Supreme Court of the United States Digs Deep Into Alabama’s Tax Code – Could Change How State Taxes are Analyzed

On March 4, 2015, The Supreme Court of the United States (the “SCOTUS”) released its decision in Alabama Department of Revenue v. CSX Transportation, which dealt with the issue of whether Alabama’s sales tax violated the Railroad Revitalization and Regulation Reform Act (“4-R Act”), which forbids states from imposing taxes that discriminate against a rail carrier.  The SCOTUS determined that while Alabama’s sales tax treated an out-of-state railroad company differently than its in-state competitors, the sales tax was not discriminatory.  A separate Alabama tax applies to motor carriers but not railroad companies, essentially “offsetting” the negative effect of the sales tax on the railroad company.

The SCOTUS’s detailed analysis and application of a separate tax related to the otherwise discriminatory effect of the sales tax is a marked change in approach and could seriously impact how other similar state tax issues are decided.

What did the U.S. Supreme Court do that is so unique?

Historically, a review by the SCOTUS of whether a state tax is discriminatory or otherwise violates federal statutes or the U.S. Constitution has focused solely on the tax being challenged.  CSX is the first SCOTUS case to substantively examine different parts of a state’s tax code to determine that an “offsetting” tax essentially eliminates the discriminatory effect of the tax being challenged.  The SCOTUS has typically, if not exclusively, shied away from digging too deep into state tax statutes; generally requiring state courts and legislatures to resolve similar types of inquiries.

The SCOTUS is rarely empowered to make such a detailed analysis, and is only able to do so here based upon their interpretation of the 4-R Act and the meaning of “discrimination.”  By defining “discrimination” in a way that allows a similar tax to offset discrimination in one tax with discrimination in another tax, SCOTUS became empowered to embark on this broad analysis of Alabama tax law.  This expansion of analysis by SCOTUS could change the way future state taxes are analyzed.

What does this have to do with my business?

The framework of how the SCOTUS analyzed Alabama’s sales tax, if applied to other state tax issues, creates a new framework for examining state tax laws.  Below are illustrations of potential issues or concerns:

• Like Alabama, Ohio exempts motor carriers from sales tax on purchases of diesel fuel and levies a fuel tax based upon diesel fuel purchased.
• Unlike Alabama, for sales tax purposes, Ohio exempts the sale of fuel to railroad companies, generally.  As a result, while the specific ruling in CSX does not apply to Ohio, the method of analysis used in the case may have an effect when applied to other tax issues.
• While not a Commerce Clause case, expanding this reasoning to Commerce Clause determinations of whether a state tax “unduly burdens” interstate commerce could save otherwise prohibited state taxes by allowing states to point to other parts of their tax code in supporting the challenged tax.For example, other Ohio taxes apply differently to different business types or specific purchases; the newly created Petroleum Activity Tax (“PAT”) was created to alleviate constitutional issues within the Commercial Activity Tax (“CAT”).

  The application of the two taxes may cause issues with similar situated businesses, or competitors.

• Any case involving the resolution of these issues would be considered under CSX which would allow the courts to compare the application of all state taxes to determine whether an individual tax violates a federal statute or the U.S. Constitution.

For questions on how CSX could impact your business, please contact us.