Multi-State Tax Law Blog
Each year, the Supreme Court punts on dozens of cases. Included in the dozens of cases which the court elects not to hear each year are sales tax cases. They are uninteresting to the majority of the population and just not the type of cases the justices want to hear. In fact, despite having a significant affect in most multi-state businesses, the Supreme Court has not heard a sales tax nexus case since Quill in 1992.
If there was ever a case to hear, it was Amazon and Orbitz versus New York. 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 punt on this case at the end of 2013. Perhaps, it thought Congress was going to shock the world and actually do something. Or, perhaps, it just really didn’t care about sales tax nexus.
Then along comes CSX Transportation v. Alabama DOR. At issue is whether a state can enact a tax that imposes a higher rate on one group opposed to another group. In other words, can a state charge one group a 2% sales tax and another group a 4% sales tax on the same item? Without a sufficient justification it generally cannot. But does anyone really care?
For those that do care, Congress enacted the Railroad Revitalization and Regulatory Reform Act of 1976 in order to “restore the financial stability of the railway system.” Basically, the law declares that a state cannot make a tax that discriminates against railroads. The Railroads argument was a simple one, in that here, the state charges a 4% sales tax on railroads and 0% to its competitors, motor and water carriers. Therefore, railroads are discriminated against. On the flip side, the state’s side argued that while it is true motor carriers pay other taxes, they do not pay sales tax on similar purchases.
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. In other words, should the railroad be compared to other commercial companies, many of which pay the 4% sales tax in Alabama? Or should the railroad only be compared to its competitors, water and motor carriers? The distinction as to the identifiable class would likely change the result of whether discrimination occurred as to the railroad. I am sure you are out of your seat with excitement at this point.
After a laborious and deep discussion of the “functional” approach and the more narrow “competitive” approach, the court ultimately decided to use the competitive approach. However, if this case was heard in the 5th or 9th circuits, then the opposite test may have applied. Looking at the railroads versus its competitors, the state had to show something more than “a Zen proverb” to justify its discrimination. When asked, Alabama responded that the difference in tax treatment was “motor and water carriers are taxed differently because they are taxed differently.” Certainly a winning argument. Consequently, the 11th circuit ruled in the railroad’s favor and the case was appealed to the Supreme Court.
To the shock and dismay of many, the Supreme Court elected to hear this case. I mean state and local tax cases are about at the bottom of the totem pole for sexy cases for the court to hear, but this one might even be below that. This case is a very narrow case that will only directly affect railroads. While it is true, the court will give 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 am more curious to hear feedback from the SALT community as to why the court elected to hear this bizarre case but refused to hear Amazon. I’m sure everyone will be watching this one closely….
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 is currently pursuing 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.