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Unfair railroad fuel taxation? U.S. Supreme Court agrees to hear CSX Transportation case

The U.S. Supreme Court granted certiorari in Alabama Dept. of Revenue v. CSX Transportation, Inc., --- S. Ct. ---- (2014), on July 1, 2014. While the Court generally addresses the questions presented in the writ of certiorari if it decides to hear the case, the Court added a question of its own for the parties to argue and brief in its grant:

Whether, in resolving a claim of unlawful tax discrimination under 49 U.S.C. § 11501(b)(4), a court should consider other aspects of the State’s tax scheme rather than focusing solely on the challenged tax provision.

The question presented in the writ of certiorari was:

Whether a State “discriminates against a rail carrier” in violation of 49 U.S.C. § 11501(b)(4) when the State generally requires commercial and industrial businesses, including rail carriers, to pay a sales-and-use tax but grants exemptions from the tax to the railroads’ competitors.

Background

This case arrives for a second time at the Court after a history which includes numerous decisions. Both parties have “won” their case at various points in this history. The key points of the underlying dispute are as follows.

CSX Transportation, Inc. (CSX), a railroad company, brought suit against the Alabama Department of Revenue, claiming that Alabama’s tax laws discriminated against railroads, thus violating the Railroad Revitalization and Regulatory Reform Act, 49 U.S.C. § 11501(b) (4–R Act). This discrimination existed, CSX alleged, due to the state’s exemption for interstate motor and water carriers from sales and use taxes on the purchase and consumption of fuel.

The 11th Circuit, in its decision, stated that the 4-R Act “target[s] state and local taxation schemes that discriminate against rail carriers[]” and was enacted to “restore the financial stability of the railways system of the United States.” CSX Transp., Inc. v. Ala. Dep’t of Revenue, 720 F.3d 863, 866 (2013) quoting CSX Transp., Inc. v. Ala. Dep’t of Revenue (CSX II), 131 S.Ct. 1101, 1105 (2011). More specifically, the 11th Circuit pointed out that the 4-R Act provides that a state may not “[i]mpose another tax that discriminates against a rail carrier providing transportation subject to the jurisdiction of the Board under this part.” 49 U.S.C. § 11501(b)(4).

While water carriers, rail carriers, and motor carriers all compete in the shipment of freight market, each pays a different fuel tax under Alabama state law. Water carriers pay no tax whatsoever on their diesel fuel purchases; motor carriers pay an excise tax of 19 cents per gallon; and rail carriers pay the state’s four percent sales tax.

Remarks

As one can surmise, this Court’s answers to the questions presented may have major implications for state tax jurisprudence. This also appears to be a very close case, as lower courts have found in favor of both parties in this case’s history.

As we have remarked before in the Multistate Tax Update, many of the upcoming decisions of the Court will have a ripple effect on state taxation throughout the country. How big those ripples will be has yet to be seen. What is certain is that companies should take note of these cases and plan accordingly.

The Court has had an influx of state tax-related petitions lately. The Court denied certiorari to a case concerning New York’s affiliate nexus law, a case many thought the Court would hear. However, the Court recently granted certiorari to Comptroller v. Wynne, a case which will address matters of importance to taxpayers who are subject to the taxation in multiple states. Additionally, the Court granted certiorari to Direct Marketing Association v. Brohl, a case which will address the constitutionality of a state imposing use tax reporting requirements on out-of-state businesses (as opposed to imposing the obligation to collect and remit sales taxes).

The Multistate Tax Update will continue following developments of significance to state taxation in the U.S. Supreme Court.

Vermont provides draft guidance on the taxation of prewritten software accessed remotely

The Vermont Department of Taxes (the Department) recently issued draft guidance on the collection of sales tax on prewritten software accessed remotely in order to provide more clarity to taxpayers on this area of taxation. Prior to July 1, 2013, there was a legislative moratorium on the collection of sales tax on prewritten software accessed remotely.

The draft regulation provides that:

A transfer of prewritten computer software by a sale, license, subscription, lease or other means for consideration is a retail sale notwithstanding that the software is accessed remotely by the purchaser. The determination of whether there is a retail sale of the software is based on whether the use or control given the purchaser with respect to the software allows the purchaser merely the means to access the seller’s or third party’s services and/or data or whether the purchaser is able to use the software to independently perform tasks.

The draft regulation provides a list of transactions that are not taxable, factors that would indicate that a transaction is taxable (subject to the list of non-taxable transactions), and general examples of different types of transactions and whether such transactions are taxable sales of prewritten software. Some, but not all, of the transactions that the draft regulations list as being not taxable are reproduced below:

  • A transaction is not taxable where the focus of the transaction is the provision of services or the transfer of intangible property rights and not the transfer of prewritten software; no separate charge is made for the transfer of prewritten software; and the value of the prewritten software transferred, including the value of services added to the prewritten software transferred, is less than 10 percent of the total charge for the transaction.
  • A transaction that bundles the retail sale of prewritten software and a service is not taxable where the prewritten software is essential to the use of the service, and is provided exclusively in connection with the service, and the true object of the transaction is the service.

  • The sale of data processing and information services that allow data to be generated, acquired, stored, processed, or retrieved and delivered by an electronic transmission to a purchaser where such purchaser's primary purpose for the underlying transaction is the processed data or information.

  • The sale of website design and website hosting services. Such services, when performed by the seller rather than the customer, are not considered the sale of prewritten software.

  • Transactions where the seller provides personal or professional services (e.g. custom software, legal, accounting).

  • Transactions where the customer is running its own software, which was not obtained from the seller, on seller’s hardware in a “cloud computing” environment. This may be described as providing Infrastructure as a Service (IaaS). The IaaS business model provides the consumer with processing, storage, network capabilities, and other fundamental computing resources where the consumer is able to deploy and run software. This transaction will not be considered taxable merely because the seller of such computing resources provides access to operating system software as an incident to such services, in order to enable the customer to run its own application software.

Click here for the full text of the draft regulations. The Department is accepting comments regarding the current draft regulation until Oct. 1, 2014 at tax.commissioner@state.vt.us or 802-828-3763. After the completion of the informal comment period, the Department plans to initiate a formal rulemaking process during which additional comments may be submitted.

For additional information regarding these subjects or any other multistate tax issues, please contact:

David M. Kall
216.348.5812
dkall@mcdonaldhopkins.com

Susan Millradt McGlone
216.430.2022
smcglone@mcdonaldhopkins.com

Jeremy J. Schirra
216.348.5444
jschirra@mcdonaldhopkins.com 

Multistate Tax Services

Businesses must be vigilant and careful in managing their state and local tax liabilities and exposures. We understand this can be a daunting task. McDonald Hopkins Multistate Tax Services provides a broad range of state and local tax services including tax controversy, tax evaluation, tax planning, and tax policy. With professionals who have worked both inside and outside government agencies, our multistate tax team leverages its knowledge and experience to help clients control their complex multistate taxes.

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