koeller, 653 F.3d
at 509 (“Given our preference for clarity, however, rather than an ill-defined ‘all the
circumstances’ type of test, we are content for now to endorse reference to other commercial and
industrial users.”). While we recognize the virtues of bright-line rules, § 11501(b)(4) is a broad
statute, designed to strike down all discriminatory taxes that place rail carriers at a competitive
disadvantage—and Congress “specifically chose to omit any reference to a comparison class in
subsection [(b)(4)].” Atchison, 78 F.3d at 445 (Nielsen, J., dissenting). Thus, while a malleable
approach might not lend itself to the most efficient application, the language and purpose of
§ 11501(b)(4) require that “the comparison class should be appropriate to the type of tax and
discrimination challenged in a particular case.” Lohman, 193 F.3d at 986.
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discrimination. Quite simply, the sales tax overburdens the rail carriers because its
competitors do not pay it. It therefore becomes the State’s burden to justify its
discriminatory tax. See id. at 1110 n.8.
The State devotes the majority of its brief to defending the motor carriers’
exemption to the sales tax on the ground that the motor carriers pay a roughly
equivalent amount of taxes under the fuel excise tax. This argument misses the
mark. Rather than framing the tax in question at its highest level of abstraction as
“all the taxes paid on diesel-fuel purchases,” we agree with the Eighth Circuit that
“we look only at the sales and use tax with respect to fuel to see if discrimination
has occurred.” Union Pacific, 507 F.3d at 695 (internal quotation marks omitted).
We are persuaded that even though in some years—depending on the price of
diesel fuel—the State’s taxing arrangement might yield a fair result, “the actual
fairness of those arrangements is too difficult and expensive to evaluate.” Lohman,
193 F.3d at 986 (quoting Trailer Train Co. v. State Tax Comm’n, 929 F.3d 1300,
1303 (8th Cir. 1991)).
This construction of the 4-R Act finds support in the Act’s text. Section
11501(b)(4) prohibits the states from “impos[ing] another tax that discriminates
against a rail carrier,” but the statute hardly “suggests that an individually
discriminatory tax should be assessed for fairness against the entire tax structure of
the state.” Kansas City S. Ry. v. McNamara, 817 F.2d 368, 377 (5th Cir. 1987). If
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the 4-R Act required us to examine the tax regime for an entire commodity, it
would have said so rather than speaking in the singular about “another tax.” Like
the Eighth Circuit in Lohman, we find the Fifth Circuit’s well-reasoned opinion in
McNamara to speak directly on this issue.
In McNamara, the Fifth Circuit struck down a Louisiana tax imposed on
transportation and communication utilities, which included rail carriers. Id. at 370.
Using a commercial and industrial taxpayer comparison class, the Fifth Circuit
held that the tax was discriminatory, and that Louisiana could not justify it based
on the fact that other commercial and industrial taxpayers paid a roughly
equivalent amount in sales and use taxes. Id. at 377. Refusing to consider the
sales tax, the Fifth Circuit held that “[d]etermining the intrinsic economic fairness
of a tax system to a particular taxpayer is a paradigm of the kind of polycentric
problem for which courts are ill-suited.” Id.
McNamara provided the rationale for the Eighth Circuit in Lohman and its
progeny to hold that courts should not evaluate a state’s sales tax against other
taxes in the state’s code. See Lohman, 193 F.3d at 986. Here, the district court
below rejected the Eighth Circuit’s reliance on McNamara because McNamara
employed the functional approach rather than the narrower competitive approach,
and when the comparison class is thereby “drastically reduced” it does not “impose
substantial theoretical and practical difficulties on a court.” CSX III, 892 F. Supp.
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2d at 1311. Because the comparison class has been narrowed, the dissent assures
us, federal courts would not engage in “such a searching, time-consuming,
expensive, and impracticable analysis.” Dissenting Op. at 6. We disagree.
