[PUBLISH]

IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT

________________________ No. 12

- 14611

________________________ D.C. Docket No. 2:08

- cv - 00655

- AKK

CSX TRANSPORTATION, INC., Plaintiff

- Appellant,

versus ALABAMA DEPARTMENT OF REVENUE, COMMISSIONER, ALABAMA DEPARTMENT OF REVENUE, Defendants

- Appellees.

________________________ Appeal from the United States District Court for the Northern Di strict of Alabama

________________________ (July 1, 2013) Case: 12-14611 Date Filed: 07/01/2013 Page: 1 of 282 Before WILSON and COX, Circuit Judges, and BOWEN, * District Judge. WILSON, Circuit Judge: The State of Alabama (State) imposes a 4% sales tax on the gross receipts of retail businesses, and a 4% use tax on the storage, use, or consumption of tangible personal property. See Ala. Code §§ 40

- 23

- 2(1),

- 61(a). 1 Appellant CSX Transportation, Inc. (CSX), an interstate rail carrier, pays the 4% sales tax whenever it purchases diesel fuel in the State. CSX’s main competitors in the
State

— interstate motor and water carriers

— do not. In this appeal, we must decide whether exempting CSX’s main competitors from the State’s sales tax is discriminatory as to rail carriers in violation of the Railroad Revitaliz ation and Regulation Reform Act of 1976 (4

- R Act), 49 U.S.C. § 11501(b)(4). We conclude that the sales tax is indeed discriminatory and that the State has not offered a “sufficient justification” for exempting CSX’s competitors. See CSX Transp., Inc.

v. Ala. Dep’t of Revenue ( CSX II ),

––– U.S.

––– , 131 S. Ct. 1101, 1109 n.8 (2011) (“Whether the railroad will prevail .

. . depends on whether the State offers a sufficient justification for declining to provide the exemption at issue to rail carriers.”). Ac cordingly, we reverse.

* Honorable Dudley H. Bowen, Jr., United States District Judge for the Southern District of Georgia, sitting by designation. 1 For purposes of clarity, both taxes wi ll be referred to as the “sales tax. ” Case: 12-14611 Date Filed: 07/01/2013 Page: 2 of 283 I. BACKGROUND Rail carriers, motor carriers, and water carriers all compete for the shipment of freight in interstate commerce. Although all three purchase diesel fuel toward that end, the State taxes each competitor’s purchases dif ferently: water carriers pay no tax whatsoever on their diesel fuel purchases, see Ala. Code § 40

- 23

- 4(a)(10); rail carriers pay the State’s 4% sales tax; and motor carriers pay an excise tax of 19¢ per gallon, see Alabama Terminal Excise Tax Act (fuel ex cise tax), 2011 Ala. Act 565 (effective October 2012). 2
The State distributes the revenue from the fuel excise tax as follows: for every gallon sold, 13¢ goes to the Alabama Department of Transportation for the construction, repair, maintenance, and oper ation of public roads and bridges, and the payment of principal and interest on highway bonds; the remaining 6¢ goes to cities and counties for the construction and maintenance of roads and bridges, and to the Department of Transportation for general highw ay purposes. Revenue from the sales tax, on the other hand, goes toward a general revenue fund. See Ala. Code §§ 40

- 23

- 35, 40

- 23

- 85.

2 During the majority of this litigation, the State codified its fuel excise tax at section 40

- 17

- 2 of the Alabama Code. In October 2012, the State repealed that section and modified its motor fuel tax scheme. See Alabama Terminal Excise Tax Act, 2011 Ala . Act 565 (effective October 2012). The new statute changes the timing of the tax’s imposition, but the amount of the excise tax (19¢/gallon of diesel fuel) remains the same, and it still exempts motor carriers from paying the State’s sales tax on diesel

- fuel purchases. For purposes of clarity, both taxes will be referred to as the “fuel excise tax.”

Case: 12-14611 Date Filed: 07/01/2013 Page: 3 of 284 It is axiomatic that a state has broad discretion in the exercise of its taxing
power. See Lehnhausen v. Lake Shore Auto Parts Co. , 410 U.S. 356, 359, 93
S. Ct. 1001, 1003 (1973); Weissinger v. White , 733 F.2d 802, 805 (11th Cir. 1984). That discretion will be reined in, however, where it offends a “specific federal right.” Lehnhausen , 410 U.S. at 359, 93 S. Ct. at 1003. At issue here are the federal rights Congress has afforded rail carriers pursuant to the 4

- R Act. That Act provides that a state may not: (1) Assess rail transportation property at a value that has a higher ratio to the true market value of the rail tr ansportation 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 asse ssment 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 r ail carrier providing transportation subject to the jurisdiction of the Board under this part. 49 U.S.C. § 11501(b) (emphasis added). Enacted to “restore the financial stability of the railway system of the United States,” the 4

- R Act “target[s] state and local taxation schemes that discriminate against rail carriers.” CSX II , 131 S. Ct. at 1105 (internal quotation marks

