Atchison, Topeka and Santa Fe Ry. Co. v. State of Ariz.
| Decision Date | 04 March 1996 |
| Docket Number | No. 94-15850,94-15850 |
| Citation | 78 F.3d 438 |
| Parties | 96 Cal. Daily Op. Serv. 1408, 96 Daily Journal D.A.R. 2443 The ATCHISON, TOPEKA AND SANTA FE RAILWAY COMPANY, a Delaware corporation; Southern Pacific Transportation Company; Arizona Central Railroad, Plaintiffs-Appellees, v. STATE OF ARIZONA; Arizona Department of Revenue; City of Phoenix and Town of Clifton, Defendants-Appellants. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Paul J. Mooney, Fennemore Craig, Phoenix, Arizona, for the plaintiffs-appellees.
James M. Susa, Assistant Attorney General, Phoenix, Arizona, for the defendants-appellants.
Appeal from the United States District Court for the District of Arizona; Roger G. Strand, District Judge, Presiding.
Before FERGUSON and HAWKINS, Circuit Judges, and NIELSEN, * District Judge.
The State of Arizona appeals the district court's grant of summary judgment in favor of the plaintiffs. The district court held that Arizona's taxation scheme discriminated against the railroads and therefore violated the Railroad Revitalization and Regulatory Reform Act. We reverse.
The State of Arizona imposes both a transaction privilege tax and a use tax. Ariz.Rev.Stat.Ann. §§ 42-1301 et seq., 42-1401 et seq. (1991). 1 The Arizona transaction privilege tax, which is similar to a sales tax, is applicable to most businesses in Arizona. It is generally imposed at a rate of five percent on the sale of goods and services occurring in the state. The Arizona use tax is a reciprocal tax which imposes a five percent levy on the price of goods purchased outside the state which are later brought into the State for use, storage, or consumption.
The Arizona transaction privilege tax is applicable to seventeen classifications of industrial and commercial taxpayers. 2 The transporting classification of the transaction privilege tax is defined as "the business of transporting for hire persons, freight or property by motor vehicle, railroads or aircraft from one point to another point in this state." Ariz.Rev.Stat.Ann. § 42-1310.02 (1991).
Motor carriers are exempt from the transporting classification of the transaction privilege tax because they are taxed under a separate tax scheme. Motor carriers are taxed under Ariz.Rev.Stat.Ann. § 28-1599 et seq. (1989). The motor carrier tax is a weight-distance tax. It is generally calculated by multiplying the number of miles traveled by a motor vehicle on the public highways within the State of Arizona, by the applicable motor carrier tax rate for that motor vehicle's weight class. Ariz.Rev.Stat.Ann. § 28-1599.05(B) (1989). The motor carrier tax is not applicable to the railroads.
The State of Arizona Taxing Authorities determined that additional transaction privilege taxes were due on Southern Pacific Transportation Company's activities within Arizona. After two unsuccessful administrative appeals, Southern Pacific and the Atchison, Topeka, and Santa Fe Railroad brought suit in district court. The railroads sought a declaratory judgment that the State of Arizona's transaction privilege tax and use tax were discriminatory in violation of The Railroad Revitalization and Regulatory Reform Act (the "4-R Act"), 49 U.S.C. § 11503 (1988), and a permanent injunction against the further imposition of these taxes for current or subsequent tax periods. 3
After filing their complaint, Southern Pacific and Santa Fe moved for a preliminary injunction to prohibit the collection of the alleged discriminatory taxes. The district court denied this motion on the basis that discriminatory taxation occurs when the railroads are subject to a tax which applies only to a narrow class of taxpayers. The district court held that because the Arizona transaction privilege tax and use tax were applicable to a broad class of taxpayers, they were not discriminatory.
The Taxing Authorities then moved for summary judgment against the railroads. In response, the railroads filed a cross-motion for summary judgment against the Taxing Authorities. The district court granted the railroads' motion for summary judgment, holding that the Arizona tax scheme discriminated against the railroads because the railroads' major competitors, motor carriers, were exempt from the Arizona transaction privilege tax and use tax.
We review a grant of summary judgment de novo. Jesinger v. Nevada Fed. Credit Union, 24 F.3d 1127, 1130 (9th Cir.1994). We must determine, viewing the evidence in the light most favorable to the nonmoving party, whether there are any genuine issues of material fact and whether the district court correctly applied the relevant substantive law. Id.