Although the class of taxpayers might have been narrower had we opted for
the functional approach, the “theoretical difficult[ies]” that concerned the
McNamara court would remain. McNamara, 817 F.2d at 377. We would still be
forced to decide whether a state’s fixed-percentage sales tax for one market
participant is roughly equivalent to an ad valorem excise tax for another market
participant. In addition, the authoritative value of that assessment would ebb and
flow with every oscillation in diesel fuel’s market value—we would operate for
some months, perhaps even years, under the fiction that the two taxes are
equivalent.5 Id. (“Furthermore, there is no reason in principle why the railroads
could not sue for such a judicial assessment each year (or for each tax bill) because
the dynamic nature of any state’s economy will alter the relative benefits and
burdens of its tax system from moment to moment.” (emphasis in original)). And
if the price of diesel fuel causes rail carriers to bear a significantly larger tax
burden than its competitors, at what point must we reverse course and hold that the
5
The dissent also points out that under today’s holding, “the sales and use taxes would
discriminate against a rail carrier even if its competitors paid four times as much tax as the rail
carrier for the same commodity.” Dissenting Op. at 7–8. But if we were to adopt the dissent’s
approach and accept the State’s justification for its discriminatory tax—that motor carriers pay
some other commodity tax, that is sometimes equivalent—the reverse would also be true. That
is to say, the sales and use tax exemption would not discriminate against a rail carrier even if its
competitors paid four times less in tax as the rail carrier for the same commodity.
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sales tax is discriminatory? After one year of inequity? Three? 6 To adjust the
comparison class makes little difference, and it behooves us to bear in mind the
words of the Supreme Court:
[C]ourts as institutions are poorly equipped to evaluate with precision
the relative burdens of various methods of taxation. The complexities
of factual economic proof always present a certain potential for error,
and courts have little familiarity with the process of evaluating the
relative economic burden of taxes.
Minneapolis Star & Tribune Co. v. Minn. Comm’r of Revenue, 460 U.S. 575, 589–
90, 103 S. Ct. 1365, 1374 (1983) (footnote omitted).
We therefore decline to undertake the Sisyphean burden of evaluating the
fairness of the State’s overall tax structure in order to determine whether a single
tax exemption causes a state’s sales tax to be discriminatory. This case, then,
becomes much simpler than it would appear at first blush. Rail carriers pay the
State’s sales tax—motor and water carriers do not. It is not a sufficient
justification for the State to counter that its tax code will ultimately level the
playing field.
Even if it were true that the exemptions at issue were not enacted to
unfavorably target rail carriers, our decision would be the same because
discrimination under § 11501(b)(4) “can be shown even if there is no direct
6
This is to say nothing of the added value that the motor carriers receive from being able
to accurately forecast their year-to-year tax burden by virtue of being subject to a fixed excise tax
rather than a variable ad valorem tax.
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evidence of targeting,” as long as the tax imposes a proportionately heavier burden
on rail carriers. Koeller, 653 F.3d at 510. Here, the rail carriers’ main competitors
have received favorable treatment: tax exemptions. In response, the State offers no
“reasonable distinctions between the favored and the disfavored”; therefore it has
failed to carry the burden set forth by the Supreme Court in CSX II. Id. In CSX II,
the Supreme Court queried the State: “Can you justify why motor and water
carriers are taxed differently than rail carriers?” The State responds: “Motor and
water carriers are taxed differently because they are taxed differently.” But the
Supreme Court demanded a justification from the State, not a Zen proverb.
Section 11501(b)(4) does not allow us to sit idly by and take the State at its word
that, in the long run, its tax code will burden CSX no more than its competitors.
Moreover, no one can seriously dispute that the water carriers, who pay not a cent
of tax on diesel fuel, are the beneficiaries of a discriminatory tax regime.
III. CONCLUSION
In short, after establishing a comparison class of competitors and showing
that its competitors did not pay the sales tax on diesel fuel purchases, CSX made a
prima facie showing of discrimination under § 11501(b)(4). The burden shifted to
the State to provide a “sufficient justification” for the exemptions. It did not. We
reverse the district court, hold that the State’s sales tax violates the 4-R Act, and
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remand to the district court with instructions to enter declaratory and injunctive
relief in favor of CSX consistent with this opinion.
