(The following story by Clay Carey appeared on The Tennessean website on March 15, 2010.)
NASHVILLE, Tenn. — A railroad company has challenged a state tax that it claims gives trucking companies an unfair advantage in the freight hauling business in Tennessee.
Trains pay a 7 percent tax on diesel fuel, a charge trucks are exempt from paying under state law. In a federal lawsuit filed last month, Illinois Central Railroad Co. claims the train tax amounts to discrimination against its industry.
At stake are millions of dollars the state collects annually from the train tax, which brought in $11.4 million last year. And the suit’s outcome could also impact the economics of the state’s freight hauling business, which is dominated by trucks.
The Nashville area is a hub for freight traffic, with nearly 300 million tons of building materials, clothes, food and other products passing through every year — mostly on the backs of 18-wheelers, the freight railroad industry’s biggest competitor. Nearly 50,000 trucks drive area interstates and roads each day, about 75 percent of which are just passing through.
Shift to rail is sought
State officials and community groups have taken notice of their impact on traffic. The Tennessee Department of Transportation has studied ways to ease freight congestion along Interstate 40 from Memphis to the North Carolina border — including trying to find ways to get big shippers to shift from road to rail.
“We do not feel the current tax structure makes that change difficult; rather, it actually supports it,” TDOT spokeswoman Julie Oaks said.
She said revenue from the tax is used to rehabilitate tracks and bridges that have been abandoned by larger railroad companies. Short-line railroads use those tracks to ship products in and out of rural areas.
“The short lines promote rural livability and economic development,” Oaks said. “Without them, the only way products could move to and from these areas would be by truck, which would increase congestion, impact air quality and reduce economic competitiveness for the state’s rural areas.”
Illinois Central doesn’t see things that way.
Its lawsuit asks a federal judge to block the state from collecting the “discriminatory and unlawful” tax. In a separate lawsuit filed in Davidson County Chancery Court in December, Illinois Central has asked for a refund of $7.7 million in taxes it paid between 2004 and 2008, plus interest.
An Illinois Central spokesman would not discuss the lawsuit when contacted last week.
State officials also declined to comment on the case. In court filings, the state claims that treating trucking companies and rail carriers differently doesn’t automatically burden railroads or discriminate against them.
Court rulings vary
At the center of Illinois Central’s legal argument is the federal Railroad Revitalization and Regulatory Reform Act passed by Congress in 1976.
The act was meant to revitalize America’s rail freight system, in part by making government subsidies available for railroad upgrades.
That law barred states, counties and cities from making policies that discriminated against railroad companies.
Motor carriers don’t pay Tennessee’s sales and use tax. They only pay a diesel tax of 17 cents per gallon.
Railroads have raised the issue in other states, and courts have come down on different sides.
The Norfolk Southern Railway Co. filed a similar suit in 2008 claiming that Alabama’s sales and use tax on diesel fuel was discriminatory. The federal court of appeals ruled against the railroad, finding that the state was within its rights to exclude river barges and trucking companies from the fee.
“Simply because Alabama exempts interstate water carriers as well as some motor carriers does not transform the assessment into a discriminatory tax,” the court’s ruling said. According to state filings in Nashville, Tennessee’s railroad use tax is virtually identical to Alabama’s.
In 2007, a federal appeals court in Minnesota ruled against the state’s revenue department when the Union Pacific and Soo Line railroads sued over a sales and use tax. Barges and ships on the Great Lakes also had to pay the tax, but motor carriers and planes were exempt.
The Tennessee attorney general’s office said the ruling in the Minnesota case and others like it were “not binding on Tennessee courts, wrongly decided and completely devoid of meaningful analysis.”