Three interrelated issues are raised by this litigation: (1) Is the 4-R Act, which seeks to prevent discriminatory taxation of the railroads, applicable to the Arizona tax scheme? (2) If so, what is the proper comparison class to employ in determining whether the Arizona tax scheme discriminates against the railroads? (3) Does the Arizona tax scheme discriminate against the railroads?
The 4-R Act was enacted by Congress in 1976 to restore financial stability to the railroad system in the United States. Department of Revenue v. ACF Indus., Inc., --- U.S. ----, ----, 114 S.Ct. 843, 846, 127 L.Ed.2d 165 (1994). Congress' purpose was to revitalize the railroads and protect them from discriminatory taxation. Id. The applicability of subsection (b)(4) of the 4-R Act is at issue in the present case.
The provisions of the 4-R Act relevant to this case are as follows:
(b) The following acts unreasonably burden and discriminate against interstate commerce, and a State, subdivision of a State, or authority acting for a State or subdivision of a state may not do any of them:
(1) assess rail transportation property at a value that has a higher ratio to the true market value of the rail transportation property than the ratio that the assessed value of other commercial and industrial property in the same assessment jurisdiction has to the true market value of the other commercial and industrial property.
(2) levy or collect a tax on an assessment that may not be made under clause (1) of this subsection.
(3) levy or collect an ad valorem property tax on rail transportation property at a tax rate that exceeds the tax rate applicable to commercial and industrial property in the same assessment jurisdiction.
(4) impose another tax that discriminates against a rail carrier providing transportation subject to the jurisdiction of the Commission under subchapter I of chapter 105 of this title.
The State of Arizona argues that Section 11503(b)(4) of the 4-R Act is not applicable to the transaction privilege taxes and use taxes at issue in this litigation. Arizona asserts that Section 11503(b)(4) prohibits only "in lieu" taxes imposed on the railroads in place of discriminatory property taxes. Such discriminatory property taxes are prohibited by subsections (b)(1) through (b)(3) of Section 11503.
The State's narrow interpretation of subsection (b)(4) of the 4-R Act has been rejected by many Circuits. In Richmond, F. & P. R.R. v. Department of Taxation, 762 F.2d 375, 379-80 (4th Cir.1985), it was held that subsection (b)(4) was unambiguously intended to prohibit all discriminatory taxes imposed on rail carriers. The Fifth Circuit, Eighth Circuit, and Eleventh Circuit have reached similar conclusions regarding the scope of subsection (b)(4). Kansas City S. Ry. v. McNamara, 817 F.2d 368, 371-74 (5th Cir.1987) (); Trailer Train Co. v. State Tax Comm'n, 929 F.2d 1300, 1302 (8th Cir.) ( that subsection (b)(4) forbids all taxes that discriminate against railroads, and not just discriminatory property taxes), cert. denied, 502 U.S. 856, 112 S.Ct. 169, 116 L.Ed.2d 133 (1991); Trailer Train Co. v. State Bd. of Equalization, 710 F.2d 468, 472 n. 6 (8th Cir.1983); Ogilvie v. State Bd. of Equalization, 657 F.2d 204, 210 (8th Cir.), cert. denied, 454 U.S. 1086, 102 S.Ct. 644, 70 L.Ed.2d 621 (1981); Alabama Great S. R.R. v. Eagerton, 663 F.2d 1036, 1040 (11th Cir.1981).
We hold that subsection (b)(4) of the 4-R Act is designed to encompass all discriminatory state taxes, not just discriminatory property taxes or in lieu taxes. Therefore, subsection (b)(4) is applicable to the analysis of Arizona's transaction privilege tax and use tax at issue in this case.
In determining whether the Arizona taxes discriminate against the railroads, the district court compared the treatment of the railroads with the treatment of their major competitors, motor carriers. The district court erred in its choice of a comparison class. We hold that the proper comparison class to use in analyzing discriminatory taxation of the railroads under the 4-R Act is "all other commercial and industrial taxpayers subject to the taxes."
Many courts have already employed the comparison class of "other commercial and industrial taxpayers subject to the tax" in analyzing subsection (b)(4) of the 4-R Act. In Kansas City S. Ry. v. McNamara, 817 F.2d 368 (5th Cir.1987), the court stated:
The only simple way to prevent tax discrimination against the railroads is to tie their tax fate to the fate of a large and local group of taxpayers.... We think the best course is to require that the railroads be taxed only under taxes applicable to 'other commercial and industrial' taxpayers.
Id. at 375 (emphasis added). Similarly, the Seventh Circuit held that "a tax is 'discriminatory' within the meaning of the fourth subsection of the 4-R Act if it imposes a...
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