Case: 12-14611 Date Filed: 07/01/2013 Page: 4 of 285 omitted). CSX contends that the State’s sales tax discriminates against it in violation of § 11501(b)(4) because CSX’s main competit ors do not pay the sales tax when they purchase diesel fuel, giving them a competitive advantage over
CSX. CSX filed this lawsuit against Alabama’s Department of Revenue and its Commissioner in 2008. After the district court dismissed the complaint, we af firmed the dismissal based on our precedent in Norfolk Southern Railroad Co. v. Alabama Department of Revenue , 550 F.3d 1306, 1316 (11th Cir. 2008), which established the rule that a railroad could not challenge its competitors’ exemptions from a sales tax as discriminatory under the 4

- R Act. See CSX Transp., Inc. v. Ala. Dep’t of Revenue ( CSX I ), 350 F. App’x 318, 319 (11th Cir. 2009) (per curiam). CSX appealed, and the Supreme Court granted certiorari, overruled our decision in Norfolk , and held that “C SX may challenge Alabama’s sales and use taxes as tax[es] that discriminat[e] against rail carrier[s] under § 11501(b)(4).” CSX II , 131 S. Ct. at 1114 (alterations in original) (internal quotation marks omitted). The Court appeared to impliedly assume t hat the State’s exemptions for CSX’s competitors would be discriminatory unless “the State offers a sufficient justification for declining to provide the exemption at issue to rail carriers.” Id. at 1109 n.8. Case: 12-14611 Date Filed: 07/01/2013 Page: 5 of 286 After we remanded the case back to the distr ict court, the court conducted a bench trial and issued an order holding that the State’s sales tax did not discriminate against CSX in violation of § 11501(b)(4). See CSX Transp. Inc. v. Ala. Dep’t of Revenue ( CSX III ), 892 F. Supp. 2d 1300, 1317 (N.D. A la. 2012). The district court reasoned that because the State’s motor carriers paid a roughly equivalent amount in taxes pursuant to the State’s fuel excise tax, the motor carriers’ exemption from the sales tax was not discriminatory. Id. at 1313 (findin g that “the tax rate imposed per gallon of diesel fuel for rail carriers and motor carriers is essentially the same”). As to the water carriers, the district court held that CSX had offered “no evidence regarding the purported discriminatory effect as it relates to water carriers.” Id. at 1316. The district court dismissed the matter, and this appeal followed.
II. ANALYSIS We review the district court’s application of the 4

- R Act de novo, see Alphamed, Inc. v. B. Braun Med., Inc. , 367 F.3d 1280, 1285 (11th Cir. 2004), taking special heed of the guidance provided by the Supreme Court in CSX II

. “‘Discrimination,’” the Court wrote, “‘is the failure to treat all persons equally when no reasonable distinction can be found between those favored and those not fa vored.’” CSX II , 131 S. Ct. at 1108 (quoting Black’s Law Dictionary 534 (9th ed. 2009)). For example, “[t]o charge one group of taxpayers a 2% rate and

Case: 12-14611 Date Filed: 07/01/2013 Page: 6 of 287 another group a 4% rate, if the groups are the same in all relevant respects, is to discriminate again st the latter.” Id. A tax exemption is analogous because the “State takes the favored group’s rate down to 0%.” Id. Therefore, CSX II ’s holding suggests that a tax exemption disfavoring a rail carrier creates a rebuttable presumption of discrimination, unless the State can “offer[] a sufficient justification for declining to provide the exemption at issue to rail carriers.” Id. at 1110 n.8. A. Comparison Class Before we address whether the exemption at issue is discriminatory, there remains a first

- orde r question that the Court left untouched and has yet to be answered in this circuit: against what do we compare the railroads? The matter is one of scope, as any model of discrimination requires a fixed set of participants. If we compare CSX to all of th e State’s taxpayers, it is no worse off because most taxpayers pay the sales tax when they purchase diesel fuel. On the other hand, if we compare CSX to motor and water carriers, questions of favorable treatment arise because they do not pay the sales tax . Among our sister circuits there are essentially two camps: the functional approach and the competitive approach. We acknowledge that the question of the proper comparison class has not been the central inquiry of this appeal. In the proceedings below , the district court and the parties adopted the competitive approach, assuming that CSX must be

Case: 12-14611 Date Filed: 07/01/2013 Page: 7 of 288 compared with only motor and water carriers. Although we ultimately conclude that the competitive approach is appropriate in this circumstance, we are obliged to say a few words concerning the diversity of opinions on this matter. Employing the functional approach, the Seventh and Ninth Circuits have compared the rail carriers to other “commercial and industrial” taxpayers based on § 11501(b)(4)’s three precedi ng subsections, which all contain the phrase “commercial and industrial.” See Kansas City S. Ry. Co. v. Koeller , 653 F.3d 496, 508 (7th Cir.), cert. denied , 132 S. Ct. 855 (2011); Atchison, Topeka & Santa Fe Ry. Co. v. Arizona , 78 F.3d 438, 441 (9th Cir. 1999). For example, in Koeller the Seventh Circuit considered whether an Illinois subdivision’s method of calculating taxes discriminated against railroads in violation of § 11501(b)(4). Seven hundred taxpayers comprised the tax base of the subdivision: eight of the 700 taxpayers were railroads, pipelines, and utilities (RPU properties). Koeller , 653 F.3d at 500. Of the remaining 692 taxpayers, 14 conducted commercial and industrial operations, several were residents, and the vast majority used the land for agricultural purposes. Id. After severe floods and an increase in the price of diesel fuel sent the subdivision into a budgetary crisis, its commissioners increased the annual maintenance assessment

