The Supreme Court of the United States (“SCOTUS”) has had its hands full with tax cases this year. Although largely unpopular and unexciting for the general public, SCOTUS find tax cases even less appealing. In fact, since 1992 in Quill, SCOTUS has not heard a case dealing with sales tax nexus. Despite its unpopularity, the nexus issue is an important one since the advent of the Internet. However, every statistic has its anomaly. From a state tax perspective, SCOTUS issued two opinions in 2 days, which is impossible. The first case, the DMAcase came down yesterday, March 3, 2015, ruling that a taxpayer could embark on a constitutional challenge to a state tax in federal court. Even more riveting, SCOTUS ruled today, March 4, 2015, in theCSX case.
By way of brief background, federal law prohibits states from imposing taxes that “discriminate against rail carriers.” With that in mind, Alabama decided to impose a 4% tax on diesel fuel purchases made by a rail carrier and exempt similar purchases made by other competitors, namely motor and water carriers. However, motor carriers pay 19 cents per gallon of fuel tax on diesel purchases and water carriers don’t pay tax on diesel fuel purchases. Is this the type of discrimination the feds were talking about? Does anyone really care?
Even more enthralling is that this this case is CSX’s second dance with SCOTUS. At the case’s inception, CSX filed suit in federal district court. The trial court rejected CSX’s complaint, and that decision was affirmed by the 11th Circuit Court of Appeals. SCOTUS thought this was an important issue, apparently, and took the case. It determined that the complaint had validity and remanded the case back down to the trial court to hear the case.
On remand, the District Court again rejected CSX’s claim and the 11th Circuit reversed its decision. The 11th Circuit determined that CSX could show discrimination which would entitle it to relief. That decision was brought to the Supreme Court and SCOTUS announced it would hear the case for a second time by grating certiorari.
Justice Scalia delivered the opinion of the court and essentially engaged in three separate analyses to reach his ultimate conclusion. First, in order for discrimination to exist, he had to determine whether the comparison class was comprised of all general commercial and industrial taxpayers or if it was limited to rail, motor, and water carriers. The Court determined that one can easily pick its class to those that are similarly situated. From there, the Court looked to whether Alabama sufficiently justified different treatment between two similarly situated taxpayers. The Court ruled that if there are roughly comparable taxes, although different ones, discrimination does not occur. However, the 11th circuit would be left to decide whether the taxes are roughly comparable. SCOTUS also punted on whether the water carriers exemption justifies the discrimination to the 11th circuit.
From the eyes of a multi-state sales and use tax attorney, the case’s main focus was on what is the comparison class to evaluate the discrimination claim. The Court left this standard somewhat amorphous in that it defined the comparison class as anyone the Plaintiff deems “similarly situated.” Even more troubling, the Court punted the ball down to the 11th circuit for now a third time to determine if the comparable motor carrier tax is comparable and whether the water carrier tax is justified. This ruling allows a very open opportunity for practitioners to attack state taxing regimes on discrimination claims.
If there was ever a case to hear, it was Amazon and Orbitz versus New York in 2013. At issue was the two large online retailers versus the mighty state of New York. To the dismay of many State and Local Tax (“SALT”) critics, the Supreme Court decided to sidestep a much more important issue. This case is much narrower and frankly, really is not of much help in assisting lower courts. State and local tax cases are at the bottom of the totem pole for sexy cases for the court to hear, but this one might even be below that. While it is true, the Court gave gave the circuits direction on the correct discrimination test that will be important for a multistate sales and use tax attorney, who else really cares? I’m sure everyone will be watching this one closely and I will be ecstatic to post about remand number 3.
About the author: Mr. Donnini is a multi-state sales and use tax attorney and an associate in the law firm Moffa, Gainor, & Sutton, PA, based in Fort Lauderdale, Florida. Mr. Donnini’s primary practice is multi-state sales and use tax as well as state corporate income tax controversy. Mr. Donnini also practices in the areas of federal tax controversy, federal estate planning, Florida probate, and all other state taxes including communication service tax, cigarette & tobacco tax, motor fuel tax, and Native American taxation. Mr. Donnini obtained his LL.M. in Taxation at NYU. If you have any questions please do not hesitate to contact him via email JerryDonnini@Floridasalestax.com or phone at 954-642-9390.