Argument analysis: Justices look for workable approach to discern whether a tax is discriminatory

Tax systems treat taxpayers differently all the time, and the central question before the Court in Alabama Department of Revenue v. CSX Transportation is when a difference in treatment amounts to a violation of the anti-discrimination provision of the Railroad Revitalization and Regulatory Reform Act of 1976 (the “4-R Act”). This is the second time this case has been before the Court, and Tuesday’s oral argument made it clear that the Court was looking for a way to avoid having this case return for a third time.

The Court seemed inclined to agree with CSX that an assessment whether there has been discrimination should be based on a comparison with a taxpayer’s competitors rather than with other businesses in general. On a second issue – how a court should conduct this discrimination analysis vis-à-vis competitors – the Court seemed more divided. On the one hand, the Court seemed very aware of how difficult it is to analyze how an entire state tax system treats two taxpayers. Yet several of the Justices also seemed troubled that the Eleventh Circuit had not analyzed at all whether a facial discrimination was justified, which seems to ignore the complicated reality of state tax systems altogether. This second concern suggests that a remand might be appropriate. However, another remand in this case did not appear to be a desirable outcome, especially because the Court would then need to give some guidance to the court of appeals as to how to take sufficient notice of the complexities of state taxes without having courts drown in these complexities.

Review of the facts and issues

Section 11501(b)(4) of the 4-R Act prohibits a state from “impos[ing] another tax that discriminates against a rail carrier.” Alabama imposes a general sales and use tax which is based on the value of the item purchased. When railroads purchase diesel fuel, they must pay the tax. However, two competing businesses are exempt from paying the same sales tax on their purchase of diesel fuel: motor carriers and interstate water carriers (that is, ships). The motor carriers pay a different tax, a per-gallon excise tax on their purchase of diesel fuels. The ships do not pay the excise tax; they have been exempt from the sales tax since 1959 because the state believed that the dormant Commerce Clause prevented it from imposing the tax.

The two questions before the Court are as follows:

1) When the statute forbids “discrimination,” to which comparison class should the lower courts look? Should the Court read in a comparison class from the immediately preceding subsections of the 4-R Act, or did Congress specifically not wish to include that limitation?

2) If a court finds facial discrimination, can a state defend it by pointing to the operation of its larger tax system?

First issue: Comparison class

As noted above, the Court seems inclined to agree with CSX that a taxpayer’s competitors constitute the appropriate comparison group.

Andrew Brasher, the solicitor general of Alabama, was immediately asked by Justice Antonin Scalia how the state could advocate reading in a limitation (commercial and industrial entities) from subsections (b)(1) through (3) of the statute when that limitation was not included in subsection (b)(4), which is the provision at issue. Furthermore, as a matter of policy and logic, Chief Justice John Roberts and Justices Samuel Alito, Stephen Breyer, and Anthony Kennedy all voiced doubt that a statute meant to protect the railroad industry, and which contained this broad catch-all provision, could be read only to protect the railroad industry from taxes imposed on it in contrast to business in general instead of from taxes imposed on the railroad industry versus its competitors.

Elaine Goldenberg, representing the United States, which filed an amicus brief in support of neither party, also disagreed with the state’s position on comparison class. The Justices allowed her to explain this position at some length. Among other points, she argued that the competitor class rule was administrable, as railroads would lose a case if they complained about dissimilar treatment of non-competitors.

Carter Phillips, representing CSX, did not dwell on this question – a good example, it would seem, of not talking past the sale.

Second issue: How to conduct the comparison

It is harder to assess how the Court will come down on the question of the method of comparison, and it seemed that several members of the Court were looking for a way to resolve the case without deciding this issue.

Justice Kagan was the first to turn Brasher to the comparison issue, noting that this is “a very hard inquiry to carry out and . . . the experience of courts, when they try to do this in commerce cases, shows that.” To the contrary, Brasher responded, the district court had conducted the analysis in “one paragraph.” All that is required is to “simply compare the taxes that we are imposing on diesel fuel for the truckers versus the taxes that the railroads are paying on the same item.” The district court performed this analysis and found that the railroads had suffered no harm.  Brasher did not get to go into much more detail about this argument before being asked about (1) whether the railroads could pay the motor fuel excise tax and (2) how to analyze the slightly different case of water transport.

But at the very end of Brasher’s first stint at the lectern, Justice Breyer did ask him a key question on the comparison issue, regarding expenditures. The district court found that, on the tax side, that the railroads actually paid a bit more in taxes, but Justice Breyer contended that CSX would likely counter, if the case were remanded to the Eleventh Circuit, that the extra tax is imposed on motor carriers “to support highways, and railroads don’t use highways.” Brasher, in response, repeated the argument of the district court, an argument later amplified by the United States: tracing tax dollars is not a tenable enterprise. Yes, the excise tax goes towards highways, but lots of other general taxes go towards highways – and the railroads also benefit from highways – and so how should courts determine where, on balance, the different industries come out?

