ATA Supports Alabama in Sales Tax Dispute

This story appears in the Oct. 11 print edition of Transport Topics.

American Trucking Associations has filed court papers backing the state of Alabama in a U.S. Supreme Court case that could determine whether states can charge railroads sales tax on fuel purchases but exempt truckers.

In Alabama, truckers pay a 19-cent fuel tax on every gallon of diesel they purchase, but their fuel purchases are exempt from the state’s 4% sales tax.

Railroads, on the other hand, must pay the sales tax on diesel purchases, but they do not pay the state diesel tax.

The case, to be heard by the high court on Nov. 10, is being pursued against Alabama by CSX Transportation Inc., which contends that the sales tax exemption for truckers constitutes discriminatory taxation against rail carriers.

Tax discrimination is prohibited by the Railroad Revitalization and Regulatory Reform Act passed by Congress in 1976, CSX contends.

In its Sept. 30 friend-of-the-court filing, however, ATA argued that the act does not apply to sales and diesel taxes, and that the granting “of an exemption” does not automatically constitute “the imposition of a tax” on rail carriers.

Although the case does not involve trucking directly, the outcome could have implications for the industry, Robert Digges, ATA vice president and chief counsel, said in a recent memo to ATA’s executive committee.

“If the railroads succeed in the case, states will either have to exempt the railroads from the sales-and-use tax or impose that tax on motor carriers who are already paying a separate highway-use tax on the fuel,” Digges said.

“Either option will create a competitive advantage for the railroads,” he said.

Attorneys for Alabama declined to comment on the case, but the attorney for CSX — Carter Phillips of Washington, D.C., law firm Sidley Austin — said the tax situation gives trucking an unfair competitive advantage over the railroad.

Once the cost of diesel is more than about $1.90 a gallon, Phillips said, railroads are paying more in sales taxes for fuel than truckers are paying by way of the per-gallon tax.

“Obviously, the railroad industry thinks that the tax is discriminatory,” Phillips said.

The case rests on narrow points of law within the 1976 Railroad Revitalization and Regulatory Reform Act.

Congress said states are not allowed to impose what it saw as excessive and discriminatory property taxes on the railroads — taxes Congress said were contributing to the decline of the railroad industry.

However, Congress included a “catch-all” provision in the act prohibiting other discriminatory taxes.

Alabama and ATA argue that the “catch-all” provision does not apply to taxes such as those on sales. The railroads, on the other hand, argue that it does.

Also at issue in the case is a conflict between U.S. appeals courts that Phillips said is expected to be settled by the Supreme Court.

The U.S. Court of Appeals for the 11th Circuit ruled in Alabama that the state fuel tax system did not discriminate against the railroads. However, in a recent Minnesota case on the same state tax question, the U.S. Eighth Circuit Court of Appeals ruled that the state’s system was discriminatory.

Various railroad companies have pursued cases against states in recent years over methods of taxing fuel. A case is pending, for instance, against the state of Tennessee on the issue. Truckers in that state pay a 17-cent-per-gallon diesel tax but do not have to pay the state’s 7% sales tax on top of the fuel tax.

Illinois Central Railroad filed the case against Tennessee in U.S. District Court for the Middle District of Tennessee in February. In May, though, the district court agreed to a delay in that case pending the outcome when CSX Transportation Inc. vs. Alabama Department of Revenue is considered by the U.S. Supreme Court.