REVERSED AND REMANDED.
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COX, Circuit Judge, dissenting:
I dissent. Though I agree that the appropriate comparison class consists of
the stipulated competitors, I do not agree that a tax exemption for interstate motor
carriers discriminates against interstate rail carriers when motor carriers in fact
carry a similar or heavier tax burden for purchase of the same commodity. As for
the tax exemption for interstate water carriers, I conclude that the district court
improperly placed the burden on CSX to provide evidence of the exemption’s
discriminatory effect. I would affirm the district court’s ruling to the extent that it
finds no violation of the 4-R Act with respect to the motor carriers’ exemption but
remand for reconsideration as to interstate water carriers.
The Railroad Revitalization and Regulatory Reform Act of 1976 (the 4-R
Act) prohibits a state taxing authority from taking certain actions that place unfair
burdens on railroads. The statute’s first three subsections bar a state from making
unfair assessments on railroad property, collecting a tax on such unfair
assessments, and collecting an ad valorem property tax at a rate greater than that
imposed on other “commercial and industrial property,” 49 U.S.C. § 11501(b)(1)–
(3).1 At issue in this case is § 11501(b)(4), which prohibits a state and its
1
Section 11501(b)(1)–(3) reads:
(b) The following acts unreasonably burden and discriminate against interstate
commerce, and a State, subdivision of a State, or authority acting for a State or
subdivision of a State may not do any of them:
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subdivisions from “[i]mpos[ing] another tax that discriminates against a rail
carrier.” Id. § 11501(b)(4).
We use a two-step inquiry to evaluate a claim of discrimination in violation
of § 11501(b)(4). See CSX Transp., Inc. v. Ala. Dep’t of Revenue, 131 S. Ct. 1101,
1109 n.8 (2011) (CSX II). The plaintiff railroad (CSX here) has the initial burden
to establish a prima facie case of discriminatory tax treatment. If the plaintiff does
so, the burden shifts to the defendant taxing authority (the State here) to establish
that the differential tax treatment is justified and does not discriminate against the
railroad. Id. (“Whether the railroad will prevail—that is, whether it can prove the
alleged discrimination—depends on whether the State offers a sufficient
justification for declining to provide the exemption at issue to rail carriers.”). If
the defendant cannot meet its burden, the tax treatment violates § 11501(b)(4).
The parties in this case have agreed that CSX’s competitors are interstate
motor carriers (“on-highway motor carriers of property in interstate commerce”)
and interstate water carriers (“carriers of property in interstate commerce by ships,
(1) Assess rail transportation property at a value that has a higher ratio to
the true market value of the rail transportation property than the ratio that
the assessed value of other commercial and industrial property in the same
assessment jurisdiction has to the true market value of the other
commercial and industrial property.
(2) Levy or collect a tax on an assessment that may not be made under
paragraph (1) of this subsection.
(3) Levy or collect an ad valorem property tax on rail transportation
property at a tax rate that exceeds the tax rate applicable to commercial
and industrial property in the same assessment jurisdiction.
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barges and other vessels”). (Dkt. 63 ¶ 10, at 3.) I proceed through the two-step
analysis first with respect to motor carriers and then with respect to water carriers.
A. Motor Carriers
Like the majority, I have no doubt that CSX has established a prima facie
§ 11501(b)(4) violation by showing that the sales and use taxes apply to rail
carriers but exempt motor carriers. (Op. at 11–12.) Where I disagree is in the
second step of the analysis: whether the State has justified the differential
treatment.
The State explains the exemption by pointing out that motor carriers must
pay the 19¢ state excise tax per gallon of fuel they purchase. Rail carriers do not
pay this tax. According to the State’s argument, the fact that rail carriers are not
subject to the excise tax justifies the differential treatment in the sales and use
taxes, and the sales and use taxes do not discriminate against rail carriers.