— which for all intents and purposes was a “tax.” Id. Although the majority of the subdivision’s landowners saw modest hikes in their annual assessments, the RPU properties saw “astronomical increase[s].” Id.

Case: 12-14611 Date Filed: 07/01/2013 Page: 8 of 289 at 502. Norfolk Southern’s assessment, for instance, jumped a whopping 8,300% in one year, fro m $1,126 to $93,920. Id. Before reaching the question of whether the tax was discriminatory, the Seventh Circuit acknowledged the different comparison

- class options at its disposal. The court opted for the functional approach, in part because of “the need to read subsection (b)(4) in light of the approach taken in the first three subsections of the 4

- R Act, which all directly or indirectly look to other commercial and industrial property.” Id. at 509 (internal quotation marks omitted). Yet the
Sevent h Circuit also recognized that “there are no competitors of the railroads

— motor carriers, air carriers, barges, [or] Great Lakes ships

— that [the subdivision] is trying to tax.” Id. (alteration in original) (emphasis in original) (internal quotation marks omitted). Therefore, opting for the competitive approach in Koeller would have yielded the bizarre result that a tax singularly raising a rail carrier’s tax rate by 4,800% was not discriminatory. With that in mind, the court compared the rail carriers wi th “the 14 additional commercial and industrial taxpayers” who did not suffer such a dramatic increase in their tax obligations, and held that the tax was discriminatory. Id. at 509

– 10. Contrarily, the Eighth Circuit has endorsed the narrower “competitive approach” model, at least when considering a state’s sales tax. See Union Pac. R.R. Co. v. Minn. Dep’t of Revenue , 507 F.3d 693, 695 (8th Cir. 2007); Burlington

Case: 12-14611 Date Filed: 07/01/2013 Page: 9 of 2810 N., Santa Fe Ry. Co. v. Lohman , 193 F.3d 984, 986 (8th Cir. 1999) (choosing the competitive m odel, but acknowledging that “the comparison class should be appropriate to the type of tax and discrimination challenged in a particular case” (emphasis added)). In Lohman , the Eighth Circuit addressed a scenario identical to the one before us: whether a n exemption to Missouri’s sales tax caused the sales tax to violate § 11501(b)(4). See Lohman , 193 F.3d at 984. In that case too, motor carriers paid a fuel excise tax rather than a sales tax. Id. at 985. The court ultimately held that “the proper comp arison class for Missouri sales and use taxes is the competitive mode.” Id. at 986. Paying homage to the 4

- R Act’s broad purpose of restoring the railroads’ financial stability, the court emphasized that “[s]tability cannot be restored without making the railroads competitive.” Id. Furthermore, the court continued, if Congress “had wanted [§ 11501(b)(4)] to have the same comparison class as the property tax subsections, and none other, it would have written it that way.” Id. ; see also Atchison , 78 F.3d at 445 (Nielsen, J., dissenting) (“If Congress wanted [§ 11501(b)(4)] to share the same broad comparison class as the three preceding subsections, and none other, it would have said so. It did not.”). This result made sense, the court reasoned, because a broad comparison class in that instance would have put the railroads “at a competitive disadvantage.” Lohman , 193 F.3d at 986

.

Case: 12-14611 Date Filed: 07/01/2013 Page: 10 of 2811 We have carefully studied the different approaches available to us, and we conclude that in light of the 4

- R Act’s purpose of ensuring “financial stability” for rail carriers, the competitive model best serves that goal in the context of a state’s sales tax on diesel fuel. 3 Moreover, CSX and the State stipulated, and the district court agreed, that the proper comparison class f or this case was CSX’s competitors. 4 Having determined that the appropriate comparison class is CSX’s competitors, we turn to the question of whether the sales tax is discriminatory.
B. Discrimination As noted earlier, the Supreme Court held that tax exemp tions can be discriminatory under the 4

- R Act. CSX II , 131 S. Ct. at 1114. Given that we have opted for a competitive model in this case, and CSX’s competitors do not pay the State’s sales tax, we hold that CSX has established a prima facie case of

3 We therefore decline to adopt Justices Thomas’s dissent in CSX II , which would have held that the appropriate comparison class in all 4

