Opinion ID: 987958
Heading Depth: 3
Heading Rank: 1

Heading: Comparison Class

Text: Before we address whether the exemption at issue is discriminatory, there remains a first-order 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 the 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 7 Case: 12-14611 Date Filed: 07/01/2013 Page: 8 of 28 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 preceding 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. 8 Case: 12-14611 Date Filed: 07/01/2013 Page: 9 of 28 at 502. Norfolk Southern’s assessment, for instance, jumped a whopping 8,300% in one year, from $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 Seventh 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 with “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 9 Case: 12-14611 Date Filed: 07/01/2013 Page: 10 of 28 N., Santa Fe Ry. Co. v. Lohman, 193 F.3d 984, 986 (8th Cir. 1999) (choosing the competitive model, 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 an 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 comparison 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. 10 Case: 12-14611 Date Filed: 07/01/2013 Page: 11 of 28 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 for 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.