Federal Relief From State Tax Discrimination Against Railroads

By John Gillis, J.D., MBA, CPA, Wegner CPAs LLP, Madison, Wis.

Editor: Michael D. Koppel, CPA/PFS/CITP, MSA, MBA

State & Local Taxes

Approximately 500 railroads operate within the United States. In spite of the many virtues of railroad technology, by the mid-1960s the U.S. railroad industry had fallen on hard times. Between 1960 and 1980 most railroads suffered from poor profitability, deteriorating infrastructure, outdated rolling stock, and a lack of investor confidence.

Discriminatory taxation of railroad property and operations by state and local governments was cited as one of the many causes of the industry's decline. In 1976, President Gerald Ford signed the Railroad Revitalization and Regulatory Reform Act (4-R Act), P.L. 94-210, which included a tax antidiscrimination provision codified as 49 U.S.C. Section 28. In 1978, this provision was amended and recodified as 49 U.S.C. Section 11503. Finally, the provision was superficially amended and recodified in 1995 as 49 U.S.C. Section 11501. This item refers to the various provisions of the tax antidiscrimination law as currently codified. This item discusses almost exclusively federal case law, but a substantial body of state case law specifically applies to Section 11501.

The Substance of the Statute

Section 11501(b) prohibits states and their subdivisions (1) from assessing rail transportation property at values with a higher ratio of assessed value to true market value than the ratio of assessed value to market value of other commercial and industrial property in the same assessment jurisdiction; (2) from levying or collecting a tax on an assessment in violation of paragraph (1); (3) from levying or collecting a tax on railroad property at a rate that exceeds the rate on commercial and industrial property in the same jurisdiction; and (4) from imposing another tax that discriminates against a rail carrier providing transportation services.

Section 11501(a) defines an "assessment" as a valuation for property tax levies; an "assessment jurisdiction" as a geographical area in a state used to determine assessed values; "rail transportation property" as property used to carry out rail services subject to the jurisdiction of the Surface Transportation Board of the U.S. Department of Transportation; and "commercial and industrial property" as property, other than transportation, farming, and timber-growing property, devoted to a commercial or industrial use and subject to a property tax levy.

Procedure and Constitutionality

Section 11501(c), notwithstanding the Tax Injunction Act (28 U.S.C. §1341), empowers federal district courts to enjoin states and their subdivisions from violating the provisions of Section 11501(b). Relief can be granted for assessment violations only if the rail property assessment/market value ratio is 5% greater than the commercial and industrial assessment/market value ratio. Restitution of back taxes to an aggrieved plaintiff is not authorized (Atchison, Topeka and Santa Fe R. Co. v. Lennen, 732 F.2d 1495 (10th Cir. 1984)). Because intrastate railroads are subject to the jurisdiction of the Surface Transportation Board under 49 U.S.C. Section 10501(a)(2), equitable relief under Section 11501 can be sought by shortline intrastate railroads.

States have latitude to exempt whole classes of property from taxation without running the risk of an injunction under Section 11501 because exempted property is not part of the assessed property against which discrimination is measured under the law (see Department of Rev. of Ore. v. ACF Indus., Inc., 510 U.S. 332 (1994)). States may also impose fees on railroads that are not charged to other industries without running afoul of Section 11501 if those fees essentially cover the states' costs of regulating railroads (see Union Pacific R. Co. v. Oregon Pub. Util. Comm'n, 899 F.2d 854 (9th Cir. 1990)).

In general, the 11th Amendment to the U.S. Constitution bars federal courts from hearing suits brought against state governments. State governments have moved for dismissal of Section 11501 suits on 11th Amendment grounds. However, federal courts have upheld federal jurisdiction in these cases because discriminatory taxation violates the Equal Protection Clause of the 14th Amendment, and Section 5 of the 14th Amendment empowers Congress to enforce the 14th Amendment by appropriate legislation (see CSX Transp., Inc. v. New York State Office of Real Property Servs., 306 F.3d 87 (2d Cir. 2002)).

Standing to Sue

Railroads are not the only plaintiffs that can sue under Section 11501. Companies that lease specialty railroad cars to shippers can bring an action to enjoin state agencies from collecting discriminatory property taxes on their leased equipment (see ACF Indus. v. California State Bd. of Equalization, 42 F.3d 1286 (9th Cir. 1994)). It is unnecessary for a plaintiff to exhaust its state administrative remedies before bringing suit under 49 U.S.C. Section 11501 (see Union Carbide Corp. v. State Bd. of Tax Comm'rs of Ind., 161 F.R.D. 359 (S.D. Ind. 1993)).

