Illinois Central Railroad Company v. Tennessee Department of Revenue et al
MEMORANDUM OPINION OF THE COURT. Signed by Chief Judge Kevin H. Sharp on 4/12/2017. (DOCKET TEXT SUMMARY ONLY-ATTORNEYS MUST OPEN THE PDF AND READ THE ORDER.)(jw)
UNITED STATES DISTRICT COURT
MIDDLE DISTRICT OF TENNESSEE
ILLINOIS CENTRAL RAILROAD
TENNESSEE DEPARTMENT OF
REVENUE and REAGAN FARR,
Commissioner of Revenue of the State
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
A two-step inquiry is used 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, 1105 & 1109 n.8 (2011) (“CSXT I”). A plaintiff
has the initial burden to establish a prima facie case of discriminatory tax treatment. If a plaintiff does so,
the burden shifts to the defendant taxing authority to establish that the differential tax treatment is
justified and does not discriminate against the railroad. Id. If the defendant cannot meet its burden, the
tax treatment violates § 11501(b)(4). Id.
In its previous opinion, this Court relied upon CSXT I as well as the Eleventh Circuit’s decision in CSX
Transp., Inc. v. Ala. Dep’t of Revenue, 720 F.3d 863 (11th Cir. 2013). Subsequent to this Court’s
previous decision, Alabama successfully sought review of the Eleventh Circuit’s decision by writ of
certiorari, resulting in the Supreme Court’s decision in CSXT II.
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
II. RELEVANT FACTS3
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
The parties have stipulated to many of the underlying facts in this matter. The Court admitted the
stipulated facts at trial. See (Docket Nos. 45 & 52). Unless otherwise noted, the facts are drawn from the
parties’ stipulations, statements of material facts, and related declarations and exhibits.
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. §§ 67-6201(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
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.
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.
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, Plaintiff
argues “his testimony fits squarely within the scope of permissible expert testimony under the
Federal Rules of Evidence and Sixth Circuit precedent.” (Id.).
Expert testimony may be introduced in summary judgment proceedings through an
affidavit or declaration that satisfies the general requirements for summary judgment affidavits
and declarations set forth in Fed. R. Civ. P. 56(c)(4). See 11 James Wm. Moore et al., Moore’s
Federal Practice § 56.94[a] (3d ed. 2011). Reports and the underlying opinions are subject to
all other rules of evidence, including traditional standards for the admissibility of expert
testimony. See Fed. R. Evid. 702; Pride v. BIC Corp., 218 F.3d 566, 577 (6th Cir. 2000) (citing
Daubert v. Merrell Dow Phar., 509 U.S. 579 (1993)). Rule 702 provides:
If scientific, technical, or other specialized knowledge will assist the trier of fact
to understand the evidence or to determine a fact in issue, a witness qualified as
an expert by knowledge, skill, experience, training, or education, may testify
thereto in the form of an opinion or otherwise, if (1) the testimony is based on
sufficient facts or data, (2) the testimony is the product of reliable principles and
methods, and (3) the witness has applied the principles and methods reliably to
the facts of the case.
Fed. R. Evid. 702.
Defendants seek to exclude Pomp’s testimony under Rules 702 and 703 of the Federal
Rules of Evidence (Docket No. 103 at 3-9), arguing that (1) Pomp’s affidavit is legal argument
and advocacy – and improper as expert testimony; (2) Rule 702 does not permit expert testimony
on conclusions of law; (3) “calling a brief an affidavit” does not make it admissible; (4)
“couching the affidavit as ‘policy’ rather than law does not alter its true character;” and (5)
Pomp’s affidavit is not reliable and because of his lack of qualifications.
“Rule 702 imposes a special obligation upon a trial judge to ensure that scientific
testimony is not only relevant, but reliable.” Kumho Tire Co. v. Carmichael, 526 U.S. 137, 147
(1999) (citing Daubert, 509 U.S. at 579). This basic gatekeeping obligation applies to all expert
testimony. Kumho Tire Co., 526 U.S. at 147.4
The requirement that expert testimony be relevant and reliable “entails a preliminary
assessment of whether the reasoning or methodology underlying the testimony is scientifically
Courts may also review the factual basis for an expert’s testimony under Rule 703 of the Federal Rules
of Evidence. Under Rule 703, expert opinions based on otherwise inadmissible facts and data are to be
admitted only if the facts and data are “of a type reasonably relied upon by experts in the particular field
in forming opinions or inferences upon the subject.” Fed. R. Evid. 703.
valid and of whether that reasoning or methodology properly can be applied to the facts in
issue.” Decker v. GE Healthcare Inc., 770 F.3d 378, 391 (6th Cir. 2014) (citations omitted). “In
short, under Daubert and its progeny, a party proffering expert testimony must show by a
‘preponderance of proof’ that the expert whose testimony is being offered is qualified and will
testify to scientific knowledge that will assist the trier of fact in understanding and disposing of
relevant issues.” Id. (citations omitted). “The [Rule 702] inquiry is a flexible one . . . [and its
focus] must be solely on principles and methodology, not on the conclusions that they generate.”
