Supreme Court sends tax dispute back home to Alabama

In the case, Alabama Department of Revenue et al v. CSX Transportation Inc. (13-553), the justices ruled 7-2 against CSXT, which had challenged the state’s assessment of a 4% sales tax whenever the railroad purchased diesel fuel. The 11th U.S. Circuit Court of Appeals had ruled in favor of CSX, refusing to consider Alabama’s justification, but the Supreme Court reversed that decision, sending the case back to the appeals court so that the state can argue its rationale, as it relates to both the trucking and the barge industries. The Court cited a provision of the 1976 4R Act prohibiting discrimination against railroads, interpreting that it may also prohibit states from taxing railroads on diesel fuel purchases if those states exempt other freight transport modes from similar taxes,

CSX argued that the tax was illegal under a federal law barring taxes that discriminate against railroads. Alabama officials said the tax system was fair because truckers already pay a different 19 cent per gallon tax on diesel fuel. That tax is an excise tax that goes into the state’s highway fund.

“Alabama currently exempts the trucking industry from the 4% sales and use taxes on fuel because the truckers pay a separate 19 cent per gallon excise tax on highway diesel that goes into the state highway fund,” explained one Capitol Hill observer. “Railroads and inland waterway barge operators are exempt from the 19 cent per gallon highway excise tax – but while railroads are still subject to the 4% sales tax on diesel, inland waterways barge operators are exempt.”

Justice Antonin Scalia said the appeals court was wrong in refusing to consider Alabama’s justification. “We do not decide whether Alabama’s tax regime subjects railroads and their competitors to roughly equivalent taxes, and therefore justifies railroads’ different treatment,” Scalia said. “We leave that to the Eleventh Circuit to decide in the first instance.”

Justice Clarence Thomas filed a dissenting opinion, saying he would have reversed the appeals court and ruled in favor of Alabama. He was joined by Justice Ruth Bader Ginsburg.

Alabama and more than a dozen other states with similar tax schemes say they stand to lose millions in revenue if the railroad tax is declared illegal. Alabama said its loss would amount to about $15 million—$5 million less in annual sales tax revenue, much of which it claims is devoted to public schools, plus $10 million in retroactive sales tax refunds.

The Obama Administration argued that Alabama could justify the different treatment of railroads by showing that its competitors are subject to “alternative and comparable” state taxes not levied against railroads. The Justice Department had urged the Supreme Court to send the case back to the lower courts for that determination.