BNSF Railway Company v. Tennessee Department of Revenue et al

Filing 34

MEMORANDUM signed by Chief Judge Kevin H. Sharp on 10/10/2014. (DOCKET TEXT SUMMARY ONLY-ATTORNEYS MUST OPEN THE PDF AND READ THE ORDER.)(hb)

UNITED STATES DISTRICT COURT
MIDDLE DISTRICT OF TENNESSEE
NASHVILLE DIVISION
BNSF RAILWAY COMPANY,
Plaintiff,
v.
TENNESSEE DEPARTMENT OF
REVENUE and RICHARD ROBERTS,
Commissioner of Revenue of
the State of Tennessee,
Defendants.

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No. 3:14-cv-01399
JUDGE SHARP
MAGISTRATE JUDGE KNOWLES

MEMORANDUM
Plaintiff BNSF Railway Company (“Plaintiff” or BNSF”) has brought this action against
Tennessee Department of Revenue, and Richard Roberts, Commissioner of Revenue of the State
of Tennessee (collectively the “Defendants” or the “Commissioner”) as a result of the recently
enacted Tennessee Transportation Fuel Equity Act (the “Act”), which allegedly violates Section
306(1)(d) of the Railroad Revitalization and Regulatory Reform Act of 1976, 49 U.S.C. §
11501(b)(4). This matter is presently before the Court on Plaintiff’s Motion for a Preliminary
Injunction (Docket Entry No. 11), to which Defendants have filed a brief in opposition (Docket
Entry No. 21), and Plaintiff filed a reply (Docket Entry No. 28). Plaintiff seeks injunctive relief
enjoining Defendants, their officers, agents, and employees, and all those acting in concert or
participation with them, from assessing, levying or collecting taxes imposed on BNSF’s railway
fuel by the Tennessee Transportation Fuel Equity Act.
On August 29, 2014, the Court conducted a hearing on the motion. Having reviewed all
the papers filed in support of, and in opposition to, Plaintiff’s motion, and having considered the
oral arguments of counsel, the Court hereby denies Plaintiff’s motion for preliminary injunction.
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I. FACTUAL BACKGROUND
Parties
According to the Complaint, BNSF is a Delaware corporation with its principal place of
business located in Ft. Worth, Texas. BNSF is engaged in interstate commerce as a common
carrier by railroad. The Tennessee Department of Revenue is the department of the State of
Tennessee charged with the responsibility to administer and collect the taxes challenged in such
instance. Richard Roberts is the Department’s Commissioner and exercises general supervision
over administration of the assessment and collection of non-property taxes in Tennessee.
(Docket Entry No. 1, Complaint at ¶¶ 5-7).
Background
Since 1941, Tennessee has imposed a cents-per-gallon "excise" tax on motor vehicle fuel,
which is dedicated to the construction and maintenance of highways in Tennessee. See §§ 2,3 of
Chapter 73, Public Acts of 1941. This tax has, from its inception, been limited to fuel consumed
"on the public highways." See id. § 1(b). Such taxes are often described as "motor fuel" or
"highway user" taxes. The current "Highway User Fuel Tax" is codified at Tenn. Code Ann. §
67-3-1201, et seq. It includes the "Gasoline tax" of 20¢ per gallon imposed by Tenn. Code Ann.
§ 67-3-201, and the "Diesel tax" of 17¢ per gallon imposed by Tenn. Code Ann. § 67-3-202. See
Tenn. Code Ann. § 67-3-1201(2) & (4).
Prior to July 1, 2014, the purchase and use of railroad diesel fuel was subject to the
Tennessee sales and use tax imposed by Chapter 6 of Title 67 of the Tennessee Code. On
August 27, 2013, this Court issued an injunctive and declaratory order that the imposition of
Tennessee sales and use taxes on the diesel fuel of the Illinois Central Railroad Company
violated Section 306. See Illinois Central Railroad Company v. Tennessee Dept. of Revenue,

