A 10-year legal challenge to the way Alabama taxes diesel fuel could be returning the United States Supreme Court for a third time, and until it’s resolved, millions of dollars intended for public education and others set aside for road maintenance will hang in the balance.
In 2008, CSX Transportation filed a lawsuit alleging a 4 percent sales and use tax CSX and other rail carriers pay on diesel fuel purchased or used in Alabama is discriminatory because competing motor carriers and water carriers are exempt from paying it.
The state maintains that even though motor carriers do not pay that particular tax, those companies do pay a 19 cent excise tax on every gallon of diesel fuel they purchase here. Water carriers pay no taxes on the fuel they use, but Alabama has argued that imposing such a tax might expose it to liability under federal laws that regulate interstate commerce.
For the most part, federal district courts have agreed with Alabama multiple times, but through a decade of appeals CSX has managed to raise several questions about the state’s tax scheme. As a result, the case has made two trips to the Supreme Court, returned to district court three times and been before the 11th Circuit Court of Appeals in Atlanta five times.
There were several reasons for those appeals, but the most recent arguments have focused on whether Alabama discriminates against railroads or whether the taxes motor carriers pay for their fuel is “roughly equivalent” to what they’re required to pay.
By the numbers, the taxes seem comparable. In fact, courts have found that over a nine-year period, the average difference was between “less-than-half-of-one cent and 3.5 cents” per gallon.
Last year, the district court — in its third ruling in the case — found the tax scheme to be fair because the 4 percent sales tax is only applied to purchases of dyed diesel. Were CSX to purchase clear fuel, as motor carriers do, they would pay the same excise tax, it concluded.
In his ruling, U.S. District Court Judge Abdul Kallon found that any discrimination CSX was facing was “self-imposed.” As a result, he dismissed the case, despite the state’s largest rail carrier’s claims it would cost an additional $9 million to make a transition to clear diesel.
CSX also appealed the ruling based on the way revenues from those taxes are spent — arguing that because the tax motor carriers pay is “used to fund public highways,” it effectively subsidizes infrastructure they benefit from. On the other hand, the sales taxes levied on railroads’ fuel purchases are earmarked for public education.
Those distinctions are what make the resolution of this sprawling litigation pertinent to city and county officials and educators alike. When the CSX case was dismissed, state officials had projected Alabama’s Education Trust Fund would receive $10 million in unpaid taxes.
However, the company appealed the ruling up to the 11th Circuit for the fifth time, and the order handed down last month could mean even more litigation going forward. Specifically, the court ruled advantages motor carriers have don’t discriminate against CSX, but the tax breaks on fuel water carriers are extended by the state of Alabama do.
As Chief Judge Ed Carnes put it, the state’s argument that it is “compelled by federal law” not to to tax fuel used by water carriers “doesn’t hold water.” Now the district court is — for the fourth time — being asked to issue a ruling on the case consistent with that line of thinking.
The ruling could also affect a number of lawsuits CSX filed against various city and county governments in hopes of recouping some of the taxes it believes to have overpaid. According to Mobile County attorney Jay Ross, those lawsuits were filed so the statute of limitations would run out on those claims, but they have been on hold pending the outcome of the state’s lawsuit.
If the 11th Circuit’s recent ruling stands, Ross said the county, the city of Mobile and a number of other municipalities would have to return funds collected from CSX.
“For the county, I believe it would be something like $60,000 to $70,000. Because the dollar amount was so low, relatively speaking, the county decided we would just wait to see how the litigation with the state wound up,” he said. “The city and state have more money involved.”
As for the actual parties in the case, they’ve yet to comment on the most recent developments.
A CSX media relations manager said there’s a company policy to not comment on pending legal matters. A spokesperson for the Alabama Department of Revenue gave a similar response and declined to clarify what financial impact the state might see if CSX were to ultimately prevail.
However, he did say the department was “reviewing the decision and evaluating options.”
Alabama Attorney General Steve Marshall is also evaluating how to move forward in the case, and spokesperson Mike Lewis told Lagniappe Marshall’s considerations do include “whether to petition the U.S. Supreme Court to review the case” for the third time in 10 years.