The district court agreed with the State. CSX Transp., Inc. v. Ala. Dep’t of
Revenue, 892 F. Supp. 2d 1300, 1312–14 (N.D. Ala. 2012) (CSX III). The court
compared the state sales and use taxes (measured in terms of what rail carriers paid
per gallon of fuel, including the 4% tax) to the state motor-fuel excise tax
(measured in terms of what motor carriers paid per gallon, including the 19¢-per-
gallon tax) assessed from January 2007 to December 2009. Id. at 1313. The court
found that “motor carriers actually pa[id] a higher” state tax. Id. Even adding to
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the comparison the additional sales and use taxes imposed on rail carriers by
counties and cities in Alabama, motor carriers and rail carriers paid “substantially
similar” taxes during the period in question. Id. 2 And that comparison failed to
incorporate the motor-fuel excise taxes assessed by counties and cities on motor
carriers, which ranged from 1¢ to 6¢ added to the state excise tax imposed on
motor carriers. Id. In sum, the district court found, the taxes paid by rail carriers
and motor carriers for fuel was “essentially the same.” Id. Because its findings are
not challenged on appeal, I accept them as accurate.
None of these findings are relevant, CSX argues, because the State cannot
justify differential treatment by showing that the entities that are exempt from sales
and use taxes are subjected to a separate tax not imposed on rail carriers. The
majority agrees with CSX’s position. It refuses to compare the two taxes,
regardless of the numbers the taxing arrangement yields. (See Op. at 12.) But
based on my reading of the Supreme Court’s opinion in CSX II and case law in
other circuits, I find this position both unsupported and contrary to Congress’s
intent.
CSX’s argument and the majority opinion follow the approach taken by the
Eighth Circuit in Union Pacific Railroad Co. v. Minnesota Department of Revenue,
2
I assume that sales and use taxes imposed by cities and counties are at issue in this case.
Given that CSX named no city or county as a defendant, this assumption may not be true; I
hesitate to agree that a city or county can be enjoined from imposing a tax when it has not been
named as a party. But even if they can, my conclusion remains the same.
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507 F.3d 693 (8th Cir. 2007). There, the Eighth Circuit considered Minnesota’s
generally applicable sales tax on railroad fuel that exempted two primary
competitors (motor carriers and air carriers) because they paid a separate excise
tax, see id. at 694—a scenario nearly identical to the one confronting us here.
Based on its earlier opinion in Burlington Northern, Santa Fe Railway Co. v.
Lohman, 193 F.3d 984 (8th Cir. 1999), the Eighth Circuit refused to consider any
other tax as a justification for the facial discrimination. See Union Pac., 507 F.3d
at 695 (“[W]e ‘look only at the sales and use tax with respect to fuel to see if
discrimination has occurred.’” (quoting Lohman, 193 F.3d at 986)).
But as the district court recognized, see CSX III, 892 F. Supp. 2d at 1310–11,
the Eighth Circuit’s simplistic approach to evaluating challenges under
§ 11501(b)(4) incorrectly relies on distinguishable case law. Lohman, on which
Union Pacific rests, refuses to consider other taxes as justification for facially
discriminatory tax treatment. 193 F.3d at 986. The Lohman court relies on two
cases for the proposition that the fairness of this tax scheme is “too difficult and
expensive to evaluate,” id.: the Fifth Circuit’s opinion in Kansas City Southern
Railway Co. v. McNamara, 817 F.2d 368 (5th Cir. 1987), and the Eighth Circuit’s
own opinion in Trailer Train Co. v. State Tax Commission, 929 F.2d 1300 (8th Cir.
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1991). 3 But both McNamara and Trailer Train address a materially distinct fact
pattern, and their analyses are unsuitable for this case.