De Jure and De Facto Discrimination

Federal courts have systematically enjoined state taxes on rail property that were facially discriminatory against railroads and their property (see Union Pacific R. Co. v. State Tax Comm'n of Utah, 716 F. Supp. 543 (D. Utah 1988), and General Am. Transp. Co. v. Kentucky, 791 F.2d 38 (6th Cir. 1986)). The more difficult questions arise in cases where state appraisals and practices result in arguably discriminatory effects against the rail industry.

Oversight of State Appraisal and Assessment

Some federal courts had taken the position that the methodology states employed to appraise railroad property could not be challenged by the railroads, provided the methodology was rational and not adopted to discriminate against railroad property. However, the U.S. Supreme Court in CSX Transp. Inc. v. Georgia State Bd. of Equalization, 552 U.S. 9 (2007), held that the railroads could challenge the states' appraisal methods under the 4-R Act. For a unanimous Court, Chief Justice John Roberts wrote,

We do not see how a court can go about determining true market value if it may not look behind the State's choice of valuation methods. Georgia insists there is a clear and important distinction between valuation methodologies and their application. As the State would have it, the statute allows courts to question only the latter. We find no distinction between method and application in the language of the Act, and see no passage limiting district court fact-finding in the manner the State proposes. [CSX Transp., 552 U.S. at 9.]

Federal district courts have uniformly held that the state as a whole was the proper assessment jurisdiction to compare railroad appraisals and assessments with commercial and industrial appraisals and assessments. In Burlington Northern R. Co. v. Bair, 815 F. Supp. 1223 (S.D. Iowa 1993), the court wrote,

A comparison of the assessment ratio for commercial and industrial property throughout the state with [Burlington Northern's] true market value would tend to be more reliable because of the greater number of parcels involved. In addition, all the railroads that run through Iowa would be subject to the same assessment ratio for commercial and industrial property, thus eliminating any competitive advantage or disadvantage which might result from possible uneven assessments in different counties. [Burlington Northern, 815 F. Supp. at 1241.]

Another Tax That Discriminates Against a Rail Carrier

Section 11501(b)(4) prohibits states from imposing any other tax that discriminates against rail carriers providing transportation. This has generally been construed to ban all types of taxes that burden the railroads more than other industries, especially state tax schemes that benefit other modes of transportation, such as airlines, trucks, or barges, at the expense of the railroad industry.

In Atchison, Topeka and Santa Fe R. Co. v. Bair, 338 N.W.2d 338 (Iowa 1983), the Iowa Supreme Court, citing what is now Section 11501, struck down an Iowa fuel tax imposed only on railroads that was dedicated to propping up the most financially troubled railroads operating in Iowa. The court first dismissed the state's argument that the only purpose of Section 11501 was to invalidate discriminatory property taxes. The court then focused on the practicalities of the intended use of the funds, such as refurbishing major portions of the bankrupt Rock Island Railroad, and that other modes of transportation would not be subject to the tax.

In Burlington Northern R. Co. v. Triplett, 682 F. Supp. 443 (D. Minn. 1988), the federal district court in Minnesota enjoined the Minnesota Department of Revenue from collecting the state's fuel tax as it was applied to railroads. The court based its decision on (1) the fact that an equal tax was applied to the truck and barge industry; (2) the taxes collected from the trucking industry were spent on the trucking industry's roadbed; and (3) the railroad industry maintained its own right of way and did not benefit at all from the funds collected.

On the other hand, in Midwest Railcar Repair, Inc. v. South Dakota Dep't of Rev., 659 F.3d 664 (8th Cir. 2011), the Eighth Circuit seems to have ignored economic reality and the purpose of Section 11501 by upholding a tax that burdened railroads but not airlines. Midwest's complaint was that South Dakota's imposition of a use tax on the tangible personal property Midwest used to repair railcars, while exempting tangible personal property used to repair aircraft, violated Section 11501. The tax was upheld because the plaintiff was not sufficiently connected to the railroad industry. The decision noted that successful nonrailroad plaintiffs, such as rail car leasing companies, in prior cases were held to fall within the protection of Section 11501 because they "were in effect adjuncts, if indeed not corporate subsidiaries, of the railroads to which they provided rail cars, rather than unaffiliated enterprises that merely provided railcar repair services" (Midwest Railcar, 659 F.3d at 670).

Vigilance Against Discrimination

Railroads and their suppliers should remain on guard against state and local tax discrimination with respect to all forms of state tax law and procedure. It may be easy to identify and halt tax schemes that facially discriminate against the rail industry. However, de facto discrimination can be discovered and enjoined only with great effort.


Michael Koppel is with Gray, Gray & Gray LLP in Canton, Mass.

For additional information about these items, contact Mr. Koppel at 781-407-0300 or mkoppel@gggcpas.com.

Unless otherwise noted, contributors are members of or associated with CPAmerica International.

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