- R Act discriminatio n cases is all commercial and industrial taxpayers. See CSX II , 131 S. Ct. at 1115 (Thomas, J., dissenting) (“I would hold that, to violate § 11501(b)(4), a tax exemption scheme must target or single out railroads by comparison to general commercial and i ndustrial taxpayers.”). While this comparison class might be appropriate in certain situations, like Koeller , it fails to address discriminatory taxes that place rail carriers at a significant disadvantage vis

- à

- vis their competitors. 4 Our approach cre ates tension with the Seventh Circuit’s holding in Koeller only to the extent that Koeller established a bright

- line rule for § 11501(b)(4) cases. See Koeller , 653 F.3d at 509 (“Given our preference for clarity, however, rather than an ill

- defined ‘all th e circumstances’ type of test, we are content for now to endorse reference to other commercial and industrial users.”). While we recognize the virtues of bright

- line rules, § 11501(b)(4) is a broad statute, designed to strike down all discriminatory taxes that place rail carriers at a competitive disadvantage

— and Congress “specifically chose to omit any reference to a co mparison class in subsection [(b)(4)] .” Atchison , 78 F.3d at 445 (Nielsen, J., dissenting). Thus, while a malleable approach might not lend itself to the most efficient application, the language and purpose of § 11501(b)(4) require that “the comparison class should be appropriate to the type of tax and discrimination challenged in a particular case.” Lohman , 193 F.3d at 986

.

Case: 12-14611 Date Filed: 07/01/2013 Page: 11 of 2812 discr imination. Quite simply, the sales tax overburdens the rail carriers because its competitors do not pay it. It therefore becomes the State’s burden to justify its discriminatory tax. See id. at 1110 n.8. The State devotes the majority of its brief to de fending the motor carriers’ exemption to the sales tax on the ground that the motor carriers pay a roughly equivalent amount of taxes under the fuel excise tax. This argument misses the mark. Rather than framing the tax in question at its highest level o f abstraction as “all the taxes paid on diesel

- fuel purchases,” we agree with the Eighth Circuit that “we look only at the sales and use tax with respect to fuel to see if discrimination has occurred.” Union Pacific , 507 F.3d at 695 (internal quotation ma rks omitted). We are persuaded that even though in some years

— depending on the price of diesel fuel

— the State’s taxing arrangement might yield a fair result, “the actual fairness of those arrangements is too difficult and expensive to evaluate.” Lohman , 193 F.3d at 986 (quoting Trailer Train Co. v. State Tax Comm’n , 929 F.3d 1300, 1303 (8th Cir. 1991)). This construction of the 4

- R Act finds support in the Act’s text. Section 11501(b)(4) prohibits the states from “impos[ing] another tax that discriminat es against a rail carrier,” but the statute hardly “suggests that an individually discriminatory tax should be assessed for fairness against the entire tax structure of the state.” Kansas City S. Ry. v. McNamara , 817 F.2d 368, 377 (5th Cir. 1987). If

Case: 12-14611 Date Filed: 07/01/2013 Page: 12 of 2813 the 4

- R Act required us to examine the tax regime for an entire commodity, it would have said so rather than speaking in the singular about “another tax.” Like the Eighth Circuit in Lohman , we find the Fifth Circuit’s well

- reasoned opinion in
McNamara to spe ak directly on this issue.
In McNamara , the Fifth Circuit struck down a Louisiana tax imposed on transportation and communication utilities, which included rail carriers. Id. at 370. Using a commercial and industrial taxpayer comparison class, the Fifth Circuit held that the tax was discriminatory, and that Louisiana could not justify it based on the fact that other commercial and industrial taxpayers paid a roughly equivalent amount in sales and use taxes. Id. at 377. Refusing to consider the sales tax, the Fifth Circuit held that “[d]etermining the intrinsic economic fairness of a tax system to a particular taxpayer is a paradigm of the kind of polycentric problem for which courts are ill

- suited.” Id.
McNamara provided the rationale for the Eighth Circuit in Lohman and its progeny to hold that courts should not evaluate a state’s sales tax against other taxes in the state’s code. See Lohman , 193 F.3d at 986. Here, the district court below rejected the Eighth Circuit’s reliance on McNamara because McNamara employed the functional approach rathe r than the narrower competitive approach, and when the comparison class is thereby “drastically reduced” it does not “impose substantial theoretical and practical difficulties on a court.” CSX III , 892 F. Supp.

Case: 12-14611 Date Filed: 07/01/2013 Page: 13 of 2814 2d at 1311. Because the comparison class ha s been narrowed, the dissent assures us, federal courts would not engage in “such a searching, time

- consuming, expensive, and impracticable analysis.” Dissenting Op. at 6. We disagree. Although the class of taxpayers might have been narrower had we opt ed for the functional approach, the “theoretical difficult[ies]” that concerned the
McNamara court would remain. McNamara , 817 F.2d at 377. We would still be forced to decide whether a state’s fixed

- percentage sales tax for one market participant is roug hly equivalent to an ad valorem excise tax for another market participant. In addition, the authoritative value of that assessment would ebb and flow with every oscillation in diesel fuel’s market value

