D.A.R. 2443
The ATCHISON, TOPEKA AND SANTA FE RAILWAY COMPANY, a
Delaware corporation; Southern Pacific
Transportation Company; Arizona Central
Railroad, Plaintiffs-Appellees,
v.
STATE OF ARIZONA; Arizona Department of Revenue; City of
Phoenix and Town of Clifton, Defendants-Appellants.
No. 94-15850.
United States Court of Appeals,
Ninth Circuit.
Argued and Submitted Oct. 19, 1995.
Decided March 4, 1996.
Paul J. Mooney, Fennemore Craig, Phoenix, Arizona, for the plaintiffs-appellees.
James M. Susa, Assistant Attorney General, Phoenix, Arizona, for the defendants-appellants.
Appeal from the United States District Court for the District of Arizona; Roger G. Strand, District Judge, Presiding.
Before FERGUSON and HAWKINS, Circuit Judges, and NIELSEN,* District Judge.
FERGUSON, Circuit Judge:
The State of Arizona appeals the district court's grant of summary judgment in favor of the plaintiffs. The district court held that Arizona's taxation scheme discriminated against the railroads and therefore violated the Railroad Revitalization and Regulatory Reform Act. We reverse.
I. Statement of the Case
A. Factual Background
The State of Arizona imposes both a transaction privilege tax and a use tax. Ariz.Rev.Stat.Ann. §§ 42-1301 et seq., 42-1401 et seq. (1991).1 The Arizona transaction privilege tax, which is similar to a sales tax, is applicable to most businesses in Arizona. It is generally imposed at a rate of five percent on the sale of goods and services occurring in the state. The Arizona use tax is a reciprocal tax which imposes a five percent levy on the price of goods purchased outside the state which are later brought into the State for use, storage, or consumption.
The Arizona transaction privilege tax is applicable to seventeen classifications of industrial and commercial taxpayers.2 The transporting classification of the transaction privilege tax is defined as "the business of transporting for hire persons, freight or property by motor vehicle, railroads or aircraft from one point to another point in this state." Ariz.Rev.Stat.Ann. § 42-1310.02 (1991).
Motor carriers are exempt from the transporting classification of the transaction privilege tax because they are taxed under a separate tax scheme. Motor carriers are taxed under Ariz.Rev.Stat.Ann. § 28-1599 et seq. (1989). The motor carrier tax is a weight-distance tax. It is generally calculated by multiplying the number of miles traveled by a motor vehicle on the public highways within the State of Arizona, by the applicable motor carrier tax rate for that motor vehicle's weight class. Ariz.Rev.Stat.Ann. § 28-1599.05(B) (1989). The motor carrier tax is not applicable to the railroads.
B. Procedural Background
The State of Arizona Taxing Authorities determined that additional transaction privilege taxes were due on Southern Pacific Transportation Company's activities within Arizona. After two unsuccessful administrative appeals, Southern Pacific and the Atchison, Topeka, and Santa Fe Railroad brought suit in district court. The railroads sought a declaratory judgment that the State of Arizona's transaction privilege tax and use tax were discriminatory in violation of The Railroad Revitalization and Regulatory Reform Act (the "4-R Act"), 49 U.S.C. § 11503 (1988), and a permanent injunction against the further imposition of these taxes for current or subsequent tax periods.3
After filing their complaint, Southern Pacific and Santa Fe moved for a preliminary injunction to prohibit the collection of the alleged discriminatory taxes. The district court denied this motion on the basis that discriminatory taxation occurs when the railroads are subject to a tax which applies only to a narrow class of taxpayers. The district court held that because the Arizona transaction privilege tax and use tax were applicable to a broad class of taxpayers, they were not discriminatory.
The Taxing Authorities then moved for summary judgment against the railroads. In response, the railroads filed a cross-motion for summary judgment against the Taxing Authorities. The district court granted the railroads' motion for summary judgment, holding that the Arizona tax scheme discriminated against the railroads because the railroads' major competitors, motor carriers, were exempt from the Arizona transaction privilege tax and use tax.