In McNamara and Trailer Train, the court considered a different kind of
tax—a specific tax that “targeted” railroads for differential treatment, 4 rather than a
general tax that exempted railroads’ competitors. In each case, the court decided
that the appropriate comparison class consisted of all commercial and industrial
taxpayers. In each case, the state argued that the tax did not discriminate against
railroads because the state’s tax structure, as a whole, treated railroads similarly to
every other commercial and industrial taxpayer. And in each case, the court
refused to entertain such a searching, time-consuming, expensive, and
impracticable analysis. See Trailer Train, 929 F.2d at 1302–03; McNamara, 817
F.2d at 377–78.
Here, we have a much narrower issue. The appropriate comparison class
includes the two stipulated competitors—a far more manageable class than one
composed of all commercial and industrial taxpayers in Alabama. And in arguing
that a single tax on motor carriers justifies their exemption from another tax, the
State does not come close to proposing the massive endeavor that Trailer Train
3
The majority opinion also applies McNamara and acknowledges Trailer Train. (See
Op. at 12–14.)
4
In McNamara, Louisiana imposed a tax on “public utilities,” a relatively small group of
taxpayers that included railroads. 817 F.2d at 374. Notably, “public utilities” also included
certain motor and water carriers. Id. In Trailer Train, Missouri taxed an activity in which only
railroads engaged. 929 F.2d at 1302.
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and McNamara refused to undertake. Like the district court, see CSX III, 892 F.
Supp. 2d at 1310–11, I would distinguish Trailer Train and McNamara on that
ground, and I would decline to follow Lohman’s and Union Pacific’s lead because
they rely on those distinguishable cases.
That we must evaluate the State’s justification, despite the Eighth Circuit’s
approach, is all the clearer after CSX II. There, the Court conceded that
discrimination cases under the 4-R Act will often “raise knotty questions about
whether and when dissimilar treatment is adequately justified.” CSX II, 131 S. Ct.
at 1114. But as the Court then insisted, “Congress has directed the federal courts
to review a railroad’s challenge[,] and . . . we would flout the congressional
command were we to declare the matter beyond us.” Id.
Perhaps the most compelling reason to depart from the Eighth Circuit’s
approach is that, under that approach, we may reach the bizarre holding that a tax
discriminates against a rail carrier even though the tax puts the rail carrier at no
discernible disadvantage. The majority opinion reaches just that result, concluding
that the sales and use taxes discriminate against rail carriers and in favor of motor
carriers even though motor carriers pay “essentially the same” tax on their fuel.
(See Op. at 12 (refusing to evaluate the comparison between the two taxes “even
though in some years . . . the State’s taxing arrangement might yield a fair
result”).) Under the majority’s approach, the sales and use taxes would
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discriminate against a rail carrier even if its competitors paid four times as much
tax as the rail carrier for the same commodity.
I cannot agree with that approach. Congress created the 4-R Act to stabilize
railroads financially. Dep’t of Revenue v. ACF Indus., Inc., 510 U.S. 332, 336, 114
S. Ct. 843, 846 (1994). This goal implies that an offending tax must disadvantage
railroads; I fail to see how a tax that places rail carriers in the same tax position as
their competitors—or a better one—could threaten railroads’ financial stability. So
it is clear to me that Congress enacted § 11501(b)(4) to eliminate tax schemes that
impose a greater tax burden on railroads than other taxpayers. This purpose is
explicit in the first three subsections of § 11501(b), each of which prohibits
taxation methods that assess or tax rail carriers’ property at a higher rate than other
taxpayers. See § 11501(b)(1)–(3). By outlawing “another tax that discriminates”
in the final subsection, Congress specifically targeted taxes that have a similar
effect as those referred to in the previous three—placing a greater tax burden on
railroads than other taxpayers for the same taxable item or event. In finding
discrimination against rail carriers without determining whether rail carriers have
actually been disadvantaged, the majority opinion flouts the language of the statute
and Congress’s clear intent.
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Turning now to the State’s justification, I agree with the district court that
the State has met its burden to show that the tax exemption for motor carriers was
not discriminatory against railroads.
