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Illinois Central Railroad Co. v. Tennessee Department of Revenue

United States District Court, M.D. Tennessee, Nashville Division

April 12, 2017

ILLINOIS CENTRAL RAILROAD COMPANY, Plaintiff,
v.
TENNESSEE DEPARTMENT OF REVENUE and REAGAN FARR, Commissioner of Revenue of the State of Tennessee, Defendants.

MEMORANDUM

          KEVIN H. SHARP UNITED STATES DISTRICT JUDGE.

         This action is brought under Section 306(1)(d) of the Railroad Revitalization and Regulatory Reform Act of 1976 (“Section 306” or the “4-R Act”), 49 U.S.C. § 11501(b)(4), which prohibits state and local governments from discriminating against railroads with respect to taxation. Plaintiff contends that the sales and use tax assessments imposed by the State are discriminatory because motor carriers are exempt from the tax, but rail carriers are not exempt. Plaintiff seeks injunctive and declaratory relief pursuant to Section 306. The matter is before the Court on the following motions, which were filed following remand of this matter by the United States Court of Appeals for the Sixth Circuit, (Docket No. 107): Plaintiff Illinois Central Railroad Company's Motion for Summary Judgment (Docket No. 85); Defendants' Motion for Summary Judgment (Docket No. 93); and Defendants' Motion to Exclude Affidavit and Testimony of Richard Pomp (Docket No. 102).

         I. PROCEDURAL HISTORY

         This Court held a bench trial in this matter on June 5 and 11, 2012. In its Findings of Fact and Conclusions of Law, (Docket No. 59), this Court found that the imposition of Tennessee sales and use tax on railroad diesel fuel, but not on diesel fuel used by interstate motor carriers, placed rail carriers at an overall disadvantage. The Court further found that Defendants had not provided sufficient evidence that the differential tax treatment is justified. The Court concluded that the imposition of the sales and use tax on railroad diesel fuel violates 49 U.S.C. § 11501(b)(4). (Id.). By an accompanying order, this Court declared that the imposition of sales and use taxes authorized by Tennessee law on Plaintiff's purchases or consumption of diesel fuel for rail transportation purposes violates § 11501(b)(4).[1] The order further permanently enjoined Defendants from assessing, levying, or collecting sales and use taxes on or from Plaintiff on its purchase or consumption of diesel fuel for rail transportation purposes. See (Docket No. 60).

         Defendants appealed the judgment to the Sixth Circuit Court of Appeals. See Circuit Case No. 13-6348. After briefing and oral argument, but before the issuance of an opinion by the Sixth Circuit, the United States Supreme Court issued its opinion in Alabama Dept. of Revenue v. CSX Transportation, Inc., 135 S.Ct. 1136, 1143 (2015) (“CSXT II”), ruling that “an alternative, roughly equivalent tax is one possible justification that renders a tax disparity nondiscriminatory.”[2] Following the Supreme Court's decision, Plaintiff filed a motion in the Sixth Circuit to remand the matter to this Court for further proceedings in light of CSXT II. The Sixth Circuit granted that motion by order entered May 11, 2015 and remanded the matter to this Court for further proceedings.

         The parties then filed a joint motion to schedule a status conference, which was granted. (Docket No. 77). That status conference was held on August 20, 2015, and as a result, the Court issued an order calling for supplemental briefs, responses to supplemental briefs, and reply briefs.

         II. RELEVANT FACTS[3]

         Plaintiff Illinois Central Railroad Company (“Plaintiff” or “ICRR”) is an Illinois corporation with its principal office in Homewood, Illinois. ICRR is engaged in interstate commerce as a common carrier by railroad. ICRR is the corporate holding company for some of the U.S. properties of Canadian National Railway and is the entity that pays taxes in Tennessee. ICRR does business under the trade name CN, and CN is sometimes used to refer to the Plaintiff in this case.

         The Tennessee Department of Revenue (“Department”) is the department of the State of Tennessee charged with the responsibility to administer and collect sales and use taxes within Tennessee. Tenn. Code Ann. § 67-1-101(b). The Department is also charged with the responsibility to administer and collect motor fuel taxes within Tennessee. Id. Defendant Commissioner of Revenue of the State of Tennessee (“Commissioner, ” or collectively with the Department, hereinafter, “Defendants” or the “State”) is named in this action in his official capacity only. The Commissioner exercises general supervision over administration of the assessment and collection of sales and use taxes and motor fuel taxes in Tennessee. The Tennessee Department of Transportation (“TDOT”) is charged with building and maintaining public roads in Tennessee.

