Supreme Court Orders New Review of CSX Challenge to Alabama Fuel Tax

This story appears in the Feb. 28 print edition of Transport Topics.

The U.S. Supreme Court last week directed a lower court to reconsider a claim by freight railroad CSX Transportation Inc. that the Alabama fuel tax it pays is discriminatory because truckers are exempt from the same tax.

The Supreme Court stopped short, however, of ruling that the tax does discriminate against railroads. Instead, it said the lower court erred in not allowing CSX to use a 1976 federal law in pressing its discrimination claims.

Because truckers could face additional taxes if CSX wins its case, the lawsuit ultimately could change the way states tax motor carriers, American Trucking Associations has stated.

The case was filed in federal court in Alabama in 2008.

“We hold that CSX may challenge Alabama’s sales and use taxes as taxes that discriminate against . . . rail carriers,” the high court said in its 7-2 decision. “We do not address whether CSX should prevail in that challenge — whether, that is, Alabama’s taxes in fact discriminate against railroads by exempting interstate motor and water carriers.”

Truckers pay a 19-cent-a-gallon tax on every gallon of diesel they purchase in the state, 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.

CSX sued the Alabama Department of Revenue claiming that the state’s tax scheme discriminates against railroads in violation of the Railroad Revitalization and Regulatory Reform Act of 1976.

That law was aimed at restoring financial stability to the railroad industry, and targeted state and local taxation schemes that discriminate against rail carriers, according to court documents.

But the Supreme Court sent the case back to the federal district court “for further proceedings consistent with this opinion” to determine whether the tax scheme discriminates against rail carriers or not. The ruling reversed a decision by the 11th U.S. Circuit Court of Appeals that the tax did not discriminate against the railroads, following a dismissal of the suit by the lower court.

The ruling will not immediately affect the trucking industry, said Prasad Sharma, vice president and deputy chief counsel for American Trucking Associations.

CSX spokeswoman Carla Groleau said, “We look forward to having our case reconsidered by the lower courts in accordance with the Supreme Court decision.”

Sharma said ATA believes an exemption for motor carriers that pay a separate diesel tax will not lead to a finding of discrimination by the lower courts.

“The court accepted the case on narrow grounds and ruled only that CSX can bring a challenge to the Alabama sales and use taxes on diesel fuel imposed upon railroads,” Sharma told Transport Topics. “The court specifically did not hold that the Alabama tax is discriminatory and left that to be determined by the lower courts.”

In September, ATA filed court papers backing the state of Alabama in the Supreme Court case, which was argued on Nov. 10. ATA contended that the federal law 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.

ATA has said that if the railroads succeed in the legal action, states will either have to exempt the railroads from the sales-and-use tax or impose that tax on motor carriers already paying the highway-use tax on fuel.