— we would operate for some months, perhaps even years , under the fiction that the two taxes are equivalent. 5 Id. (“Furthermore, there is no reason in principle why the railroads could not sue for such a judicial assessment each year (or for each tax bill) because the dynamic nature of any state’s economy wi ll alter the relative benefits and burdens of its tax system from moment to moment.” (emphasis in original)). And if the price of diesel fuel causes rail carriers to bear a significantly larger tax burden than its competitors, at what point must we revers e course and hold that the

5 The dissent also points out that under today’s holding, “the sales and use taxes would discriminate against a rail carrier even if its competitors paid four times as much tax as the rail carrier for the same commodity.” Dissenting Op. at 7

– 8. But if we were to adopt the dissent’s approach and accept the State’s justification for its discriminatory tax

— that motor carriers pay some other commodity tax, that is sometimes equivalent

— the reverse would also be true. That is to say, the sales and use tax e xemption would not discriminate against a rail carrier even if its competitors paid four times less in tax as the rail carrier for the same commodity.

Case: 12-14611 Date Filed: 07/01/2013 Page: 14 of 2815 sales tax is discriminatory? After one year of inequity? Three? 6 To adjust the comparison class makes little difference, and it behooves us to bear in mind the words of the Supreme Court: [C]ourts as institutions are poorly eq uipped to evaluate with precision the relative burdens of various methods of taxation. The complexities of factual economic proof always present a certain potential for error, and courts have little familiarity with the process of evaluating the relative economic burden of taxes. Minneapolis Star & Tribune Co. v. Minn. Comm’r of Revenue , 460 U.S. 575, 589

– 90, 103 S. Ct. 1365, 1374 (1983) (footnote omitted). We therefore decline to undertake the Sisyphean burden of evaluating the fairness of the State’s overall tax structure in order to determine whether a single tax exemption causes a state’s sales tax to be discriminatory. This case, then, becomes much simpler than it would appear at first blush. Rail carriers pay the State’s sales tax

— motor and wate r carriers do not. It is not a sufficient justification for the State to counter that its tax code will ultimately level the playing field. Even if it were true that the exemptions at issue were not enacted to unfavorably target rail carriers, our decis ion would be the same because discrimination under § 11501(b)(4) “can be shown even if there is no direct

6 This is to say nothing of the added value that the motor carriers receive from being able to accurate ly forecast their year - to

- year tax burden by virtue of being subject to a fixed excise tax rather than a variable ad valorem tax.

Case: 12-14611 Date Filed: 07/01/2013 Page: 15 of 2816 evidence of targeting,” as long as the tax imposes a proportionately heavier burden on rail carriers. Koeller , 653 F.3d at 510. Here, the rail carri ers’ main competitors have received favorable treatment: tax exemptions. In response, the State offers no “reasonable distinctions between the favored and the disfavored”; therefore it has failed to carry the burden set forth by the Supreme Court in CSX I I

. Id. In CSX II , the Supreme Court queried the State: “Can you justify why motor and water carriers are taxed differently than rail carriers?” The State responds: “Motor and water carriers are taxed differently because they are taxed differently.” But the Supreme Court demanded a justification from the State, not a Zen proverb. Section 11501(b)(4) does not allow us to sit idly by and take the State at its word that, in the long run, its tax code will burden CSX no more than its competitors. Moreover, no one can seriously dispute that the water carriers, who pay not a cent of tax on diesel fuel, are the beneficiaries of a discriminatory tax regime.
III. CONCLUSION In short, after establishing a comparison class of competitors and showing that its competi tors did not pay the sales tax on diesel fuel purchases, CSX made a prima facie showing of discrimination under § 11501(b)(4). The burden shifted to the State to provide a “sufficient justification” for the exemptions. It did not. We reverse the distric t court, hold that the State’s sales tax violates the 4

- R Act, and

Case: 12-14611 Date Filed: 07/01/2013 Page: 16 of 2817 remand to the district court with instructions to enter declaratory and injunctive relief in favor of CSX consistent with this opinion. REVERSED AND REMANDED. Case: 12-14611 Date Filed: 07/01/2013 Page: 17 of 2818 COX, Circuit Judge, dissenting: I dissent. Though I agree that the appropriate comparison class consists of the stipulated competitors, I do not agree that a tax exemption for interstate motor carriers discriminates against interstate rail carriers when motor carriers in fact carry a similar or heavier tax burden for purchase of the same commodity. As for the tax exemption for interstate water carriers, I conclude that the district court improperly placed the burden on CSX to provide evidence of the exemption’s discriminatory effect. I would affirm the district court’s ruling to the extent that it finds no violation of the 4

- R Act with re spect to the motor carriers’ exemption but remand for reconsideration as to interstate water carriers. The Railroad Revitalization and Regulatory Reform Act of 1976 (the 4

- R Act) prohibits a state taxing authority from taking certain actions that place u nfair burdens on railroads. The statute’s first three subsections bar a state from making unfair assessments on railroad property, collecting a tax on such unfair assessments, and collecting an ad valorem property tax at a rate greater than that imposed o n other “commercial and industrial property,” 49 U.S.C. § 11501(b)(1)

