The justices ruled 7-2 against CSXT, which had challenged the state’s assessment of a 4% sales tax whenever the railroad purchased diesel fuel. The 11th U.S. Circuit Court of Appeals had ruled in favor of CSX, refusing to consider Alabama’s justification, but the Supreme Court reversed that decision, sending the case back to the appeals court so that the state can explain its rationale, as it relates to both the trucking and the barge industries.
CSX argued that the tax was illegal under a federal law barring taxes that discriminate against railroads. Alabama officials said the tax system was fair because truckers already pay a different 19-cent per gallon tax on diesel fuel.
Justice Antonin Scalia said the appeals court was wrong in refusing to consider Alabama’s justification. “We do not decide whether Alabama’s tax regime subjects railroads and their competitors to roughly equivalent taxes, and therefore justifies railroads’ different treatment,” Scalia said. “We leave that to the Eleventh Circuit to decide in the first instance.”
Justice Clarence Thomas filed a dissenting opinion, saying he would have reversed the appeals court and ruled in favor of Alabama. He was joined by Justice Ruth Bader Ginsburg.
Alabama and more than a dozen other states with similar tax schemes say they stand to lose millions in revenue if the railroad tax is declared illegal. Alabama said its loss would amount to about $15 million—$5 million less in annual sales tax revenue, much of which it claims is devoted to public schools, plus $10 million in retroactive sales tax refunds.
The Obama Administration argued that Alabama could justify the different treatment of railroads by showing that its competitors are subject to “alternative and comparable” state taxes not levied against railroads. The Justice Department had urged the Supreme Court to send the case back to the lower courts for that determination.