Sales Tax Slice: CSX II--The Litigation Engine that Could (or Couldn’t)

Last week the U.S. Supreme Court issued its ruling in CSX II resolving circuit splits on two issues related to discrimination claims under the Railroad Revitalization and Regulation Reform (“4-R”) Act

(1) When determining whether sales and use tax exemptions discriminate against rail carriers, is the treatment of rail carriers appropriately compared to that of motor and water carriers? 

(2) Should taxes other than sales and use tax be considered when evaluating whether a challenged sales and use tax is discriminatory? 

The court answered “Yes” to both of these questions.

While the court’s ruling on the first issue was a victory for CSX, its ruling on the second issue will likely be fatal to the rail carrier’s claim.  On this issue, Justice Scalia, writing for the majority, instructed that on remand the 11th Circuit consider Alabama’s 19-cent-per-gallon excise tax on diesel fuel purchased by motor carriers against the 4-percent sales and use tax paid by rail carriers. The same week that the court issued its opinion, the price of diesel fuel in the Gulf Coast states was less than $3.00 per gallon according to the U.S. Energy Information Administration.  Based on this, rail carriers were paying less than 12 cents per gallon in Alabama for diesel fuel compared to the 19 cents per gallon levied on diesel fuel purchased by motor carriers. Even applying this analysis to higher historical prices, CSX’s discrimination argument appears set up to fail on remand.

Despite the likely failure of CSX’s claim, rail carriers may still be able to prevail on similar claims in other states. At least 10 other states, including Tennessee, Washington, South Carolina, Oklahoma, Maryland, Iowa, Idaho, Florida, Arizona, and Georgia exempt diesel fuel from sales and use tax when purchased by motor or water carriers, but not when purchased by rail carriers.

Following the decision, the circuits remain split on at least one issue: What type of remedy may a federal court grant under the 4-R Act? While a plurality of courts that have ruled on the issue have favored only prospective injunctive relief, other courts have been more taxpayer friendly, ordering either refunds of tax paid or credits against future taxes.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Does Alabama’s taxing scheme discriminate against rail carriers compared to their competitors? Should relief under the 4-R Act be limited to prospective injunctive relief?

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