– (3). 1 At issue in this case is § 11501(b)(4), which prohibits a state and its

1 Section 11501(b)(1)

– (3) reads: (b) The following acts unreasonably burden and discriminate against interstate commerce, a nd a State, subdivision of a State, or authority acting for a State or subdivision of a State may not do any of them: Case: 12-14611 Date Filed: 07/01/2013 Page: 18 of 2819 subdivisions from “[i]mpos[ing] another tax that discriminates against a rail carrier.” Id. § 11501(b)(4).
We use a two

- step inquiry to evaluate a claim of discrimination in violation of § 11501(b)(4). See CSX Transp., Inc. v. Ala. Dep’t of Revenue , 131 S. Ct. 1101, 1109 n.8 (2011) ( CSX II ). The plaintiff railroad (CSX here) has the initial burden to establ ish a prima facie case of discriminatory tax treatment. If the plaintiff does so, the burden shifts to the defendant taxing authority (the State here) to establish that the differential tax treatment is justified and does not discriminate against the rail road. Id. (“Whether the railroad will prevail

— that is, whether it can prove the alleged discrimination

— depends on whether the State offers a sufficient justification for declining to provide the exemption at issue to rail carriers.”). If the defendant ca nnot meet its burden, the tax treatment violates § 11501(b)(4). The parties in this case have agreed that CSX’s competitors are interstate motor carriers (“on

- highway motor carriers of property in interstate commerce”) and interstate water carriers (“carr iers of property in interstate commerce by ships,

(1) Assess rail transportation property at a value that has a higher ratio to the true market value of the rail transportation property t han 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 m ade 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. Case: 12-14611 Date Filed: 07/01/2013 Page: 19 of 2820 barges and other vessels”). (Dkt. 63 ¶ 10, at 3.) I proceed through the two

- step analysis first with respect to motor carriers and then with respect to water carriers. A. Motor Carriers Like the majorit y, I have no doubt that CSX has established a prima facie § 11501(b)(4) violation by showing that the sales and use taxes apply to rail carriers but exempt motor carriers. (Op. at 11

– 12.) Where I disagree is in the second step of the analysis: whether th e State has justified the differential
treatment. The State explains the exemption by pointing out that motor carriers must pay the 19 ¢ state excise tax per gallon of fuel they purchase. Rail carriers do not pay this tax. According to the State’s argume nt, the fact that rail carriers are not subject to the excise tax justifies the differential treatment in the sales and use taxes, and the sales and use taxes do not discriminate against rail carriers. The district court agreed with the State. CSX Transp ., Inc. v. Ala. Dep’t of
Revenue , 892 F. Supp. 2d 1300, 1312

– 14 (N.D. Ala. 2012) ( CSX III ). The court compared the state sales and use taxes (measured in terms of what rail carriers paid per gallon of fuel, including the 4% tax) to the state motor

- fuel ex cise tax (measured in terms of what motor carriers paid per gallon, including the 19 ¢

- per gallon tax) assessed from January 2007 to December 2009. Id. at 1313. The court found that “motor carriers actually pa[id] a higher” state tax. Id. Even adding to

Case: 12-14611 Date Filed: 07/01/2013 Page: 20 of 2821 the comparison the additional sales and use taxes imposed on rail carriers by counties and cities in Alabama, motor carriers and rail carriers paid “substantially similar” taxes during the period in question. Id. 2 And that comparison failed to incorpora te the motor

- fuel excise taxes assessed by counties and cities on motor carriers, which ranged from 1 ¢ to 6¢ added to the state excise tax imposed on motor carriers. Id. In sum, the district court found, the taxes paid by rail carriers and motor carriers for fuel was “essentially the same.” Id. Because its findings are not challenged on appeal, I accept them as accurate. None of these findings are relevant, CSX argues, because the State cannot justify differential treatment by showing that the entities that are exempt from sales and use taxes are subjected to a separate tax not imposed on rail carriers. The majority agrees with CSX’s position. It refuses to compare the two taxes, regardless of the numbers the taxing arrangement yields. ( See Op. at 12 .) But based on my reading of the Supreme Court’s opinion in CSX II and case law in other circuits, I find this position both unsupported and contrary to Congress’s intent. CSX’s argument and the majority opinion follow the approach taken by the Eighth Ci rcuit in Union Pacific Railroad Co. v. Minnesota Department of Revenue ,

2 I ass ume that sales and use taxes imposed by cities and counties are at issue in this case. Given that CSX named no city or county as a defendant, this assumption may not be true; I hesitate to agree that a city or county can be enjoined from imposing a tax wh en it has not been named as a party. But even if they can, my conclusion remains the same.

