Norfolk Southern Ry. v. Alabama Dept. of Revenue

• Decision Date: 11 December 2008
• Docket Number: No. 08-12712.,08-12712.
• Citation: 550 F.3d 1306
• Parties: NORFOLK SOUTHERN RAILWAY COMPANY, Plaintiff-Appellant, v. ALABAMA DEPARTMENT OF REVENUE, Tim Russell, Commissioner of Revenue, Defendants-Appellees.
• Court: U.S. Court of Appeals — Eleventh Circuit

550 F.3d 1306

NORFOLK SOUTHERN RAILWAY COMPANY, Plaintiff-Appellant, v. ALABAMA DEPARTMENT OF REVENUE, Tim Russell, Commissioner of Revenue, Defendants-Appellees.

No. 08-12712.

United States Court of Appeals, Eleventh Circuit.

December 11, 2008.

Kathryn Jennifer Gainey, Betty Jo Christian, Timothy M. Walsh, Steptoe & Johnson, LLP, Washington, DC, Sydney F. Frazier, Jr., Roy J. Crawford, Cabaniss, Johnston, Gardner, Dumas & O'Neal, Birmingham, AL, for Plaintiff-Appellant.

Margaret Johnson McNeill, Glenmore Patrick Powers, II, AL Dept. of Rev., Montgomery, AL, for Defendants-Appellees.

Appeal from the United States District Court for the Northern District of Alabama.

Before BARKETT and WILSON, Circuit Judges, and POGUE,^* Judge.

POGUE, Judge:

Norfolk Southern Railway Company ("Norfolk") appeals an order denying its application for preliminary injunctive relief from the imposition of Alabama's sales and use tax on diesel fuel. Norfolk asserts that the sales and use tax on diesel fuel discriminates against railroad companies in violation of Section 306(1)(d) of the Railroad Revitalization and Regulatory Reform Act of 1976 (the "4-R Act"), currently codified as 49 U.S.C. § 11501(b)(4).

We affirm the district court's denial of a preliminary injunction. Norfolk S. Ry. v. Ala. Dep't of Revenue, Civil Action No. 2:08-cv-00285-HGD, slip op. at 33 (N.D.Ala. Apr. 9, 2008). Before we explain the reasons for that affirmance, however, we will first outline the tax provisions Norfolk challenges, briefly review the purpose and text of the 4-R Act, and summarize the proceedings below; we will then explain our conclusion that Alabama's tax does not violate the 4-R Act.

I

Though Norfolk is a Virginia railway corporation, it is qualified to do business in Alabama and has approximately a one-third market share among Alabama rail carriers. While Norfolk's operations extend across twenty-two states, it owns its rights-of-way and builds, maintains, and repairs its tracks and other structures in Alabama, and is therefore subject to taxation there.

Pursuant to ALA.CODE §§ 40-23-1 to -213 (2008), Alabama levies a "sales tax" on the gross receipts of retail entities selling tangible personal property within the state,¹ id. § 40-23-2(1), and a "use tax" on the storage, use, or consumption of tangible personal property in the state. Id. § 40-23-61(a). The tax is levied at a rate of four percent of the purchase price. Id. §§ 40-23-2(1), -61(a). After the payment of administrative and enforcement expenses, and small payments to other state funds, Alabama deposits the sales and use tax proceeds into its Education Trust Fund. Id. §§ 40-23-35(a) to -35(f), -85. Further, a number of Alabama cities and counties levy local sales and use taxes at varying rates. Norfolk S. Ry., Civil Action No. 2:08-cv-00285-HGD, slip op. at 5. Norfolk must pay these state and local sales and use taxes on its purchase, consumption, or use of diesel fuel.² According to expert testimony, after capital improvements and compensation, diesel fuel constitutes Norfolk's third-highest business expense.

By and large, Norfolk's main competitors³ do not pay Alabama's sales and use tax on the diesel fuel they purchase or consume. Rather, so long as motor carriers pay Alabama's motor fuel excise tax, at a total of $0.19 per gallon, such entities do not pay the sales and use tax on diesel fuel. Id. §§ 40-17-2(1) (imposing $0.13 per gallon on motor fuel; having paid this tax, motor carriers are "not subject to any other excise tax levied by the state"), -220(e) (imposing upon distributors and suppliers an additional excise tax of $0.06 per gallon on motor fuel received from a terminal, refinery, barge, or pipeline), -220(j).⁴ Notably, however, motor carriers are not exempt from the sales and use tax if they do not pay the motor fuel excise tax on diesel fuel. See id. § 40-17-2(1).⁵ Alabama spends its fuel excise tax proceeds on the construction, repair, and maintenance of public highways, id. §§ 40-17-13(4), -146, -222, as well as on costs of tax collection and bonds previously issued to build roads. Id. § 40-17-13.

