High Court Sides With Ala. in Fuel-Tax Case

This story appears in the March 16 print edition of Transport Topics.

The U.S. Supreme Court ruled Alabama should have an opportunity to substantiate its long-standing practice of issuing a fuel sales tax on railroads but not competitors in the trucking industry.

In an ongoing legal battle, CSX Transportation Inc. challenged Alabama’s assessment of a 4% sales tax whenever the railroad purchased diesel fuel.

The justices ruled 7-2 on March 4 that Alabama should be allowed an opportunity to justify the levy, indicating that a federal appeals court erred when it decided that Alabama’s tax system discriminates against the railroad.

This is the second time the case has been heard at the Supreme Court as federal judges have wrestled over what constitutes tax discrimination. The case was first heard at the Supreme Court in 2010.

Though the 11th U.S. Circuit Court of Appeals previously ruled in favor of CSX, it was wrong not to consider the state’s justification: Truckers pay a 19-cents-per-gallon diesel tax, the Supreme Court said.

“We do not decide whether Alabama’s tax regime subjects railroads and their competitors to roughly equivalent taxes, and therefore justifies railroads’ different treatment. We leave that to the Eleventh Circuit to decide,” Justice Antonin Scalia wrote in the High Court’s opinion.

The appeals court is to address whether Alabama’s per-gallon tax is the “rough equivalent” of the sales tax and justifies the exemption for truckers, Scalia wrote.

Alabama and more than a dozen other states with similar tax schemes stand to lose millions in revenue if the railroad tax is declared illegal. A loss for the state means about $5 million less in annual sales tax revenue, much of that devoted to public schools. The state says it also would be on the hook to refund more than $10 million.

Alabama Solicitor General Andrew Brasher, who argued the state’s case before the court in December, said the ruling is a victory for states and trucking.

“This was absolutely a win for the truckers’ interests because the particular tax structure at issue here, where you’re taxing off-road diesel differently than on-road diesel, was something that the Supreme Court said . . . states can do,” Brasher said. “And that’s a structure that many, many, many states have.”

But in a dissenting opinion, Justices Clarence Thomas and Ruth Bader Ginsberg said they would have reversed the decision altogether.

They said that the majority opinion just prolongs “Alabama’s burden” of defending itself against a “baseless” discrimination claim.

“CSX will continue to pursue this discrimination claim in the federal courts,” CSX spokeswoman Kristin Seay told Transport Topics.

American Trucking Associations, which previously filed a “friend of the court” brief in the case, said if truckers had to pay a per-gallon fuel tax plus the sales tax, it would be double taxation.

ATA’s general counsel, Prasad Sharma, said the Supreme Court ruling acknowledges that state tax systems for the transportation sector are complex but also makes it clear that the lower courts must allow states to present justification for why they tax the modes differently.

“However complicated it might be, the courts have to do that,” Sharma said.

He added that the ruling says to states fighting similar challenges that as long as there’s “rough equivalence between what motor carriers are paying and what railroads are paying, even if they’re different taxes,” it’s not discrimination.

“There’s still an active case in Tennessee, and I think that is pretty squarely addressed by this opinion,” Sharma said.

Tennessee officials declined to talk about their case, but Tennessee, with a group of other states, filed a “friend of the court” brief in support of Alabama. In 2013, a federal court sided with Illinois Central Railroad and ruled Tennessee’s sales tax on railroad fuel purchases was discriminatory because truckers didn’t have to pay the tax.

Tennessee lawmakers voted to have the railroads pay the same per-gallon tax as truckers. But Illinois Central, CSX, BNSF Railway and Norfolk Southern Railway since have filed suits alleging that new tax law targets railroads.