II. Discussion
We review a grant of summary judgment de novo. Jesinger v. Nevada Fed. Credit Union,
Three interrelated issues are raised by this litigation: (1) Is the 4-R Act, which seeks to prevent discriminatory taxation of the railroads, applicable to the Arizona tax scheme? (2) If so, what is the proper comparison class to employ in determining whether the Arizona tax scheme discriminates against the railroads? (3) Does the Arizona tax scheme discriminate against the railroads?
A. Analysis Under the 4-R Act
The 4-R Act was enacted by Congress in 1976 to restore financial stability to the railroad system in the United States. Department of Revenue v. ACF Indus., Inc., --- U.S. ----, ----,
The provisions of the 4-R Act relevant to this case are as follows:
(b) The 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 do any of them:
(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 clause (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 transportation subject to the jurisdiction of the Commission under subchapter I of chapter 105 of this title.
49 U.S.C. § 11503(b)(1)-(4).
The State of Arizona argues that Section 11503(b)(4) of the 4-R Act is not applicable to the transaction privilege taxes and use taxes at issue in this litigation. Arizona asserts that Section 11503(b)(4) prohibits only "in lieu" taxes imposed on the railroads in place of discriminatory property taxes. Such discriminatory property taxes are prohibited by subsections (b)(1) through (b)(3) of Section 11503.
The State's narrow interpretation of subsection (b)(4) of the 4-R Act has been rejected by many Circuits. In Richmond, F. & P. R.R. v. Department of Taxation,
We hold that subsection (b)(4) of the 4-R Act is designed to encompass all discriminatory state taxes, not just discriminatory property taxes or in lieu taxes. Therefore, subsection (b)(4) is applicable to the analysis of Arizona's transaction privilege tax and use tax at issue in this case.
B. The Choice of Comparison Class
In determining whether the Arizona taxes discriminate against the railroads, the district court compared the treatment of the railroads with the treatment of their major competitors, motor carriers. The district court erred in its choice of a comparison class. We hold that the proper comparison class to use in analyzing discriminatory taxation of the railroads under the 4-R Act is "all other commercial and industrial taxpayers subject to the taxes."
Many courts have already employed the comparison class of "other commercial and industrial taxpayers subject to the tax" in analyzing subsection (b)(4) of the 4-R Act. In Kansas City S. Ry. v. McNamara,
The only simple way to prevent tax discrimination against the railroads is to tie their tax fate to the fate of a large and local group of taxpayers.... We think the best course is to require that the railroads be taxed only under taxes applicable to 'other commercial and industrial' taxpayers.
Id. at 375 (emphasis added). Similarly, the Seventh Circuit held that "a tax is 'discriminatory' within the meaning of the fourth subsection of the 4-R Act if it imposes a proportionately heavier tax on railroading than on other activites." Burlington N. R.R. v. City of Superior,
Moreover, the purpose of the 4-R Act was not to grant railroads preferential treatment. CSX Transp., Inc. v. Tennessee State Bd. of Equalization,
This proposed antidiscrimination tax bill, ... has the obvious merit of insuring that such carriers would receive equal treatment with other taxpayers subject to the same tax rates in accordance with applicable State law. The proposal in no way alters the freedom of the State to tax its taxpayers as in its discretion it deems best, so long as such carriers are accorded equal tax treatment with other taxpayers.
Ogilvie,
The comparison class of "commercial and industrial taxpayers subject to the tax" must be used in analyzing the Arizona tax scheme because a narrow comparison class, comprised only of "motor carriers," would result in preferential treatment for the railroads. In order for railroad carriers to receive equal treatment with other taxpayers subject to the same tax law, they must be compared to all others subject to the tax in question, not just compared to motor carriers. Although subsection (b)(4) is silent as to the proper comparison class, congressional intent behind the 4-R Act dictates that the comparison class of "other commercial and industrial taxpayers subject to the tax" be used. See Pilot Life Ins. Co. v. Dedeaux,
C. Discriminatory Taxation Analysis
In claiming that the Arizona transaction privilege tax and use tax are discriminatory, the railroads make two arguments: 1) the Arizona transaction privilege tax and use tax exemption for motor carriers is discriminatory; and 2) the Arizona transaction privilege tax and use tax impose discriminatory rates upon the railroads. Both of these arguments lack merit.
