Alabama Diesel Tax Unfair to Railroads, Federal Appeals Court Declares

This story appears in the July 15 print edition of Transport Topics.

A federal appeals court has ruled that Alabama discriminates against railroads because it makes them pay a sales tax on diesel fuel that truckers and other freight haulers do not have to pay.

The July 1 ruling by the U.S. Court of Appeals for the 11th Circuit is the latest twist in a five-year dispute between Alabama and CSX Transportation Inc. that has already been argued once before the U.S. Supreme Court.

“The sales tax is indeed discriminatory,” the court said in its ruling. “The state has not offered a ‘sufficient justification’ for exempting CSX’s competitors,” such as interstate motor carriers and ocean carriers.

In Alabama, railroads pay a 4% sales tax on diesel purchases, but are not required to pay the state’s 19-cent-a-gallon diesel tax.

Truckers, meanwhile, pay the per-gallon tax but are exempt from the sales tax. Ocean carriers are exempt from all fuel taxes.

Although trucking is not directly involved in the case, Richard Pianka, deputy general counsel for American Trucking Associations, said the industry is concerned that if the appeals court decision stands, there would be financial consequences for truckers.

“Potentially, Alabama could start charging motor carriers sales tax on diesel purchases or it could exempt railroads from those taxes,” Pianka said. “Either way, you’re going to have a serious competitive advantage to railroads; they’re either going to be paying far less tax [than truckers] or no tax at all on diesel fuel.”

In addition, he said, other states could be sued or become reluctant to tax railroads on their fuel purchases.

Frank Filgo, president of the Alabama Trucking Association, said that based on current diesel prices, the railroads pay only 15 cents per gallon in taxes.

“So trains currently receive a 4-cent-per-gallon competitive advantage over trucks,” Filgo said. “Fact is, trains currently get a tax break because trucks pay more.”

Carla Snellgrove, spokeswoman for the Alabama Department of Revenue, said the state is reviewing the decision and has not decided what its next step will be or whether it will take the case to the Supreme Court.

The legal issues revolve around federal laws that have been written specifically to exempt the railroads from some state taxation.

From the time CSX filed its original case against Alabama in 2008, the railroad has argued that the tax violates the 1976 Railroad Revitalization and Regulatory Reform Act. That law prohibits states from imposing discriminatory property taxes against railroads, which Congress said were accelerating the decline of the railroad industry.

But the law also contains what is called a “catchall” provision that prohibits other kinds of discriminatory taxes, and CSX contended that the provision applies to Alabama’s sales tax.

When lower federal courts disagreed with CSX, it went to the Supreme Court in 2010 and, at that time, ATA filed a brief in the high court in support of Alabama, arguing that a tax exemption for trucking is not per se a case of discrimination against the railroads.

In February 2011, however, the Supreme Court issued a ruling that did not address the central issue of discrimination but, rather, said the lower courts erred in not allowing CSX to challenge Alabama’s sales tax as discriminatory under the 1976 law.

CSX, subsequently, returned to the lower courts to begin pressing its discrimination case again. If Alabama decides to defend its sales tax, the state now will have to convince the Supreme Court that the tax “discrimination” is justified.