KEVIN H. SHARP, District Judge.
This action is brought under Section 306(1)(d) of the Railroad Revitalization and Regulatory Reform Act of 1976 ("Section 306" or the "4-R Act"), 49 U.S.C. § 11501(b)(4), which prohibits state and local governments from discriminating against railroads with respect to taxation. Plaintiff contends that the sales and use tax assessments imposed by the State are discriminatory because motor carriers are exempt from the tax, but rail carriers are not exempt. Plaintiff seeks injunctive and declaratory relief pursuant to Section 306.
The Court held a bench trial in this matter on June 5 and 11, 2012, after which the parties were instructed to file post-trial briefs.
Having reviewed the parties' briefs, the record, the exhibits received in evidence, and the testimony of the witnesses, after considering their interests and demeanor, the Court enters the following Findings of Fact and Conclusions of Law. Except where the Court discusses different testimony on a specific issue, any contrary testimony on a specific matter has been rejected in favor of the specific fact found. Further, the Court omits from its recitation facts that it deems to be immaterial to the issues presented.
The parties have stipulated to many of the underlying facts in this matter.
The Tennessee Department of Revenue ("Department") is the department of the State of Tennessee charged with the responsibility
Cars, motorcycles, trucks (both large and small), cyclists, and pedestrians use roads. Generally, Tennessee imposes a tax on the sale, consumption, and use of tangible personal property in Tennessee. See Tenn.Code Ann. § 67-6-101 et seq. The sales tax is collected by the seller at retail from the purchaser and paid over to the Commissioner by the seller. See Tenn.Code Ann. §§ 67-6-502-504.
Tennessee imposes a tax on the use, consumption, or storage for use or consumption of tangible personal property unless the sales tax on such property has been paid. Tenn.Code Ann. §§ 67-6-201(2) and (5), 67-6-202, and 67-6-203. Railroads are subject to sales or use tax on either their purchase or consumption or use of diesel fuel in Tennessee. For years 2006 to the present, the tax is imposed by the State at the rate of 7% of the retail price. (Complaint, ¶ 11). ICRR holds a direct pay permit issued by the Department and pays state sales and use taxes upon its purchase of diesel fuel within the State directly to the Commissioner.
The principal competitors to rail carriers in the transportation of property in interstate commerce in the State of Tennessee are on-highway motor carriers of property in interstate commerce ("motor carriers"). (Complaint, ¶ 13). Water carriers are secondary competitors to rail carriers in the transportation of property in interstate commerce in Tennessee. Motor carriers are exempt from the Tennessee sales and use tax imposed by chapter 6 of Title 67 on the purchase or consumption of diesel fuel in the State of Tennessee; however, water carriers are not exempt. See Tenn.Code Ann. § 67-6-329(a)(2).
Tennessee, along with the other 47 contiguous states and bordering Canadian provinces, is a party to the International Fuel Tax Agreement ("IFTA") the purpose of which is to simplify the collecting and reporting of taxes on motor fuel used by motor carriers operating in more than one jurisdiction. IFTA requires that the fuel use tax imposed by member jurisdictions be measured by the consumption of fuel in a motor vehicle. See 49 U.S.C. § 31701(2). The standard IFTA tax return shows tax rates for each member jurisdiction in terms of per-gallon or per-liter taxes. See (Rowen Depo., Exh. 4).
Fuel costs incurred in the transportation of property in interstate commerce are a significant annual operating expense of both rail carriers and motor carriers. For the years 2005 through 2010, fuel costs as a percentage of total operating expenses for railroads were 16.5, 19.8, 20.9, 25.8, 15.3 and 18.5, respectively. (Defendants' Tr. Exh. 7, Railroad Facts 2011, p. 61).
Motor carriers pay a motor fuel tax totaling 18.4¢ a gallon. Tenn.Code Ann. § 67-3-202-205. Under Tenn.Code Ann. § 67-3-203 and 204, 1¢ of the 18.4¢ is a special privilege tax and .4¢ of the 18.4¢ is an environmental assurance fee. Approximately 70% of the motor fuel taxes collected from motor carriers are allocated to the highway fund, which is allocated to TDOT. Approximately 28% is allocated to cities and counties and designated for use on roads. Approximately 2% is allocated to the general fund. In addition to the sales and use tax, railroads also pay the 1¢ and.4¢ tax imposed under Tenn.Code Ann. § 67-3-203 and 204.
In the tax years 2006 through 2010, ICRR paid the following amounts of Tennessee sales tax on its diesel fuel:
2006 $1,838,217 2007 $1,839,288 2008 $2,745,049 2009 $1,341,981 2010 $1,689,664.
In the tax years 2006 through 2010, ICRR paid the following amounts of property tax to cities and counties in Tennessee on its track structure, right of way, and signals:
2006 $1,885,344 2007 $2,148,995 2008 $2,418,641 2009 $2,581,751 2010 $2,517,645.
The parties have stipulated that ICRR is a "common carrier by railroad" within the meaning Section 306(1)(d) of the Railroad Revitalization and Regulatory Reform Act of 1976, 49 U.S.C. § 11501.