First, the discriminatory exemption argument fails because the Supreme Court, in Department of Revenue v. ACF Indus., Inc., --- U.S. ----, ----,
Although ACF specifically addressed property tax exemptions, the logic advanced by the Supreme Court is equally applicable to the context of transaction privilege tax and use tax exemptions. The Court in ACF reasoned that if Congress, as a condition of permitting the taxation of railroad property had intended to restrict state power to exempt non-railroad property, Congress would have done so with clarity and precision. ACF, --- U.S. at ----,
The transaction privilege tax and use tax at issue in this case are generally applicable taxes. The transaction privilege tax is imposed upon seventeen classifications of business activities, including railroad activities, and encompasses over 140,000 industrial and commercial taxpayers. The Arizona use tax is imposed on all businesses in Arizona, irrespective of whether the business is additionally subject to the transaction privilege tax. The number of businesses subject to the use tax is so large that the Taxing Authorities cannot provide an exact number. However, they are confident that the number exceeds the 140,000 taxpayers subject to the transaction privilege tax.
Following the logic advanced by the Supreme Court in ACF, the Arizona transaction privilege tax and use tax do not violate the 4-R Act merely because they provide an exemption for motor carriers. The Arizona transaction privilege tax and use tax are taxes of general applicability, and therefore, the exemptions for motor carriers are permissible under the 4-R Act. Furthermore, the transaction privilege tax and use tax exemptions for motor carriers do not entirely exempt motor carriers from taxation because motor carriers are taxed under a separate tax scheme.
The second argument advanced by the railroads is that the Arizona tax scheme is discriminatory because the railroads are subjected to discriminatory tax rates. This argument fails as well. The tax rate imposed on the railroads is equivalent to that imposed on the vast majority of other commercial and industrial taxpayers. The transaction privilege tax rate of five percent applies to fourteen of the seventeen classifications of businesses subject to the tax. Those fourteen classifications comprise approximately seventy-nine percent of the total transaction privilege tax collected by the State of Arizona.
Lastly, the railroads argue that the Arizona tax scheme is discriminatory because the revenue collected from motor carrier taxes is used to repair the roads, while the railroads must repair trackage themselves. This argument is without merit. The Arizona Constitution allows taxes to be "levied and collected for public purposes only." Ariz. Const. art. 9, § 1 (1984) (Ariz.Rev.Stat.Ann.). See City of Phoenix v. Michael,
In sum, the railroads have not been singled out for discriminatory taxation through either the use of discriminatory tax exemptions or through excessive tax rates. According to ACF, discrimination under the 4-R Act does not arise when exemptions are granted from a generally applicable tax if the railroads are treated fairly in comparison to other commercial and industrial taxpayers subject to the tax. The Arizona transaction privilege tax and use tax exemptions for motor carriers do not violate the 4-R Act because the taxes at issue are generally applicable and because the railroads are treated fairly in comparison to other taxpayers subject to the Arizona taxes. The tax rates imposed by Arizona are also not discriminatory. The railroads pay the same tax rate as fourteen of the seventeen classifications subject to the transaction privilege tax.
III. Conclusion
The district court's grant of summary judgment for the plaintiffs is REVERSED. The district court's grant of a permanent injunction for the plaintiffs is REVERSED. We REMAND and direct the district court to grant summary judgment in favor of the defendants.
WM. FREMMING NIELSEN, District Judge, dissenting:
I concur with the Court's holding in respect to Section II A. However, I respectfully dissent because the majority utilizes an inappropriate comparison class in determining whether this tax exemption results in discrimination against the Railroads. I would AFFIRM the district court's holding that the correct comparison group is the Railroads' competitors, and that the tax discriminates against the Railroads.
I believe that using the competitor comparison class in this case serves the purpose of (1) harmonizing what appears to be a conflict amongst the courts regarding the appropriate comparison class under 306(1)(d); (2) making statutory sense of 306(1) which provides a specific comparison class in three of four subsections, but pointedly omits any reference to a comparison class in the subsection at issue here; (3) upholding the purposes of the 4-R Act in avoiding adverse competitive effects against the railroads; and (4) avoiding the patently discriminatory effects of this tax.