In addition, Alabama levies a gasoline tax at a rate of $0.12 per gallon on gasoline intended for use in internal combustion engines. Id. § 40-17-31(a) (imposing an excise tax of $0.07 per gallon and a supplemental excise tax of $0.05 per gallon). An additional excise tax of $0.04 per gallon also applies to gasoline. Id. § 40-17-220(a)-(b). Alabama spends the proceeds from the gasoline taxes to maintain highways and streets. Id. §§ 40-17-31(c)(2), -223. Moreover, motor carriers are also subject to a motor carrier fuel excise tax equal to the applicable gasoline or diesel fuel tax, but they receive credit as to their motor carrier fuel excise tax bill for gasoline or diesel fuel tax already paid on the subject gasoline or diesel fuel. Id. §§ 40-17-141, — 142(a).⁶

Interstate and international water carriers are also exempt from the sales and use tax on fuel. Id. §§ 40-23-4(a)(10), -62(12). While intrastate water carriers must pay sales and use taxes on fuel, Norfolk insists that intrastate water carrier shipments constitute only a small portion (according to one of Norfolk's trial exhibits, only about one million of approximately 194 million tons of intrastate shipments) of its competition within Alabama.

II

Norfolk challenges Alabama's levy of sales and use tax on diesel fuel under the 4-R Act. Congress passed the 4-R Act in 1976:

"to provide the means to rehabilitate and maintain the physical facilities, improve the operations and structure, and restore the financial stability of the railway system of the United States." § 101(a). Among the means chosen by Congress to fulfill these objectives, particularly the goal of furthering railroad financial stability, was a prohibition on discriminatory state taxation of railroad property. After an extended period of congressional investigation, Congress concluded that "railroads are over-taxed by at least $ 50 million each year." H.R.Rep. No. 94-725, p. 78 (1975)....

In broad terms, Congress declared in § 306(b) that assessment ratios or taxation rates imposed on railroad property which differ significantly from the ratios or rates imposed on other commercial and industrial property are prohibited as burdens on interstate commerce. Section 306(c) declared an exception from the provisions of the Tax Injunction Act, 28 U.S.C. § 1341, allowing railroads to challenge discriminatory taxation in federal district courts.

Burlington N. R.R. v. Okla. Tax Comm'n, 481 U.S. 454, 457, 107 S.Ct. 1855, 95 L.Ed.2d 404 (1987) (footnotes omitted).

Consistent with its purpose, the text of the 4-R Act focuses primarily on discriminatory property taxation, but it also includes a broader prohibition in section 11501(b)(4). In current form, 49 U.S.C. § 11501⁷ reads:

(a) In this section —

(1) the term "assessment" means valuation for a property tax levied by a taxing district;

(2) the term "assessment jurisdiction" means a geographical area in a State used in determining the assessed value of property for ad valorem taxation;

(3) the term "rail transportation property" means property, as defined by the Board, owned or used by a rail carrier providing transportation subject to the jurisdiction of the Board under this part; and

(4) the term "commercial and industrial property" means property, other than transportation property and land used primarily for agricultural purposes or timber growing, devoted to a commercial or industrial use and subject to a property tax levy.

(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 paragraph (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 Board under this part.

(c) Notwithstanding section 1341 of title 28 and without regard to the amount in controversy or citizenship of the parties, a district court of the United States has jurisdiction, concurrent with other jurisdiction of courts of the United States and the States, to prevent a violation of subsection (b) of this section. Relief may be granted under this subsection only if the ratio of assessed value to true market value of rail transportation property exceeds by at least 5 percent the ratio of assessed value to true market value of other commercial and industrial property in the same assessment jurisdiction. The burden of proof in determining assessed value and true market value is governed by State law. If the ratio of the assessed value of other commercial and industrial property in the assessment jurisdiction to the true market value of all other commercial and industrial property cannot be determined to the satisfaction of the district court through the random-sampling method known as a sales assessment ratio study (to be carried out under statistical principles applicable to such a study), the court shall find, as a violation of this section —

(1) an assessment of the rail transportation property at a value that has a higher ratio to the true market value of the rail transportation property than the assessed value of all other property subject to a property tax levy in...