As I explained above, a tax discriminates against railroads in violation of
§ 11501(b)(4) if the tax imposes a greater tax burden on railroads than it does on
comparable taxpayers. The district court found that rail carriers paid less state tax
on fuel than motor carriers during the period in question and that, even adding the
local taxes imposed on rail carriers (and without adding local excise taxes paid by
motor carriers), rail carriers and motor carriers paid “essentially the same” tax.
CSX III, 892 F. Supp. 2d at 1313. These factual findings are not challenged on
appeal. And I cannot conclude from these findings that railroads have been
competitively disadvantaged in any way by the sales and use taxes’ exemptions for
motor carriers.5 I would hold that the State has met its burden to justify the
5
CSX contends that, even if rail carriers face the same tax burden as motor carriers in
terms of purchasing and consuming fuel, rail carriers are still disadvantaged because they must
maintain their own rights-of-way (tracks) while motor carriers’ rights-of-way (highways) are
maintained in part by the excise taxes they pay. CSX argues that the district court’s refusal to
consider these uneven operating expenses in its comparison to the two taxes, see CSX III, 892 F.
Supp. 2d at 1314–15, was error because any analysis of relative tax burdens must include an
analysis of the tangible benefits received or not received.
I disagree. True, railroads have to maintain their tracks. But that burden is not a tax
burden that the 4-R Act prohibits, and no tax affects that burden. Say, for example, that the State
eliminated both the motor-fuel excise tax and the motor-carrier exemptions in the sales and use
taxes, leaving a system in which rail carriers and motor carriers paid identical 4% taxes on the
purchase and use of their fuel. By CSX’s logic, even that totally equal tax scheme would
disadvantage railroads in violation of the 4-R Act because railroads have higher overhead
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differential treatment and, therefore, that the tax exemption does not discriminate
against rail carriers within the meaning of § 11501(b)(4).
B. Water Carriers
The district court held that the sales and use taxes’ exemptions for water
carriers did not discriminate against rail carriers in violation of the 4-R Act, in part
because CSX “fail[ed] to meet it[s] evidentiary burden of proof.” CSX III, 892 F.
Supp. 2d at 1316. This conclusion is not entirely unreasonable; after all, the
Supreme Court in CSX II did hint that the rail carrier must “prove the alleged
discrimination” to prevail. CSX II, 131 S. Ct. at 1109 n.8 (“Whether the railroad
will prevail—that is, whether it can prove the alleged discrimination—depends on
whether the State offers a sufficient justification . . . .”).
But the district court required too much of CSX. The rail carrier bringing a
§ 11501(b)(4) claim can establish its prima facie case simply by showing that the
tax in question exempts competitors. See id. at 1108 (noting that a state
discriminates against one group of taxpayers by charging them a higher tax rate
than another group). It then becomes the state’s burden to show that the tax did not
expenses. Motor carriers still would not be responsible for maintaining the public highways of
Alabama.
The difference in right-of-way maintenance costs has no place in the comparison of tax
burdens. That railroads must pay for their own tracks is the inherent burden of operating a
transportation network on private rights-of-way. In other words, it is a fundamental competitive
disadvantage that railroads face. Congress did not intend the 4-R Act to eliminate all of
railroads’ competitive disadvantages, only those created by taxes. And here, the State has shown
that the sales and use tax exemptions for motor carriers creates no tax disadvantage for railroads.
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in fact discriminate against the railroad. See id. at 1109 n.8 (“[W]hether [the
railroad] can prove the alleged discrimination[ ]depends on whether the State
offers a sufficient justification . . . .”).
In requiring more from CSX than a showing that the tax exempts water
carriers, the district court muddied the two-step inquiry and applied an incorrect
legal standard. When a district court uses the wrong legal standard, we can remand
for application of the appropriate standard. See Kearse v. Sec’y, Fla. Dep’t of
Corr., 669 F.3d 1197, 1198 (11th Cir. 2011). Accordingly, I would remand this
case so the district court can apply the correct standard (based on the existing
record) and determine whether the State has offered sufficient justification for the
tax exemption given to water carriers.
28