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969 F. Supp. 2d 892 (M.D. Tenn. 2013).1 In reaction to the Order, Plaintiff claims that on May
13, 2014, Tennessee Enacted the Transportation Fuel Equity Act, as part of Public Chapter 908
of the Public Acts of 2014. The Act became effective on July 1, 2014. Section 11 of Public
Chapter 908 repeals the sales and use tax on railroad diesel fuel, and instead imposes a tax of 17¢
per gallon on diesel fuel used by railroads in the State.2 See (Docket Entry No. 1 at ¶¶ 8-10).
The Act exempts the water ways from its coverage. Water carriers and railroads use fuel
dyed in accordance with federal regulation to power their marine vessels and locomotives. See
(Id. at 12-13). Plaintiff contends that although the Act purports to impose a tax on “commercial
carriers,” in reality railroads will be the only commercial carriers paying tax on dyed diesel fuel.
And furthermore, Plaintiff continues, although fuel used by interstate motor carriers is subject to
a diesel tax under T.C.A. § 67-3-202, as amplified by the Highway User Fuel Tax, T.C.A. § 673-1201 et seq., the motor carriers, unlike railroads, do not use dyed fuel but instead use clear
diesel fuel, which is taxed in order to support and maintain the highways used by the motor
carriers. (Id. at ¶¶ 12-15).
II. ANALYSIS
A. Legal Standard for Preliminary Injunction
For a party seeking injunctive relief under the 4-R Act, “a railroad need only demonstrate
that there is ‘reasonable cause’ to believe a violation of the 4-R Act has occurred or is about to
occur.” CSX Transp., Inc. v. Tennessee State Bd. of Equalization, 964 F.2d 548, 551 (6th Cir.

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This case is currently pending on appeal in the Sixth Circuit Court of Appeals, No. 13-6348.

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BNSF’s first payment of this tax is due no later than October 20, 2014. (Id. at 11). Tennessee law
imposes penalty and interest on delinquent diesel fuel taxes, and according to Plaintiff, it could suffer
penalties and interest unless the collection of the taxes is enjoined, citing Tenn. Code Ann. § 67-31208(b) & (c). (Docket Entry No. 12 at 10).
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1992). A mere “possibility” of a violation of the 4-R Act is not sufficient. Tennessee State Bd.
of Equalization, 964 F.2d at 555.
B. Discussion
At this juncture, the Court is not deciding the merits of Plaintiff’s case, but rather the
Court is called upon to determine whether Plaintiff has shown reasonable cause to believe that
Section 306(1)(d) of the Railroad Revitalization and Regulatory Reform Act of 1976, 49 U.S.C.
§ 11501(b)(4) has been violated, or is about to be violated.
Plaintiff ultimately seeks to enjoin Defendants from assessing, levying or collecting taxes
imposed on its fuel by the Tennessee Transportation Fuel Equity Act. As part of its claim,
Plaintiff contends such an action would violate Section 306.
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), prohibits state and local governments
from discriminating against railroads with respect to taxation. The 4-R Act establishes that
“[t]he following acts unreasonably burden and discriminate against interstate commerce, and a
State, subdivision of a State, or Authority acting for a State or subdivision of 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 transportation 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 assessment 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 rail carrier providing
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transportation subject to the jurisdiction of the Board under this part.”
49 U.S.C. § 11501(b).
Sections 11501(b)(1)-(3) prohibit “the imposition of higher assessment ratios or tax rates
upon rail transportation property than upon ‘other commercial and industrial property.’ ” Dep't of
Revenue of Or. v. ACF Indus., Inc., 510 U.S. 332, 336, 114 S.Ct. 843, 127 L.Ed.2d 165 (1994).
Section 11501(b)(4) of the 4-R Act is broader and prohibits the imposition of “another tax that
discriminates against a rail carrier providing transportation.” Id. This case is brought pursuant to
the fourth provision.
According to Plaintiff, “[f]ollowing this Court’s injunction on a sales tax on railroad
diesel fuel, the Tennessee General Assembly improvidently reacted by passing a flawed and illconceived state statute that violates Section 306(1)(d) under several, equally applicable modes of
analysis.” (Docket Entry No. 12 at 10). Citing ACF, 510 U.S. at 346-347, Plaintiff argues the
following:
One type of taxation which the courts have invariably prohibited under Section
306(1)(d) is a tax which "targets" or "singles out" railroads for discriminatory
treatment. As recognized by the United States Supreme Court, Section 306(1)(d)
would be applicable where a state has "singled out railroad property for
discriminatory treatment," such as the case where "the railroads – either alone or
as part of some isolated and targeted group – are the only commercial entities
subject to an ad valorem property tax."
***
But the Tennessee Transportation Fuel Equity Act is a classic example of a
“targeting” or singling out” tax. Railroads are the only users of dyed diesel fuel –
that is, diesel fuel used for non-highway purposes – subject to the new Act. At
trial, BNSF will introduce the legislative history of the new Act, showing that the
proposed legislation at one time included commercial water carriers, but they
were excluded prior to the passage of the new Act. That leaves railroads as the
only taxed industry under the new Act for non-highway use.
In its attempt to resume discriminatory taxation previously enjoined by this Court,
Tennessee has tried to pound a round peg into a square hole. Tennessee has made
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the railroads the only taxpayer in Tennessee subject to tax under Tenn. Code Ann.
§ 67-3-202 on their nonhighway use of dyed diesel fuel. This attempt to impose a
discriminatory tax does not pass muster under Section 306(1)(d).
(Id. at 11 and 13).
Defendants claim, nevertheless, that “the adoption of the [Act] is not the type of action
that impelled Congress to pass the 4-R Act.” (Docket Entry No. 21 at 2). Defendants further
argue,
BNSF, and similarly-positioned railroads, are here attempting to be the only nongovernmental entities in Tennessee that pay no tax on the purchase or
consumption of fuel used for transportation. . . The Act cannot be evaluated in a
vacuum. It is an “equity” act because it was passed with the express purpose of
eliminating the difference in treatment between railroads and trucks that the
railroad complained about and this Court identified in Illinois Central R.R. Co. v.
Tennessee Dep’t of Revenue, 969 F.Supp.2d 892 (M.D. Tenn. 2013), appeal
pending, No. 13-6348 (6th Cir.). It is designed to conform to the law as expressed
in that decision. It treats railroads and trucks, their primary competitors, exactly
the same way.
***
BNSF fails to acknowledge critical facts. The Act imposes the same per-gallon
tax on railroads that is imposed on motor carriers and, as with motor carriers,
measures the amount of that tax in terms of gallons of fuel consumed in
Tennessee. The Act provides a credit to railroads for sales taxes paid on
purchases in other states that renders the tax on them lower than that on their
competitors. The only difference between clear diesel fuel and dyed diesel fuel is
color. A state’s allocation of proceeds from a tax has no bearing on the question
of tax discrimination. . . Railroads simply are not objects of discrimination as to
their consumption of fuel in Tennessee, and BNSF is entitled to no relief in this
case.
(Id. at 1-3).3