Lee v. Smith & Wesson Corp., 760 F.3d 523, 526 (6th Cir. 2014) (citing Daubert, 509 U.S. at
Daubert provides a non-exclusive, flexible checklist of factors to consider when
evaluating reliability, including the following: “whether [the theory or technique] can be (and has
been) tested”; “whether the theory or technique has been subjected to peer review and
publication”; “in the case of a particular scientific technique, . . . the known or potential rate of
error”; and the degree of acceptance within the relevant scientific community. Daubert, 509 U.S.
at 593–94. “[T]he Daubert factors do not constitute a ‘definitive checklist or test,’ but may be
tailored to the facts of a particular case.” In re Scrap Metal Antitrust Litig., 527 F.3d 517, 529
(6th Cir. 2008) (citations omitted). “[T]he Daubert factors ‘are not dispositive in every case,’
and should be applied only ‘where they are reasonable measures of the reliability of expert
testimony.’” Id. (citations omitted).
An expert opinion “is not objectionable just because it embraces an ultimate issue.” Fed.
R. Evid. 704(a). Indeed, the “[Sixth Circuit has] held that an expert opinion may opine on a legal
conclusion so long as his testimony would not determine an ultimate issue before the jury.” U.S.
v. Geiger, 303 Fed. App’x. 327, 331 (6th Cir. 2008). The Court’s discretion to admit expert
testimony in bench trials is particularly broad at earlier stages in the proceeding, such as
summary judgment. Gonzalez v. Nat’l Bd. of Med. Exam’rs, 225 F.3d 620, 635 (6th Cir. 2000)
(“[D]istrict courts conducting bench trials have substantial flexibility in admitting proffered
expert testimony at the front end, and then deciding for themselves during the course of trial
whether the evidence meets the requirements of Kumho Tire Co. and Daubert and deserves to be
Here, the Court finds that Plaintiff’s expert, Professor Pomp, has displayed sufficient
knowledge of the subject matter that his opinion will assist the trier of fact in evaluating this
case. However, given that this case is a bench trial, the Court is mindful it can weigh its
probative value and reject any improper inferences. Defendants’ complaints about Professor
Pomp’s opinions go to the weight of the testimony as opposed to their admissibility. Plaintiff, as
the proponents of the testimony, do not have the burden of proving that it is scientifically correct,
but that by a preponderance of the evidence, it is reliable. Here, the Court finds that Professor
Pomp’s opinions are reliable. Thus, Defendant’s motion is denied.
Cross Motions for Summary Judgment
Finally, the parties have filed cross motions for summary judgment quarrelling over
whether the State can meet its burden to prove that the use tax paid by interstate motor carriers
constitutes sufficient justification for the exemption of motor carriers from the sales tax, which is
imposed on railroads.
A. Standard of Review
A party may obtain summary judgment if the evidence establishes there are not any
genuine issues of material fact for trial and the moving party is entitled to judgment as a matter
of law. See Fed. R. Civ. P. 56(c); Covington v. Knox County School Sys., 205 F.3d 912, 914
(6th Cir. 2000). The moving party bears the initial burden of satisfying the Court that the
standards of Rule 56 have been met. See Martin v. Kelley, 803 F.2d 236, 239 n.4 (6th Cir.
1986). The ultimate question to be addressed is whether there exists any genuine issue of
material fact that is disputed. See Anderson v. Liberty Lobby, 477 U.S. 242, 248 (1986);
Covington, 205 F.3d at 914 (citing Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986)). If so,
summary judgment is inappropriate.
To defeat a properly supported motion for summary judgment, the nonmoving party must
set forth specific facts showing that there is a genuine issue of material fact for trial. If the party
does not so respond, summary judgment will be entered if appropriate. Fed. R. Civ. P. 56(e).