         Generally, Tennessee imposes a tax on the sale, consumption, and use of tangible personal property in Tennessee. See Tenn. Code Ann. § 67-6-101 et seq. The sales tax is collected by the seller at retail from the purchaser and paid over to the Commissioner by the seller. See Tenn. Code Ann. §§ 67-6-502 -504. The Tennessee sales tax applies unless a sales tax on such property has previously been paid in another jurisdiction. Tenn. Code Ann. §§ 67-6-201(2) and (5), 67-6-202, and 67-6-203.

         Railroads are subject to sales or use tax on their purchase, consumption, or use of diesel fuel in Tennessee. For years 2006 through June 2014, the tax was imposed by the State at the rate of 7% of the retail price. ICRR holds a direct pay permit issued by the Department and pays state sales and use taxes upon its purchase of diesel fuel within this State directly to the Commissioner.

         On-highway motor carriers compete with rail carriers for the transportation of property in interstate commerce in Tennessee. Motor carriers are exempt from the Tennessee sales and use tax imposed by chapter 6 of Title 67 on the purchase or consumption of diesel fuel in Tennessee. See Tenn. Code Ann. § 67-6-329 (a)(2).

         In lieu of the sales tax, motor carriers pay a motor fuel tax totaling 18.4¢ a gallon. Tenn. Code Ann. § 67-3-202 -205. Under Tenn. Code Ann. §§ 67-3-203 and 204, 1¢ of the 18.4¢ is a special privilege tax, and 0.4¢ is an environmental assurance fee. Approximately 70% of the motor fuel taxes collected from motor carriers is allocated to the Tennessee Department of Transportation. Approximately 28% is allocated to cities and counties and designated for use on roads. Approximately 2% is allocated to the general fund. In addition to the sales and use tax, railroads also pay the 1¢ special privilege tax and 0.4¢ environmental assurance fee imposed under Tenn. Code Ann. §§ 67-3-203 and 204.

         Tennessee's motor fuel tax was first enacted in 1941 and has been applied to motor carriers since then. The broadly applicable sales and use tax, which applies to railroads, was first enacted in 1947, and motor carriers have always been exempt from that tax. Under the respective tax rates (17¢ per gallon for motor carriers, in contrast to 7% of the purchase price for railroads) in effect since before 2006 through June 30, 2014, motor carriers were taxed more per gallon of diesel fuel than railroads were taxed unless fuel prices exceeded $2.62 per gallon. In fact, from 1941 through 2010, motor carriers actually paid more tax per gallon than railroads paid in every year except one, which was in 2008 when fuel prices spiked. The State of Tennessee has no control over the price of diesel fuel.

         Tennessee, along with the other 47 contiguous states and bordering Canadian provinces, is a party to the International Fuel Tax Agreement (“IFTA”), the purpose of which is to simplify the collecting and reporting of taxes on motor fuel used by motor fuel carriers operating in more than one jurisdiction. State participation in IFTA is essentially mandated by federal legislation. See 49 U.S.C. §§ 31701-07. IFTA requires that the fuel use tax imposed by member jurisdictions be measured by the consumption of fuel in a motor vehicle. See 49 U.S.C. § 31701(2). Motor carriers register and file tax returns in a single base jurisdiction, which, in turn, is responsible for distributing the tax proceeds to other jurisdictions in which the carrier operates. Motor carriers receive in each jurisdiction a credit or refund for taxes paid on fuel used outside the jurisdiction where it was purchased. There is no similar multi-state agreement with respect to fuel purchased, used, or consumed by railroads.

         III. ANALYSIS

         I. Motion to Exclude Affidavit and Testimony of Richard Pomp

         As a preliminary matter, Defendants have moved to exclude the affidavit of Plaintiff's expert, Richard Pomp, under Rules 702 and 703 of the Federal Rules of Evidence. The Court will first address this issue and then move on to the substantive claims.

         Plaintiff engaged Professor Richard Pomp, law professor at the University of Connecticut Law School and adjunct professor at NYU Law School in the L.L.M. Program for Taxation, to render an expert opinion regarding “the meaning of a ‘comparable' or ‘roughly equivalent' tax as that term is understood by practitioners and scholars in the field of state taxation.” (Docket No. 90 at ¶ 5).

         Defendants argue that “[b]eyond a bare recitation of qualifications and facts, the affidavit consists entirely of a discussion of purportedly applicable law, legal conclusions, and arguments concerning the central legal issue now before the Court-whether the sales tax paid by railroads on diesel fuel purchases in Tennessee and the motor fuel excise tax paid by trucks are “alternative, roughly equivalent” taxes within the meaning of [CSXT II].” (Docket No. 103 at 1). Plaintiff counters that “Professor Pomp does not opine on the ultimate legal issue of whether the sales tax assessed to ICRR is discriminatory[.]” (Docket No. 105 at 2). Regardless, ...


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