By Liz Cha and Eric Coffill

The United States District Court for the Middle District of Tennessee held that Tennessee’s sales tax on railroad carriers for the purchase or use of diesel fuel was not discriminatory under the Railroad Revitalization and Regulatory Reform Act of 1976 (4-R Act) even though it did not similarly apply to motor carriers because motor carriers are subject to a comparable excise tax on motor carrier fuel. This case was on remand from the Sixth Circuit Court of Appeals following the U.S. Supreme Court’s decision in Alabama Dept. of Revenue v. CSX Transportation, Inc., 135 S.Ct. 1136, 1143 (2015), holding that a rail carrier can show discrimination under the 4-R Act by demonstrating that it is subject to differential tax treatment compared to its competitors; although, tax disparity may be nondiscriminatory if competitors are subject to an alternate, comparable tax. 

Railroad carriers are subject to a sales or use tax on their purchase, consumption or use of diesel fuel in Tennessee while competing motor carriers are exempt from such tax. However, in lieu of the sales tax, motor carriers pay a motor fuel tax. For the tax years at issue, the railroad carriers were subject to a 7% tax on diesel fuel and motor carriers paid a motor fuel tax of 18.4 cents per gallon. Despite the effect of varying fuel prices on the amount of taxes paid by railroad carriers and motor carriers in recent years, the court determined that the tax burden bore by motor carriers was historically higher than railroad carriers and that over the years the tax burden on both motor and railroad carriers was “roughly” equivalent. In addition, the court agreed with the Tennessee Department of Revenue that there was sufficient justification for a different tax imposed on railroad carriers because railroad carriers purposely choose to use dyed fuel instead of clear fuel, which is exempt from the sales and use tax. The railroad carriers could, like the motor carriers, use clear diesel fuel and be subject to the same tax scheme as motor carriers but choose not to do so to avoid a federal excise tax on the use of clear diesel fuel. Accordingly, the court determined that the Department provided sufficient justification for the sales tax on railroad carriers for their purchase or use of diesel fuel and that there was no violation of the 4-Act. Illinois Central Railroad Co. v. Tennessee Dep’t of Revenue, No. 3:10-cv-00197 (M.D. Tenn. April 12, 2017).

By Christopher Chang and Andrew Appleby

In an action challenging the constitutionality of two New York flat highway taxes, a New York trial court ruled in favor of the taxpayer, denying a motion to dismiss filed by the New York State Department of Taxation and Finance. The taxpayer made clear in its opposition to the Department’s motion that it relies on the U.S. Supreme Court decision in American Trucking Associations, Inc., 483 U.S. 266 (1987) to assert that New York State’s flat vehicle registration and decal charges violate the Commerce Clause. In American Trucking Associations, the U.S. Supreme Court determined that two Pennsylvania flat vehicle taxes violated the Commerce Clause, in part, because the taxes effectively imposed a higher charge per mile on out-of-state vehicles. The New York trial court determined that the U.S. Supreme Court’s Commerce Clause analysis in American Trucking Associations, coupled with the factual allegations in the taxpayer’s complaint, were sufficient to set forth a cognizable Commerce Clause cause of action by the taxpayer. The trial court also denied the Department’s motions to dismiss the plaintiff’s claims for refund, injunctive relief and prospective relief, but did grant the Department’s motion to dismiss the second cause of action in the complaint involving a Due Process challenge. The outcome of this case could impact a number of unapportioned taxes—interested taxpayers should keep an eye on this case as it makes its way through the New York courts. Owner Operator Ind. Drivers Assoc. v. New York State Dep’t of Taxation & Fin., N.Y. Slip Op. 30226 (U) (N.Y. Sup. Ct., Jan. 28, 2014).