It fell to Goldenberg, representing the United States, to argue at length as to how the lower courts could conduct the comparability analysis. Justice Alito raised the issue in a way suggestive of the quandary many of the Justices seem to feel about this case: “it’s easy for ­­ for us to say . . . go back and . . . do it, district court or court of appeals, but how would you do ­­ how would you resolve those issues?” Goldenberg’s first reply was to note that it “can’t possibly be correct” for the court of appeals to have done no analysis at all; she noted that the Supreme Court has done similar analysis under the dormant Commerce Clause. To this, Justice Kagan responded that those cases arguably make CSX’s point that the doctrine is unmanageable. Goldenberg replied that the Court has taken a very narrow view of when a tax is truly complementary to another tax and that this doctrine could be applied here.

Carter Phillips also faced some tough issues on the comparison issue. First, Justice Sotomayor challenged Phillips to defend his argument that how a state spent its tax dollars would be relevant to a general discriminatory tax analysis. Phillips responded that it is not the railroads’ burden to show that tax dollars are not being spent fairly; instead, the state created the tax discrimination and therefore has the burden to justify it.

Following up on this question, Justice Breyer asked a question that went to a tension in CSX’s position. On the one hand, as had just been maintained in response to Justice Sotomayor, it was CSX’s position that if the Court were to require a full consideration of other parts of a state’s tax system, then the purpose for which taxes are collected is relevant. However, CSX does not believe that the Court should require such an analysis at all. Instead, once a court finds a difference in tax treatment between a railroad and its competitors, that is the end of the matter – there is no need to attend to the purpose of either tax levy. And so Justice Breyer asked how a judge could assess whether there is discrimination without knowing where the money is to go: what if the trucking companies paid a special tax to aid railroads? This fact would seem relevant and Justice Breyer was concerned that the Eleventh Circuit did not give the state a chance to justify its facial discrimination. Justice Kagan also expressed concern about the lower court’s refusal to conduct any analysis. After all, Phillips has now argued on behalf of CSX that the approach advocated by the state and applied by the district court is “simpleminded,” but the Eleventh Circuit did not reach that conclusion.

Concluding thoughts

Most of the questions were asked by only a few Justices, which makes prognosticating even more difficult than usual. Certainly it seems that the Court is trying to find a way to respect the complicating balancing inherent to a state tax system without involving courts in unanswerable questions about tax incidence and without undermining the broad protection granted to railroads under the Section 11501(b)(4) of the 4-R Act.

If the Court wants to avoid trying to articulate a tax system analysis for the Eleventh Circuit to conduct on remand, oral argument provided at least three routes. None are perfect.

First, and right from the start of oral argument, there was a great deal of interest, especially from the Chief Justice, but also from Justices Scalia and Sotomayor, in the issue of water transport. Interstate water transport is exempt from the sales tax and does not pay the motor fuel excise tax. This therefore seems to be a facial discrimination that has no complementary tax justification. Resolving the case in CSX’s favor on this ground is made more complicated by the fact that (1) the district court did accept the justifications offered by the state and (2) the Eleventh Circuit did not address this argument.

Second, and in response to a question from Justice Sotomayor, Alabama’s Brasher repeated an argument, found in the state’s briefs, that – if the railroads wanted to – then the railroads could pay the excise tax instead of the sales tax. This would mean that they could opt for the exact same treatment as motor carriers and hence there would be no discrimination. Needless to say, CSX did not agree about this possibility in its brief, but this could be an issue that is remanded.

Finally, at the very end of Goldenberg’s time, and then again at the end of Phillips’s time, Justice Ginsburg brought up the decision of the district court as to the comparability of the different taxes. She asked if the United States agreed with how the district court did the analysis; Goldenberg answered that she did agree and that furthermore the two parties had agreed as to how the analysis would be done.  Phillips of course did not agree with the district court. If the Court were to agree with Goldenberg’s characterization of how the issue was resolved below, then that might be another way to resolve the case without going into detail as to how the analysis is to be conducted in all future cases.

But perhaps the Court will jump into the ring of fire, if only to be sure that this case – or one much like it – does not come back before it. And perhaps this will turn out not to hurt so much. It continues to seem a bit odd to this observer that CSX and its amici chose to argue against even the application of the complementary tax doctrine, which is a dormant Commerce Clause doctrine, to Section 11501(b)(4) of the 4-R Act. This is because, as the briefs note and as both Goldenberg and Phillips observed in oral argument, the reach of the modern doctrine is quite narrow and largely because of the very concerns with applying it that CSX is now arguing should prevent it being applied altogether. Indeed, one of the leading modern cases applying the doctrine narrowly –Fulton Corp. v. Faulkner – cites to the same influential article written by Walter Hellerstein in 1986 that Hellerstein now, as an amicus supporting CSX, cites as providing reason not to apply the complementary tax doctrine at all.   If the Court finds that the doctrine is relevant to the 4-R Act, then arguably it could give relatively clear instructions to the court of appeals as to how to proceed. Indeed, the Court could apply this analysis itself and finish with this case.