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CSX Transportation Inc. v. South Carolina Department of Revenue

United States District Court, D. South Carolina, Columbia Division

January 7, 2019

CSX Transportation, Inc., Plaintiff,
v.
South Carolina Department of Revenue and W. Harley Powell, [1] Agency Director of the South Carolina Department of Revenue, Defendants.

          OPINION AND ORDER

          Margaret B. Seymour Senior United States District Judge

         Plaintiff CSX Transportation, Inc. (hereinafter “CSXT”) is an interstate common carrier by railroad. Tr. 14:3, ECF No. 80. CSXT operates in twenty-three states, including South Carolina. Id. at 37:2-14. Defendant South Carolina Department of Revenue is an agency of South Carolina. See S.C. Code Ann. § 12-4-10. It is charged by law to administer and enforce the revenue laws of the state. Id. Defendant W. Hartley Powell is the Agency Director of the South Carolina Department of Revenue (hereinafter together with Defendant South Carolina Department of Revenue “the State”). This matter is before the court on remand from the United States Court of Appeals for the Fourth Circuit. The issue is whether the South Carolina Reform Act (hereinafter the “SC Valuation Act” or “Act”), which is codified at S.C. Code Ann. §§ 12-37-3110 to -3170, impermissibly discriminates against CSXT in violation of the 4-R Act, 49 U.S.C. § 11501(b).

         I.

         The Railroad Revitalization and Regulatory Reform Act of 1976 (4-R Act), codified at 49 U.S.C. § 11501(b)(4), prohibits the imposition of any tax that results in the discriminatory treatment of a railroad. The 4-R Act was enacted in part to “restore the financial stability of the railway system of the United States.” CSX Transp., Inc v. Alabama Dep't of Revenue, 562 U.S. 277, 280 (2011) (CSX I). In crafting this legislation, Congress observed that the “railroads ‘are easy prey for State and local tax assessors' in that they are ‘nonvoting, often nonresident, targets for local taxation,' who cannot easily remove themselves from the locality.” Dep't of Revenue v. ACF Indus., Inc., 510 U.S. 332, 336 (1994) (ACF) (quoting Western Air Lines, Inc. v Bd. of Equalization, 480 U.S. 123, 131 (1987)). “Section 306 of the 4-R Act, now codified at 49 U.S.C. § 11501, addresses this concern by prohibiting the States (and their subdivisions) from enacting certain taxation schemes that discriminate against railroads.” Id. 336. The 4-R Act provides:

(b) The following acts unreasonably burden and discriminate against interstate commerce, and a State, subsection of a State, or authority acting for a State or subdivision of a State may not do any of them:
(1) Assess rail transportation property at 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.

49 U.S.C. § 11501(b).

         Subsections (b)(1)-(3) prohibit “the imposition of higher assessment ratios or tax rates upon rail transportation property than upon ‘other commercial and industrial property.'” ACF, 510 U.S. at 337. The term “commercial and industrial property” means property, other than transportation property and land used primarily for agricultural purposes or timber growing, devoted to a commercial or industrial use and subject to a property tax levy. 49 U.S.C. § 11501(a)(4). Subsection (b)(4) has been interpreted broadly and targets all types of discrimination against railroads. See Alabama Dep't of Revenue v. CSX Transp., Inc., 135 S.Ct. 1136, 1141-42 (2015) (CSX II). Subsection (b)(4) is “intended as a catchall provision designed to prevent discriminatory taxation of a railroad carrier by any means.” Richmond, Fredericksburg & Potomac R.R. Co. v. Dep't of Taxation, 762 F.2d 375, 377 (4th Cir. 1985)).

         The South Carolina Legislature passed the S.C. Valuation Act in 2010. The Act generally limits the permissible increases in appraised values of commercial and industrial real properties to no more than 15% within a five-year period for property tax purposes. Tr. 22:6-10; 54:2-5. The S.C. Valuation Act excludes “[r]eal property valued by the unit valuation method.” S.C. Code Ann. § 12-37-3140(D). Railroad companies, along with utility providers such as water, sewer, and power companies, are valued under the unit valuation concept, and thus the real properties of these companies are not afforded the 15% cap. Tr. 145:12-17.

         On September 30, 2014, CSXT filed a Verified Complaint seeking an injunction and declaratory relief with respect to real property taxes that were imposed by the State. Compl., ECF No. 1. CSXT alleges that the S.C. Valuation Act's exclusion of properties valued by the unit valuation method violates Section 306(1)(d) of the 4-R Act. The case proceeded to a bench trial, which was held on November 3, 2015. ECF No. 77. At trial, CSXT relied on subsection (b)(4) of the 4-R Act to argue that the S.C. Valuation Act imposes another tax “that is directed and targeted at railroads for disfavored treatment.” Tr. 54:17-25. In the court's Findings of Fact and Conclusions of Law, ECF No. 86, the court found that the S.C. Valuation Act does not impose a tax within the meaning of subsection (b)(4). Rather, the court concluded the “Act introduces one particular element, a cap on increases in appraised values, to an already-existing tax scheme.” Findings of Fact, 8. Accordingly, the court declined to enter declaratory judgment on CSXT's behalf and dismissed the complaint with prejudice.

         On appeal, the Fourth Circuit vacated and remanded this court's ruling. CSX Transp., Inc. v. South Carolina Dep't of Revenue, 851 F.3d 320 (4th Cir. 2017). The Fourth Circuit held that subsection (b)(4) is the proper vehicle for CSXT to bring its challenge against the S.C. Valuation Act's 15% cap. Id. at 326. The Fourth Circuit found that this “court's observation that the [SC Valuation Act] does not itself impose taxes is immaterial . . . and that CSXT's action plainly challenged the imposition of a tax.” Id. “Thus, if CSXT can prove that the tax imposed was discriminatory, it will have demonstrated a (b)(4) violation.” Id. Accordingly, the Fourth Circuit instructed this court to determine whether CSXT suffered discrimination from the denial of the S.C. Valuation Act's 15% cap. Id. at 332.

         II.

         In CSX I, the Supreme Court stated that to determine whether a subsection (b)(4) suit may go forward, two questions must be answered: (1) is CSXT challenging “another tax” within the meaning of the statute; and (2) if so, might that tax “discriminate” against railroad carriers by exempting their competitors. CSX I, 562 U.S. at 283-84. A State's tax discriminates only where the State cannot sufficiently justify differences in treatment between similarly situated taxpayers. CSX II, 135 S.Ct. at 1143. As noted above, the Fourth Circuit has determined that “CSXT's action plainly challenged the imposition of a tax” under subsection (b)(4). CSX Transp., 851 F.3d at 326. The issue before ...


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