Perspectives

US Supreme Court remands Alabama sales tax 4-R Act case to the 11th Circuit

Multistate tax alert | March 17, 2015

​In ‘Alabama Department of Revenue v. CSX Transportation, Inc.,' the US Supreme Court recently reversed in part and remanded an earlier US Court of Appeals, Eleventh Circuit decision. This tax alert reviews the 11th Circuit’s decision in Alabama Department of Revenue v. CSX Transportation, Inc. and summarizes the US Supreme Court decision.

Railroad Revitalization and Regulatory Reform Act

In Alabama Department of Revenue v. CSX Transportation, Inc., the US Supreme Court (“Court”) recently reversed in part and remanded an earlier US Court of Appeals, Eleventh Circuit (“11th Circuit”) decision.1 The 11th Circuit had held Alabama’s sales tax regime, which imposes a sales tax on a railroad’s purchases of diesel fuel but exempts similar purchases by certain competitors, violated the antidiscrimination provisions of the Railroad Revitalization and Regulatory Reform Act (“4-R Act”). In accordance with 49 U.S.C. § 11501(b)(4) (“subsection (b)(4)”) of the 4-R Act, a state is prohibited from “impos[ing] another tax that discriminates against a rail carrier providing transportation . . . .”2

In its opinion, delivered by Justice Scalia, the Court agreed with the 11th Circuit’s holding that the appropriate comparison class of “similarly situated” taxpayers for purposes of determining discrimination was the taxpayer’s competitors (i.e., motor and water carriers).3 The Court, however, disapproved of what it viewed as the 11th Circuit’s refusal or failure to examine whether Alabama could justify its disparate treatment of the taxpayer and its common carrier competitors.4 The Court concluded that for a 4-R Act subsection (b)(4) violation to occur, the applicable tax “must discriminate—but it does not discriminate unless it treats railroads differently from other similarly situated taxpayers without sufficient justification.”5 Accordingly, the Court remanded the case to the 11th Circuit for further proceedings to address whether Alabama can demonstrate the requisite “sufficient justification.”6

In this Tax Alert, we review the 11th Circuit’s decision, summarize the Court’s decision, and provide some taxpayer considerations.

1 Ala. Dep’t of Revenue v. CSX Transp., Inc., No. 13-553, slip op, at 10 (U.S. Mar. 4, 2015), rev’g and remanding 720 F.3d 863 (11th Cir. 2013). The Court’s decision is available here (please link to: http://www.supremecourt.gov/opinions/14pdf/13-553_1b82.pdf).

2 49 U.S.C. § 11501(b)(4). Note that the subsection (b)(4) reference to “another tax” distinguishes that provision from subsections (b)(1)-(3), which “contain three specific prohibitions directed towards property taxes.” No. 13-553 at 4.

3 No. 13-553 at 7-8.

4 Id. at 8-9. As explained by the Court, “We . . . cannot approve of the Eleventh Circuit’s refusal to consider Alabama’s tax-based justification. . . . The Eleventh Circuit failed to examine these [other] justifications . . . .” Id. at 9.

5 Id.

6 Id. at 8.

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