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According to Defendant, “Tennessee, along with the other 47 contiguous states and bordering Canadian
provinces, is a party to the International Fuel Tax Agreement (“IFTA”), the purposes of which is to
simplify the collection and reporting of taxes on motor fuel used by motor carriers operating in more than
one jurisdiction. State participation in IFTA is essentially mandated by federal legislation. See 49 U.S.C.
§ 31701 through -07. IFTA requires that the fuel use tax imposed by member jurisdictions be measured
by the consumption of fuel by 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
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Before the Court can assess whether there is “reasonable cause to believe” that the Act is
discriminatory, it must first determine the appropriate class for comparison. CSX Transp., Inc. v.
Alabama Dep’t of Revenue, __ U.S. __ , 131 S.Ct. 1101, 1107 (2011) (“CSX”).
Under the first three subsections of the statute that deal exclusively with property taxes,
Congress specifically provided a comparison class comprised of “other commercial and
industrial property.” 49 U.S.C. § 11501(b)(1–3). It did not provide such a comparison class for
the catchall provision. See 49 U.S.C. § 11501(b)(4). The proper approach toward defining the
appropriate class for comparison under subsection (b)(4) has divided the circuits,4 and the
Supreme Court's most recent decision in this area, CSX, declined to resolve the split. 131 S.Ct. at
1107 n. 5; see id. at 1115, 1118 n. 3 (Thomas, J., dissenting) (noting the division of authority);
Norfolk S. Ry. Co. v. Alabama Dep't of Rev., 550 F.3d 1306, 1308 n. 3 (11th Cir. 2008)
(collecting cases), abrogated on other grounds by CSX, 131 S.Ct. 1101.
The Commissioner contends the proper comparison class is the class of other commercial
and industrial taxpayers. (Docket Entry No. 21 at 6). In its Reply brief, Plaintiff submits that

multi-state agreement with respect to fuel purchased, used, or consumed by railroads.” See (Docket Entry
No. 21 at 4, fn 4).
4