The nonmoving party’s burden of providing specific facts demonstrating that there remains a
genuine issue of material fact for trial is triggered once the moving party shows an absence of
evidence to support the nonmoving party’s case. Celotex, 477 U.S. at 325. A genuine issue
exists “if the evidence is such that a reasonable jury could return a verdict for the nonmoving
party.” Anderson, 477 U.S. at 248. In ruling on a motion for summary judgment, the Court must
construe the evidence in the light most favorable to the nonmoving party, drawing all justifiable
inferences in its favor. See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587
The standard remains the same when both parties move for summary judgment. Taft
Broad. Co. v. United States, 929 F.2d 240, 248 (6th Cir. 1991). “When reviewing cross-motions
for summary judgment, the court must evaluate each motion on its own merits and view all facts
and inferences in the light most favorable to the nonmoving party.” Wiley v. United States (In re
Wiley), 20 F.3d 222, 224 (6th Cir. 1994).
The issue before this Court on remand is whether Defendants can offer sufficient
justification for subjecting railroads and motor carriers to different tax treatment of their
purchases and consumption of diesel fuel for transportation purposes. See CSXT I, 131 S.Ct. at
1109 n.8. The Supreme Court has instructed that “an alternative, roughly equivalent tax is one
possible justification that renders a tax disparity nondiscriminatory,” CSXT II, 135 S.Ct. at 1144.
The Court must first address the parties’ dispute on whether the compensatory tax
doctrine is applicable to this case. Plaintiff insists that “CSXT II’s direct reference to the
Supreme Court’s negative Commerce Clause jurisprudence (i.e., the Compensatory Tax
Doctrine) is the clearest direction that the lower courts have received from CSXT II.” (Docket
No. 108 at 8). Defendants maintain the doctrine is inapplicable.
Plaintiff argues “[i]n holding that a facially discriminatory tax on railroads – as we
unquestionably have here – can possibly be justified by a ‘roughly equivalent’ or ‘roughly
comparable’ tax on their competitors,” the Court was “invoking a rich history of Supreme Court
jurisprudence establishing a specific and settled standard under its ‘negative Commerce Clause’
cases.” (Docket No. 86 at 10). Plaintiff contends that the Court cited Gregg Dyeing Co. v.
Query, 286 U.S. 472, 479–80 (1932) to invoke its “negative Commerce Clause cases,” which
afford “a guiding light for deciding when two different taxes are ‘roughly equivalent.’” (Id. at
12). Defendants counter “[i]f the Supreme Court had intended to define the precise analytical
parameters of ‘roughly equivalent’ for use by lower courts in 4-R Act cases it would have done
so. It did not.” (Docket No. 100 at 4).
In CSXT II, the Supreme Court cited Gregg Dyeing and observed that “[o]ur negative
Commerce Clause cases endorse the proposition that an additional tax on third parties may
justify an otherwise discriminatory tax.” 135 S.Ct. at 1143. This is the first and only time either
Gregg Dyeing or the Commerce Clause is mentioned. In Gregg Dyeing, the Supreme Court was
addressing the threshold issue of whether a state tax violated the Commerce Clause. The Court
rejected a negative Commerce Clause challenge to a South Carolina tax on imported gasoline
stored for use or sale within the state “upon which a like tax ha[d] not been paid under other
statutes.” 286 U.S. at 479. The Court held that, because the taxpayer had not established that it
had suffered discrimination as a result of the state tax, it had not proved that the state tax violated
the Commerce Clause.
This Court does not interpret the Supreme Court’s single reference of the Commerce
Clause as explicit direction to apply the compensatory tax doctrine here. The plain language of
the opinion instructs that “an alternative, roughly equivalent tax is one possible justification that
renders a tax disparity nondiscriminatory,” CSXT II, 135 S.Ct. at 1144 − and the Court will
proceed with that instruction, simply analyzing whether the taxes paid by motor carries is
roughly equivalent to those paid by the locomotives.
Proceeding to the substantive issues before the Court, as stated supra, the Supreme Court
directed the Eleventh Circuit (and now this Court pursuant to the Sixth Circuit’s remand Order)
to consider “whether Alabama’s fuel-excise tax is the rough equivalent of Alabama’s sales tax as
applied to diesel fuel, and therefore justifies the motor carrier sales-tax exemption.” CSXT II,
135 S. Ct. at 1144. Therefore, this Court must determine the same as it pertains to the Tennessee
taxes. As Plaintiff correctly points out in its brief,5 the burden is now on Defendants to prove
sufficient justification for exempting motor carriers from the sales tax, which is imposed on
railroads. Defendants’ Motion for Summary Judgment relies on two arguments supporting that
“One principle is clear from the Supreme Court’s two decisions in the Alabama CSXT cases—the
burden is now on the State.” See (Docket No. 86 at 7).
justification. First, Defendants argue that “motor fuel taxes paid by motor carriers and sales and
use taxes paid by railroads are alternative, roughly equivalent taxes on the same activity within
the meaning of CSX[T] II[.]” (Docket No. 94 at 5-6). Second, they argue that “railroads choose
tax treatment different from that of motor carriers because railroads choose to use dyed diesel
fuel, which is not exempt from sales and use taxes.” (Id. at 6).