Case: 12-14611 Date Filed: 07/01/2013 Page: 21 of 2822 507 F.3d 693 (8th Cir. 2007). There, the Eighth Circuit considered Minnesota’s generally applicable sales tax on railroad fuel that exempted two primary competitors (motor carriers and air carriers) because they paid a separate excise tax, see id. at 694

— a scenario nearly identical to the one confronting us here. Based on its earlier opinion in Burlington Northern, Santa Fe Railway Co. v. Lohman , 193 F.3d 984 (8th Cir. 1999), the Eighth Circuit refused to consider any other tax as a justification for the facial discrimination. See Union Pac. , 507 F.3d at 695 (“[W]e ‘look only at the sales and use tax with respect to fuel to see if discrimination has occurred.’” (quoting Lohman , 193 F.3d at 986)). But as the district court recognized, see CSX III , 892 F . Supp. 2d at 1310

– 11, the Eighth Circuit’s simplistic approach to evaluating challenges under § 11501(b)(4) incorrectly relies on distinguishable case law. Lohman , on which Union Pacific rests, refuses to consider other taxes as justification for faciall y discriminatory tax treatment. 193 F.3d at 986. The Lohman court relies on two cases for the proposition that the fairness of this tax scheme is “too difficult and expensive to evaluate,” id. : the Fifth Circuit’s opinion in Kansas City Southern Railway Co. v. McNamara , 817 F.2d 368 (5th Cir. 1987), and the Eighth Circuit’s own opinion in Trailer Train Co. v. State Tax Commission , 929 F.2d 1300 (8th Cir.

Case: 12-14611 Date Filed: 07/01/2013 Page: 22 of 2823 1991). 3 But both McNamara and Trailer Train address a materially distinct fact pattern, and their ana lyses are unsuitable for this case.
In McNamara and Trailer Train , the court considered a different kind of
tax

— a specific tax that “targeted” railroads for differential treatment, 4 rather than a general tax that exempted railroads’ competitors. In each case, the court decided that the appropriate comparison class consisted of all commercial and industrial taxpayers . In each case, the state argued that the tax did not discriminate against railroads because the state’s tax structure, as a whole , treated r ailroads similarly to every other commercial and industrial taxpayer. And in each case, the court refused to entertain such a searching, time

- consuming, expensive, and impracticable analysis. See Trailer Train , 929 F.2d at 1302

– 03; McNamara , 817 F.2d at 377

– 78. Here, we have a much narrower issue. The appropriate comparison class includes the two stipulated competitors

— a far more manageable class than one composed of all commercial and industrial taxpayers in Alabama. And in arguing that a single tax o n motor carriers justifies their exemption from another tax, the State does not come close to proposing the massive endeavor that Trailer Train

3 The majority opinion also applies McNamara and acknowledges Trailer Train . ( See Op. at 12

– 14.) 4 In McNamara , Louisiana imposed a tax on “public utilities,” a re latively small group of taxpayers that included railroads. 817 F.2d at 374. Notably, “public utilities” also included certain motor and water carriers. Id. In Trailer Train , Missouri taxed an activity in which only railroads engaged. 929 F.2d at 1302.

Case: 12-14611 Date Filed: 07/01/2013 Page: 23 of 2824 and McNamara refused to undertake. Like the district court, see CSX III , 892 F. Supp. 2d at 1310

– 11, I would di stinguish Trailer Train and McNamara on that ground, and I would decline to follow Lohman ’s and Union Pacific ’s lead because they rely on those distinguishable cases. That we must evaluate the State’s justification, despite the Eighth Circuit’s approach, is all the clearer after CSX II . There, the Court conceded that discrimination cases under the 4

- R Act will often “raise knotty questions about whether and when dissimilar treatment is adequately justified.” CSX II , 131 S. Ct. at 1114. But as the Court then insisted, “Congress has directed the federal courts to review a railroad’s challenge[,] and

. . . we would flout the congressional command were we to declare the matter beyond us.” Id. Perhaps the most compelling reason to depart from the Eighth Circuit’s approach is that, under that approach, we may reach the bizarre holding that a tax discriminates against a rail carrier even though the tax puts the rail carrier at no discernible disadvantage. The majority opinion reaches just that result, conc luding that the sales and use taxes discriminate against rail carriers and in favor of motor carriers even though motor carriers pay “essentially the same” tax on their fuel. ( See Op. at 12 (refusing to evaluate the comparison between the two taxes “even though in some years

. . . the State’s taxing arrangement might yield a fair result”).) Under the majority’s approach, the sales and use taxes would

Case: 12-14611 Date Filed: 07/01/2013 Page: 24 of 2825 discriminate against a rail carrier even if its competitors paid four times as much tax as the rail carrie r for the same commodity. I cannot agree with that approach. Congress created the 4

- R Act to stabilize railroads financially. Dep’t of Revenue v. ACF Indus., Inc. , 510 U.S. 332, 336, 114 S. Ct. 843, 846 (1994). This goal implies that an offending tax must disadvantage railroads; I fail to see how a tax that places rail carriers in the same tax position as their competitors

— or a better one

— could threaten railroads’ financial stability. So it is clear to me that Congress enacted § 11501(b)(4) to elimina te tax schemes that impose a greater tax burden on railroads than other taxpayers. This purpose is explicit in the first three subsections of § 11501(b), each of which prohibits taxation methods that assess or tax rail carriers’ property at a higher rate than other taxpayers. See § 11501(b)(1)

– (3). By outlawing “another tax that discriminates” in the final subsection, Congress specifically targeted taxes that have a similar effect as those referred to in the previous three

— placing a greater tax burden on railroads than other taxpayers for the same taxable item or event. In finding discrimination against rail carriers without determining whether rail carriers have actually been disadvantaged, the majority opinion flouts the language of the statute and Con gress’s clear intent.