Plaintiff has pending in the Chancery Court for Davidson County, Tennessee, a refund action seeking a refund of all sales and use taxes paid on its purchases of diesel fuel in Tennessee from 2005 through 2010.
Plaintiff contends that the assessment, levy, and collection of a sales and use tax on its purchase or use of diesel fuel in Tennessee discriminates against rail carriers in violation of 49 U.S.C. § 11501(b)(4).
The Court finds the U.S. Supreme Court's decision in CSX Transp., Inc. v. Ala. Dep't of Revenue, ___ U.S. ___, 131 S.Ct. 1101, 1105, 179 L.Ed.2d 37 (2011) ("CSX I") and the subsequent CSX Transp., Inc. v. Ala. Dep't of Revenue, 720 F.3d 863
CSX II, 720 F.3d at 871.
As recognized by the United States Supreme Court: "[R]ailroads are easy prey for state and local tax assessors in that they are nonvoting, often nonresident, targets for local taxation, who cannot easily remove themselves from the locality." Dep't of Revenue of Or. v. ACF Indus., Inc., 510 U.S. 332, 336, 114 S.Ct. 843, 127 L.Ed.2d 165 (1994) (internal quotation marks omitted). The Railroad Revitalization and Regulatory Reform Act of 1976 restricts the ability of state and local governments to levy discriminatory taxes on rail carriers. CSX I, 131 S.Ct. at 1105. Congress enacted the 4-R Act to "restore the financial stability of the railway system of the United States." Id.
Accordingly, the 4-R Act establishes that "[t]he following acts unreasonably burden and discriminate against interstate commerce, and a State, subdivision of a
49 U.S.C. § 11501(b).
Sections 11501(b)(1)-(3) prohibit "the imposition of higher assessment ratios or tax rates upon rail transportation property than upon `other commercial and industrial property.'" ACF Indus., Inc., 114 S.Ct. 843. Section 11501(b)(4) of the 4-R Act is broader and prohibits the imposition of "another tax that discriminates against a rail carrier providing transportation." Id. It is this provision that Plaintiff contends bars the State from assessing a sales and use tax on the transportation fuel used by it.
Before the Court can assess the merits of Plaintiff's claim, it must first determine the appropriate class for comparison. CSX I, 131 S.Ct. at 1107.
The Commissioner submits that the proper comparison class in "exemption-based subsection (b)(4) challenges" is the class of all other commercial and industrial taxpayers that are subject to the tax being challenged. (Docket Entry No. 41 at 6). Defendants continue, "[h]ere the sales and use tax applies to virtually all persons in Tennessee, obviously a — large and local group of taxpayers, thereby marrying the fate of railroads to that of local Tennessee citizens who have both the incentive and the political clout to keep the sales and use tax as low as possible." (Id. at 7). Plaintiff counters that "the overwhelming weight of authority holds that the class of competitive modes of transportation is the appropriate comparison class where a tax on railroad diesel fuel that is not imposed on the fuel of competing transportation modes is challenged." (Docket Entry No. 55 at 7). In any event, Defendants concede that no matter how the comparison class is framed, the comparison class consists of motor carriers.
The proper approach toward defining the appropriate class for comparison under subsection (b)(4) has divided the circuits,
Under the first three subsections of the statute that deal exclusively with property taxes, Congress specifically provided a comparison class comprised of "other commercial and industrial property." 49 U.S.C. § 11501(b)(1-3). It did not provide such a comparison class for the catchall provision. See 49 U.S.C. § 11501(b)(4). As the Eleventh Circuit noted in CSX II, "[i]f [the court] compares[s] [Plaintiff] to all of the State's taxpayers, it is no worse off because most taxpayers pay the sales tax when they purchase diesel fuel. On the other hand, if [the court] compare[s] [Plaintiff] to motor [] carriers, questions of favorable treatment arise because they do not pay the sales tax." CSX II, 720 F.3d at 867. There are essentially "two camps" among our sister circuits: the functional approach and the competitive approach. Id. The Eleventh Circuit compared the two approaches as follows:
In this case, there is a direct competitor of the railroad — the motor carrier. The Court has conducted a thorough review of the different approaches available to it, and "in light of the 4-R Act's purpose of ensuring `financial stability' for rail carriers," the Court finds with respect to Tennessee's sales and use taxes at issue here, that a comparison class of competitors is more appropriate. See CSX II, 720 F.3d at 868.
Having decided the appropriate comparison class, the Court must now determine whether the sales and use taxes for diesel fuel assessed against the railroad is discriminatory.