Courts are split on the issue of the proper “comparison class.” Compare CSX Transp., Inc. v. Ala. Dep't
of Revenue, Civil Action No. 2:08-cv-00655-UWC, slip op. at 6-7 & n.3 (N.D.Ala. July 8, 2008)
(applying “competitive mode” comparison class, consisting of railroad's “direct competitors”), and Union
Pac. R.R. v. Minn. Dep't of Revenue, 507 F.3d 693, 695 (8th Cir. 2007) (same), and Ka. City S. Ry. v.
Bridges, No. 04-2547, 2007 U.S. Dist. LEXIS 23477, at *21-22 (W.D.La. Mar. 30, 2007) (same), and
Burlington N. R.R. v. Comm'r of Revenue, 509 N.W.2d 551, 553 (Minn. 1993) (same), with Burlington N.
Santa Fe Ry. v. Monroe, Civil Action No. 97-D-1754-N, slip op. at 21 (M.D.Ala. Aug. 10, 1998)
(applying comparison class of other “commercial and industrial taxpayers”), and Atchison, Topeka &
Santa Fe Ry. v. Arizona, 78 F.3d 438, 441 (9th Cir. 1996), cert. denied, 519 U.S. 1029, 117 S.Ct. 584, 136
L.Ed.2d 514 (1996) (same), and Ka. City S. R.R. v. McNamara, 817 F.2d 368, 375, 376 n. 15 (5th Cir.
1987) (same), and Ala. Great S. R.R. v. Eagerton, 541 F.Supp. 1084, 1086 (M.D.Ala. 1982) (same). The
Supreme Court in dicta has applied the “other commercial and industrial taxpayers” category to
challenges to state taxes under section (b)(4). See Dep't of Rev. v. ACF Indus., Inc., 510 U.S. 332, 335,
114 S.Ct. 843, 127 L.Ed.2d 165 (1994).
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“the tax which the State attempts to impose would fail under any analysis and regardless of the
comparison class used.”5 (Docket Entry No. 28 at 3). Plaintiff further argues,
To be sure, utilizing the class of other commercial and industrial taxpayers would
result in a finding of discrimination under Section 11501(b)(4). Other commercial
and industrial taxpayers, to the extent that they use diesel fuel, pay tax on that
diesel fuel only when it is used for on-highway purposes. BNSF repeats that the
tax challenged here singles out railroads because only railroads would pay the tax
on diesel fuel not used on the highway. Clearly, this is a tax that, in the words of
the Seventh Circuit, is "discriminatory" under Section 11501(b)(4) because "it
imposes a proportionately heavier tax on railroading than on other activities, even
if the taxing authority might be able to show that the activity imposes a
disproportionate burden on public services." See Burlington Northern Railroad
Co. v. City of Superior, supra, 932 F.2d at 1187.
Looking alternatively at the comparison class of "competitive modes of
transportation," the tax fails because the General Assembly refused to impose the
same tax on water carriers, which is the other principal user of non-highway use
diesel fuel in Tennessee. The exclusion of water carriers from the Act is
accomplished by the sophistry of statutorily defining "commercial carrier" in a
way that excludes water carriers. See Brief in Support, pp. 3-4. It is
extraordinarily pretextual to facially impose a tax on "commercial carriers," but
then pretend that water carriers are not such companies.

***
In attempting to support the "reasonable distinctions" between railroads and motor
carriers [sic], the Defendants' Response theorizes that "it is virtually impossible
for fuel taxes on water carriers to be measured by consumption." (p. 17). There is
no substantiation for this theory, nor do the defendants explain why it is any
easier for interstate railroads to measure consumption in Tennessee than it is for
interstate water carriers. The studies relied upon by the defendants further cite
differences between water and rail networks, and the efficiencies of different
modes of commercial transportation, and even the alleged impact on public
safety. (See Defendants' Response, pp. 18-19). But none of these alleged
differences speak to the issues here, and certainly do not constitute a "sufficient
justification" for the exemption of water carriers from the new Act now applicable
to railroads. As the Supreme Court explained in CSX Transportation, Inc. v.
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In Plaintiff’s initial brief in support of the motion, it takes the approach that the Court should use “other
commercial and industrial” taxpayers as the comparative class. Specifically, Plaintiff states, “when the
challenged tax is not one of general applicability, such as in this case where railroads are not taxed the
same as other commercial and industrial taxpayers, the courts look to ‘other commercial and industrial
taxpayers’ as the comparative class.” (Docket Entry No. 12 at 4, emphasis added).
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Alabama Dept. of Revenue, 131 S.Ct. 1101 (2011), the state must offer "a
sufficient justification" for declining to exempt railroads from a tax exempting its
competitor. See 131 S.Ct. at 1109, n. 8. Since a competitor has been exempted
from the tax and no attempt has been made to offer a "sufficient justification," a
preliminary injunction should be entered.
(Id. at 3-6).