Case: 12-14611 Date Filed: 07/01/2013 Page: 25 of 2826 Turning now to the State’s justification, I agree with the district court that the State has met its burden to show that the tax exemption for motor carriers was not discriminatory against railroads. As I explained above, a tax di scriminates against railroads in violation of § 11501(b)(4) if the tax imposes a greater tax burden on railroads than it does on comparable taxpayers. The district court found that rail carriers paid less state tax on fuel than motor carriers during the p eriod in question and that, even adding the local taxes imposed on rail carriers (and without adding local excise taxes paid by motor carriers), rail carriers and motor carriers paid “essentially the same” tax.
CSX III , 892 F. Supp. 2d at 1313. These fac tual findings are not challenged on appeal. And I cannot conclude from these findings that railroads have been competitively disadvantaged in any way by the sales and use taxes’ exemptions for motor carriers. 5 I would hold that the State has met its burd en to justify the

5 CSX contends that, even if rail carriers face the same tax burden as motor carriers in terms of purchasing and consuming fuel, rail carriers are still disadvantaged because they must maintain their own rights

- of

- way (tracks) while motor carriers’ rights

- of

- way (highways) are maintained in part by the excise taxes they pay. CSX argues that the district court’s refusal to consider these uneven operating expenses in its comparison to the two taxes, see CSX III , 892 F. Supp. 2d at 1314

– 15, was error because any analysis of relative tax burdens must include an analysis of the tangible benefits received or not received. I disagree. True, railroads have to maintain their tracks. But that burden is not a tax burden that the 4

- R Act prohibits, and no tax affect s that burden. Say, for example, that the State eliminated both the motor

- fuel excise tax and the motor

- carrier exemptions in the sales and use taxes, leaving a system in which rail carriers and motor carriers paid identical 4% taxes on the purchase and u se of their fuel. By CSX’s logic, even that totally equal tax scheme would disadvantage railroads in violation of the 4

- R Act because railroads have higher overhead

Case: 12-14611 Date Filed: 07/01/2013 Page: 26 of 2827 differential treatment and, therefore, that the tax exemption does not discriminate against rail carriers within the meaning of § 11501(b)(4). B. Water Carriers The district court held that the sales and use taxes’ exemptions for water carriers did not discriminate against rail carriers in violation of the 4

- R Act, in part because CSX “fail[ed] to meet it[s] evidentiary burden of proof.” CSX III , 892 F. Supp. 2d at 1316. This conclusion is not entirely unreasonable; after all, the Supr eme Court in CSX II did hint that the rail carrier must “prove the alleged discrimination” to prevail. CSX II , 131 S. Ct. at 1109 n.8 (“Whether the railroad will prevail

— that is, whether it can prove the alleged discrimination

— depends on whether the State offers a sufficient justification

. . . .”). But the district court required too much of CSX. The rail carrier bringing a § 11501(b)(4) claim can establish its prima facie case simply by showing that the tax in question exempts competitors. See id. at 1108 (noting that a state discriminates against one group of taxpayers by charging them a higher tax rate than another group). It then becomes the state’s burden to show that the tax did not

expenses. Motor carriers still would not be responsible for maintaining the public highwa ys of Alabama. The difference in right

- of

- way maintenance costs has no place in the comparison of tax burdens. That railroads must pay for their own tracks is the inherent burden of operating a transportation network on private rights

- of

- way. In other wo rds, it is a fundamental competitive disadvantage that railroads face. Congress did not intend the 4

- R Act to eliminate all of railroads’ competitive disadvantages, only those created by taxes. And here, the State has shown that the sales and use tax exe mptions for motor carriers creates no tax disadvantage for railroads.

Case: 12-14611 Date Filed: 07/01/2013 Page: 27 of 2828 in fact discriminate against the railroad. See id. at 1109 n.8 (“[W]hether [the railroad] can prove the alleged discrimination[ ]depends on whether the State offers a sufficient justification

. . . .”). In requiring more from CSX than a showing that the tax exempts water carriers, the district court muddied the two

- step inquiry and applied an incorrect legal standard. When a district court uses the wrong legal standard, we can remand for application of the appropriate standard. See Kearse v. Sec’y, Fla. Dep’t of
Corr. , 669 F.3d 1197, 1198 (11th Cir. 2011). Accord ingly, I would remand this case so the district court can apply the correct standard (based on the existing record) and determine whether the State has offered sufficient justification for the tax exemption given to water carriers.

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