The "statute does not define `discriminates,' and so [courts should] look [] to the ordinary meaning of the word." CSX I, 131 S.Ct. at 1108. Discrimination, the Court has said, is the "failure to treat all persons equally when no reasonable distinction can be found between those favored and those not favored." Id. (quoting Black's Law Dictionary 534 (9th ed. 2009)). CSX I did not offer further guidance on what constitutes discrimination in the present context. In dicta, however, the Court observed that "[w]hether the railroad will prevail — that is, whether it can prove the alleged discrimination — depends on whether the State offers a sufficient justification for declining to provide the exemption at issue to rail carriers." Id. at 1109 n. 8. In ACF Industries, the Court suggested another way to show discrimination under the 4-R Act's catch-all: discrimination might occur in a "case in which the railroads — either alone or as part of some isolated and target group — are the only commercial entities" subject to a tax. 510 U.S. at 346, 114 S.Ct. 843. In such a case, "one could say that the State had singled out railroad property for discriminatory treatment." Id. at 346-47, 114 S.Ct. 843.
In accordance with Title 67, Chapter 6 of the Tennessee, the State imposes a tax on the sale, consumption, and use of tangible property in Tennessee. The sales tax is a direct tax on the retail customer, and is precollected by retailers insofar as it can be done. See Tenn.Code Ann. § 67-6-502. Complementary to the sales tax, Tennessee imposes a use tax on the storage, use or consumption of tangible personal property in Tennessee. See Tenn.Code Ann. § 67-6-201(2) and (5). Under these provisions, railroads are subject to sales or use tax on their purchase or consumption or use of diesel fuel in Tennessee. The tax is imposed by the state at the rate of 7%. Tenn.Code Ann. § 67-6-202(1). The principal competitors of rail carriers, which are motor carriers, do not pay sales or use tax on the purchase or consumption of diesel fuel in the State of Tennessee. See Tenn. Code Ann. § 67-6-329(a)(2).
A two-step inquiry is used to evaluate a claim of discrimination in violation of § 11501(b)(4). See CSX I, 131 S.Ct. at 1109 n. 8. The plaintiff has the initial burden
After electing to follow a competitive model in CSX II, the Eleventh Circuit held that CSX established a prima facie case of discrimination. Moreover, CSX II held, "[q]uite simply, the sales tax overburdens the rail carriers because its competitors do not pay it." 720 F.3d at 869. Similarly, given the tax scheme in the present case, it becomes Defendants' burden to justify their tax treatment against the railroads in Tennessee.
Defendants purport that the stipulated facts in this case demonstrate more than sufficient justification to treat railroads and motor carriers differently for purposes of taxing their purchase and use of diesel fuel. (Docket Entry No. 54 at 4). Defendants further contend "[f]rom 1941 through 2012, railroads have paid a higher tax per gallon than motor carriers have paid in only one year, when diesel fuel prices paid by railroads spiked in 2008." (Id. at 3, referencing Defendants' Tr. Exh. 10). Hence, "an exemption from the sales and use tax for railroads would have turned them into `most-favored-taxpayers,' disavowed by CSX [I]." (Id.). The fact that motor carriers are subject to the higher motor fuel tax, Defendants opine, "is sufficient justification for their exemption from the less onerous sales and use tax to which railroads are subject." (Id.).
Plaintiff argues, in contrast, that the taxes paid on fuel by trucking companies are not directly comparable to the taxes paid on fuel by railroads, citing to the testimony of their expert, Benjamin Blair, the Director of U.S. Taxes for ICRR. (Docket Entry No. 55 at 10). The trucking companies' motor fuel tax applies on a consumption basis; the railroads' sales tax on diesel fuel for locomotives applies at the point of purchase. (Id.). The testimony and exhibit proffered by Benjamin Blair, Plaintiff continues, clearly established that the burden on railroads is higher because ICRR pays sales taxes on track materials used to build or maintain its rights of way, and pays property taxes on those rights of way — burdens which are not shared by the motor carriers who receive maintained rights of way as a result of the motor fuel excise tax paid by them. (Id., referencing Plaintiff's Tr. Exh. 28). The trucks do not pay property taxes on the highways and roads that they use, whereas ICRR is paying property taxes on its right of way. (Id., Tr. Transcript p. 40). Plaintiff urges, "[t]he only reliable evidence in this record demonstrates that railroads carry a heavier tax burden than do their competitors." (Id. at 11).
Similar to the State in CSX II, Defendants here devote considerable effort to defending the motor carrier's exemption to the sales and use tax on the ground that the motor carriers pay a roughly equivalent amount of taxes under the motor fuel tax — and with the exception of one year, pay higher taxes. The Eleventh Circuit held, still, "[t]his argument misses the mark." CSX II, 720 F.3d at 869. As the Eleventh Circuit stated,
Id. at 870-871.
This Court finds a similar analysis justified here. Simply put, the record before the Court provides that rail carriers in Tennessee pay the State's sales and use tax, and motor carriers do not — placing rail carriers at an overall disadvantage. Defendants have not provided sufficient evidence that the differential tax treatment is justified and thus does not discriminate against the railroad. Consequently, because Defendants have not met their burden, the Court finds that the tax treatment violates 49 U.S.C. § 11501(b)(4). See CSX I, 131 S.Ct. at 1109 n. 8.
On the basis of the foregoing, the Court finds that the sales and use tax assessments by Defendants against Plaintiff are discriminatory and therefore prohibited by Section 306(1)(d), 49 U.S.C. § 11501(b)(4).
An appropriate Order will be entered.
