Two of the nation's largest railroad companies — CSX and BNSF — have filed suit against the state of Tennessee in federal court claiming they are being forced to pay millions of dollars in taxes on diesel fuel that their highway- and water-based cargo-hauling competitors don't have to pay.
Both railroads, in separate suits filed by the same law firm in U.S. District Court in Nashville on Tuesday, contend that the state's 7 percent sales and use tax "on diesel fuel purchased and used for rail transportation purposes is discriminatory and unlawful" under the federal Railroad Revitalization and Regulatory Reform Act of 1976.
The two carriers claim that the taxes that are levied on railroads but not on over-the-road trucks or water carriers — ships and tugs — used to move cargo are discriminatory, and they seek to have the federal court enjoin the state from collecting the taxes.
Jacksonville, Fla.-based CSX Transportation, whose tracks span the state east to west, says it's on the hook for a $530,462 tax bill due Sept. 20, and asks the court to block the state from collecting the money now and in the future.
Likewise, Fort Worth, Texas-based BNSF, which operates in the Memphis area and along the state's western border, seeks the same relief, and says it has a $280,000 tax bill due on Sept. 20.
CSX won a favorable ruling against the state of Alabama in a similar case. The U.S. Court of Appeals for the 11th District ruled on July 1 that Alabama's 4 percent sales tax on CSX diesel-fuel purchases is discriminatory and against federal law because its highway- and water-based competitors aren't required to pay the tax, giving them a competitive advantage over the railroad.
Initially, the trial court dismissed the CSX suit in Alabama, which was filed in 2008, and the dismissal was upheld by the 11th District Court of Appeals. But the U.S. Supreme Court later overturned the lower courts' decisions and sent the case back for a new hearing.
The criterion that the case was decided on in the July 1 ruling was whether the state could offer "sufficient justification for declining to provide" the same tax exemption to the railroads. The Appeals Court, on reconsideration, ruled that Alabama did not have justification to exempt motor and water carriers from the tax while applying it to the railroad.
Millions at stake
CSX and BNSF brought the actions against the Tennessee Department of Revenue, which collects sales and use taxes either monthly or quarterly. If the railroads are paying that much per month, the revenue collected from them would amount to more than $6.4 million annually for CSX and $3.4 million for BNSF. It was not clear in the suit whether the stated amounts were for quarterly or monthly tax bills, and the attorneys for the railroads could not immediately be reached for clarification.
Tennessee has not yet filed a response to the suits, and a Department of Revenue spokesman said the agency would have no comment on the cases anyway, citing taxpayer privacy rules.
In the Alabama case, the state argued that motor carriers do pay a similar tax on diesel fuel — the fuel excise tax charged at the pump. But the Appeals Court noted that even so, the water carriers were paying no state tax at all on their fuel purchases.
Railroads in the past have argued against paying fuel excise taxes because those are intended to fund highway construction and improvement projects.
That issue was not raised in the Tennessee or Alabama cases.