1. Motor Fuel Taxes and Sales and Use Taxes are Roughly Equivalent
Defendants first point to CSXT II, wherein the Supreme Court stated, “[w]e think
Alabama can justify its decision to exempt motor carriers from its sales and use tax through its
decision to subject motor carriers to a fuel-excise tax,” arguing the same applies here. (Docket
No. 94 at 6) (citing CSXT II, 135 S.Ct. at 1143). Defendants posit that motor fuel taxes paid by
motor carriers and sales and use taxes paid by railroads “are alternative, roughly equivalent taxes
imposed by the same taxing authority on the same activity, the purchase or consumption of diesel
fuel for freight-transportation purposes within the meaning of CSX[T] II.” (Id.). In comparison,
Defendants argue “[f]or 61 successive years, from the inception of the sales tax in 1947 through
2007, the per gallon level of the sales tax on fuel purchases by railroads was less than the pergallon level of the motor fuel excise tax paid by trucks.” (Docket No. 100 at 13) (citing [Doc.
72-10, Defendants’ Trial Exh. D-10] Fox Affidavit, ¶ 5).
Plaintiff makes the following
arguments rebutting Defendants’ position:
At the previous trial of this matter, the State heavily relied on the calculation of a
“tax rate” comparison to show that the “rate” of the motor fuel tax on a gallon of
motor carrier fuel exceeded the “rate” of the sales tax on a gallon of railroad fuel.
Obviously, this comparison depends solely on the fluctuating cost of fuel. The
cost of fuel makes no difference in the rate of 17¢ per gallon for motor fuel, but
the cost of fuel makes all the difference in a sales tax applied to a purchase price.
Indeed, the basic tax rate on diesel fuel has been 17¢ per gallon since 1989. And
as the affidavit of Benjamin Blair demonstrates, more recent data show that the
“rate” of the sales tax is now often exceeding the rate of the motor fuel tax. See
Blair Affidavit, ¶ 13. For five of the eight years between 2007 and the first half of
2014, the sales tax rate of 7% on ICRR’s purchase of railroad diesel fuel in
Tennessee exceeded the rate of 17¢ per gallon paid by interstate motor carriers on
their consumption of diesel fuel in Tennessee. Thus, the State’s heavy reliance on
an equivalent tax rate is invalid factually.
(Docket No. 86 at 16) (internal citations omitted). Defendants respond that “while it is true that
per-gallon fuel taxes for Illinois Central exceeded the per gallon cost for trucks from 2011
through June 30, 2014, this three and one-half year stretch was a gross historical anomaly.”
(Docket No. 100 at 14). Further, “based on current fuel prices, if the sales tax regime on railroad
fuel were still in effect today the per-gallon rate for railroads would again be less than 17ȼ,
which is consistent with historical norms.” (Id.) (citing Fox Affidavit, ¶¶ 4-5).6
The CSXT II Court said
[w]e think Alabama can justify its decision to exempt motor carriers from its sales
and use tax through its decision to subject motor carriers to a fuel-excise tax. It
does not accord with ordinary English usage to say that a tax discriminates against
a rail carrier if a rival who is exempt from that tax must pay another comparable
tax from which the rail carrier is exempt. If that were true, both competitors
could claim to be disfavored—discriminated against—relative to each other.
135 S.Ct. at 1143. In this instance, the Court finds the taxes paid by motor carriers and rail
carriers roughly equivalent. It is undisputed (and even stipulated to in the prior trial) that 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. While it is true, and not contested,
that the sales tax rate of 7% on ICRR’s purchase of railroad diesel fuel in Tennessee exceeded
the rate of 17¢ per gallon paid by interstate motor carriers on their consumption of diesel fuel in
Tennessee in recent years, on average, motor carriers have a higher tax burden—which refutes
Another issue of contention is the allocation of tax proceeds. However, the Court need not expand upon
this argument because the Sixth Circuit recently provided direction on this very issue: “[H]ow Tennessee
uses the proceeds of its taxation of diesel fuel is irrelevant to the question of whether the Railroads have
been discriminated against within the meaning of the 4-R Act.” BNSF Railway Co. v. Tennessee
Department of Revenue, 800 F.3d 262, 274 (6th Cir. 2015).
the railroads being at an overall disadvantage.