I.
The majority cites two cases supporting the broad comparison group, Burlington Northern R.R. Co. v. City of Superior,
Two Circuits embraced the "other commercial and industrial taxpayer" comparative class under 306(1)(d) when railroads were essentially singled out for taxation, Burlington Northern R.R. Co. v. City of Superior,
This case, however, involves a broad tax that exempts the Railroads' primary competitors. The majority's reliance on McNamara and Burlington Northern v. City of Superior is misplaced because neither case addresses this form of discriminatory taxation. Burlington Northern R.R. Co. v. Commissioner of Revenue,
II.
Two comparison groups may be utilized under subsection (d) because that subsection does not require that a specific comparison group be adopted. This is in marked contrast to subsections (a), (b), and (c) which require that commercial and industrial taxpayers be used as the comparison class. Indeed, the Ninth Circuit previously noted this omission in subsection (d):
[S]ections 3061(a) and (c), ... restrict the comparison classes to "other commercial and industrial property." There is no analogous restriction in the broad language of section 3061(d).
ACF Indus., Inc. v. Department of Revenue,
The majority glosses over this statutory construction problem by arguing that Congressional intent "dictates" the broad comparison class be used under subsection (d). Putting aside the question of Congressional intent for a moment, this does not explain why Congress specifically chose to omit any reference to a comparison class in subsection (d), yet utilized the "other commercial and industrial" taxpayer group in subsections (a), (b), and (c). I believe a more careful analysis of the statutory construction issue is necessary in order to help discern Congressional intent.
The Supreme Court has addressed the issue of statutory omissions. Federal Trade Comm'n v. Sun Oil Co.,
Therefore, I proceed with the assumption that the omission of a comparison class in 306(1)(d) is not coincidental. If Congress wanted that subsection to share the same broad comparison class as the three preceding subsections, and none other, it would have said so. It did not. Sun Oil Co.,
III.
"The purpose of the 4-R Act was to prevent tax discrimination against railroads in any form whatsoever." Ogilvie v. State Board of Equalization,
The broad comparison group defeats the purpose of the 4-R Act by placing the Railroads at a decided competitive disadvantage. Burlington Northern R.R. v. Commissioner of Revenue,
IV.
The weakness of the exclusive use of the broad comparison class becomes evident in a case like this. The transaction privilege tax reaches over 140,000 transaction privilege tax licenses issued statewide. There is one exception. That exception, of course, is for motor carriers who represent the principal competitors of the Railroads. As the Fourth Circuit noted, "in essence, discrimination is a failure to treat all persons equally where no reasonable distinction can be found between those favored and those not favored." Richmond, Fredericksburg & Potomac R.R. v. Department of Taxation,
The broad comparison class overlooks the obvious point that a tax imposed on rail carriers, but not on motor carriers, is discriminatory in the most basic sense of the word--it treats those engaged in an identical activity differently. In this instance, it treats those involved in the transportation of goods or passengers differently, and the Railroads suffer a dramatic competitive disadvantage. This is a result the 4-R Act cannot allow.
The disparate tax treatment of the Railroads with motor carriers, their principal competitor, is discriminatory. This disparate treatment is, in my view, unlawful under the 4-R Act. Accordingly, I DISSENT.
Notes
Honorable Wm. Fremming Nielsen, District Judge for the Eastern District of Washington, sitting by designation
In addition, most Arizona cities and towns have adopted the Model City Tax Code which imposes a transaction privilege tax similar to the Arizona state transaction privilege tax
The seventeen classifications of businesses to which the transaction privilege tax applies are: retail sales, transporting, utilities, telecommunications, publication, job printing, pipelines, private car lines, commercial leases, transient lodging, personal property rentals, mining, amusement, restaurant, prime contracting, owner-builder sales and membership camping. Ariz.Rev.Stat.Ann. §§ 42-1310.01-.18 (1991 & Supp.1995)
The railroads also challenged the City of Phoenix's and Town of Clifton's transaction privilege taxes in this litigation