Defendants counter that “[w]hile it is true that water carriers, which are at best minor
competitors, are exempt from the Act, they pay sales and use tax on their (dyed) diesel fuel
purchases in Tennessee.” (Docket Entry No. 21 at 7). And because of the credit railroads
receive paid on out-of-state fuel consumptions, “it is likely that the level of sales and use tax paid
by water carriers will be higher than the level of diesel tax paid by railroads.”

(Id.).

Additionally, Defendants argue that when making an assessment under the commercial and
industrial comparison class, “railroads pay a lower level of tax on fuel than anyone else in the
class that uses fuel for transportation purposes.” (Id. at 7-8).
The Court has conducted a comprehensive review of the different approaches available to
it, and concludes the appropriate comparison class is that of other commercial and industrial
taxpayers.6 Having decided the appropriate comparison class, the Court must now determine
whether the sales and use taxes for diesel fuel assessed against the railroad is discriminatory.
The “statute does not define ‘discriminates,’ and so [courts should] look [] to the ordinary
meaning of the word.” CSX, 131 S.Ct. at 1108. Discrimination, the Court has said, is the
“failure to treat all persons equally when no reasonable distinction can be found between those
favored and those not favored.” Id. (quoting Black's Law Dictionary 534 (9th ed. 2009)). CSX
did not offer further guidance on what constitutes discrimination in the present context. In dicta,
however, the Court observed that “[w]hether the railroad will prevail—that is, whether it can
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Since the Court has opted not to use the competitive mode comparison class, it need not conduct an
analysis on the exclusion of water ways at this stage in the litigation.
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prove the alleged discrimination—depends on whether the State offers a sufficient justification
for declining to provide the exemption at issue to rail carriers.” Id. at 1109 n. 8.
A two-step inquiry is used to evaluate a claim of discrimination in violation of §
11501(b)(4). See CSX, 131 S.Ct. at 1109 n. 8. The plaintiff has the initial burden to establish a
prima facie case of discriminatory tax treatment. If the 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.
When analyzing this case under the comparative class of “other commercial and
industrial” taxpayers, Plaintiff argues that this new tax must fail under Section 306(1)(d).
(Docket Entry No. 12 at 14). “This is because although railroads are no longer subject to a sales
tax that is generally applicable to all other commercial and industrial taxpayers in Tennessee (as
was the case in Illinois Central Railroad Co. v Tennessee Dep’t of Revenue), railroads now are
subject to a tax on their dyed diesel fuel used off-highway  a tax that no other commercial and
industrial taxpayer pays.” (Id.).
Defendant urges that the Act is unlike the kind of taxes that are challenged in targeting
cases. The Act “determines the level of tax on railroads when they engage in the activity of
consuming fuel in Tennessee, an activity engaged in by trucks, barges, and every other person
who operates a vehicle for transportation purposes in Tennessee, all of whom pay state tax on the
purchase or use of that fuel.” (Docket Entry No. 21 at 5). But because of the credit railroads
receive for out-of-state purchases, “the tax imposed . . . under the Act is lower than imposed on
every other purchaser and user.” (Id. at 6).
When using the comparison class of “other commercial and industrial” and considering

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whether railroads have a heavier tax burden than all other taxpayers in the class, Plaintiff has
failed to establish a competitive disadvantage. The Supreme Court has expressly rejected any
notion that railroads are entitled under subsection (b)(4) to “most-favored-taxpayer” status. See
CSX, 131 S.Ct. at 1109, n.8. The idea that the railroads would essentially be free and clear of
any state tax on diesel fuel, when all “other commercial and industrial” taxpayers are obligated to
pay such tax, would certainly teeter on a “most-favorable-taxpayer” status. Moreover, although
other commercial and industrial taxpayers are not subject to this particular Act, Plaintiff has
failed to persuade the Court at this juncture that the imposition of the tax discriminates against
rail carriers  considering that ultimately all taxpayers pay 17¢ per gallon on diesel fuel
consumed in Tennessee. Consequently, based on the evidence in the record at this stage in the
litigation, there is not reasonable cause to believe a violation of the 4-R Act has occurred  and
therefore, does not support the imposition of a preliminary injunction.
III. CONCLUSION
For all of the reasons stated, Plaintiff’s Motion for a Preliminary Injunction (Docket
Entry No. 11) is hereby denied. The Court will return this matter to the Magistrate Judge to
conduct all further case management proceedings necessary to prepare this case for trial on the
merits.
An appropriate Order shall be entered.

_________________________________________
KEVIN H. SHARP
UNITED STATES DISTRICT JUDGE

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