Accordingly, Defendants have presented
sufficient evidence to support their contention that the fuel tax placed on motor carriers and the
sales and use tax paid by railroads are roughly equivalent.
2. Railroads Choose to Use Dyed Diesel Fuel, Which is Not Exempt From Sales and
Finally, Defendants insist that Plaintiff pays sales and use taxes only because it selects to
burn dyed diesel fuel, as opposed to clear diesel fuel in its railroads. (Docket No. 94 at 9).
Defendants argue further that no state or federal law prevents Plaintiff from burning clear diesel
fuel, “in which case it would have been subject to the same motor fuel tax, Tenn. Code Ann. §
67-3-202, that motor carriers paid.” (Id.). By it terms, Defendants contend, “the exemption from
sales and use tax that applies to motor carriers,” Tenn. Code Ann. § 67-6-329(a)(2), “is not an
exemption for any particular class of taxpayers but rather for fuel taxed under Tenn. Code Ann. §
67-3-202, which applies only to clear (undyed) diesel fuel. The dyed fuel used by railroad
locomotives is thus not exempt.” (Id. at 9). It is the opinion of Defendants that since clear diesel
is subject to a federal fuel tax,7 Plaintiff chooses to use dyed diesel to sidestep the administrative
burden involved in applying for tax refunds (which are available if clear diesel is used off-road).
Plaintiff agrees in part. Plaintiff contends if it were to “choose” to use clear diesel fuel
for off highway purposes, it would have to pay not only Tennessee’s motor fuel tax, but also the
federal excise tax. (Docket No. 96 at 11). This in turn, according to Plaintiff, would require it to
petition the Internal Revenue Service for refunds of the federal excise tax because the fuel was
used for off-highway purposes. (Id.). Thus, Plaintiff argues, the notion that Tennessee is
See 26 U.S.C.A. § 4041.
“justified in denying the sales tax exemption to railroads because railroads could ‘choose’ to
purchase clear diesel fuel is ludicrous.” (Id. at 13).8
Plaintiff further purports there are practical problems if it were to elect to use clear diesel
fuel. (Docket No. 96 at 12). First, Plaintiff argues, the purchase of clear diesel fuel in tanks of
locomotives fueled in other states would result in the mixing of clear and dyed fuel, a practice
prohibited by federal law. (Id.) (citing Declaration of Mathieu Lefebvre, ¶¶ 5, 6; Supplemental
Affidavit of Benjamin Blair, ¶ 2). Second, Plaintiff would pay the full state motor tax to
Tennessee on “a ‘point of purchase’ basis, without apportionment based on use in Tennessee, in
contrast to interstate motor carriers under IFTA. (Id.) (citing Affidavit of Benjamin Blair [Doc.
88], ¶ 7. See Declaration of Mathieu Lefebvre, ¶¶ 5, 6; Supplemental Affidavit of Benjamin
Blair, ¶ 2).
It is undisputed that railroads choose tax treatment different from that of motor carriers
because railroads choose to use dyed diesel fuel, which is not exempt from sales and use taxes,
and no state or federal law prevents Plaintiff from burning clear diesel fuel. Consequently, the
Court finds Defendants have offered sufficient justification that its tax structures for diesel are
not discriminatory against railroads.
The Court finds that no genuine issues of fact remain, and Defendants have shown
sufficient justification for the disparate sales tax treatment of rail carriers compared to motor
carriers. Therefore, the imposition of the sales and use tax on railroad diesel fuel does not
violate 49 U.S.C. § 11501(b)(4).
In support of its contention, Plaintiff cites Kraft Gen’l Foods, Inc. v. Iowa Dep’t of Revenue, 505 U.S.
71 (1992). In Kraft, the Supreme Court held that an Iowa statute that denied a dividend-received
deduction to foreign subsidiaries while allowing it for domestic subsidiaries discriminated in violation of
the Foreign Commerce Clause. 505 U.S. at 82. The Court finds there is no meaningful distinction
between the discrimination held unconstitutional in Kraft and the discrimination challenged here.
For all of the reasons stated, the Court will grant Defendants’ Motion for Summary
Judgment (Docket No. 93) and deny Plaintiff Illinois Central Railroad Company’s Motion for
Summary Judgment (Docket No. 85). Further Defendants’ Motion to Exclude Affidavit and
Testimony of Richard Pomp (Docket No. 102) will be denied.
An appropriate Order shall be entered.
KEVIN H. SHARP
UNITED STATES DISTRICT JUDGE
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