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Supreme Court Should Rule Sales Tax Exemptions Are Discriminatory Taxes

Tax Foundation Amicus Brief Argues that Tax Exemptions May Be Challenged Under 4-R Act Washington, DC, September 13, 2010 - The U.S. Supreme Court should reverse a lower court ruling and determine that sales and use tax exemptions are discriminatory taxes and are not immune from being challenged under federal law, according to a Tax Foundation legal brief.   The Supreme Court will hear arguments on November 10 in CSX Transportation, Inc. v. Alabama Department of Revenue, in which CSX argues that Alabama's state tax system is discriminatory because it grants sales and use tax exemptions for CSX's competitors but not CSX.  

The Railroad Revitalization and Regulatory Reform Act, known as the 4-R Act, prohibits discriminatory state tax policies against railroads, but the Supreme Court subsequently ruled that some property tax exemptions are immune from challenge under the act. Relying on that immunity concept, a lower court incorrectly determined that sales tax exemptions may not be challenged either.  

"A Supreme Court decision to uphold the lower court's reasoning would result in economic distortion and effectively give state governments all the discriminatory authority that they had exercised so enthusiastically before the 4-R Act was made law to rein them in," said Tax Foundation Tax Counsel and Director of State Projects Joseph Henchman., who authored a report summarizing the Tax Foundation's friend-of-the-court brief. "In particular, states could convert an impermissible discriminatory tax with higher rates on competitors into a permissible discriminatory tax with exemptions for competitors that achieve the same result."  

Tax Foundation Fiscal Fact, No. 244, "Supreme Court Considers Whether Sales Tax Exemptions Can Be Discriminatory Taxes," is available online at http://www.taxfoundation.org/publications/show/26701.html.   Even though the 4-R Act does not explicitly refer to sales and use tax exemptions as a type of discriminatory tax policy subject to challenge, subsection (b)(4) of the act prohibits "another tax that discriminates against a rail carrier." This "catch-all" provision indicates that Congress did not intend the 4-R Act to be limited to property tax rates and assessments, but that it may also apply to other taxes and their exemptions, which in effect are part and parcel of the taxes themselves, the brief argues.  

"The problems created by discriminatory state property taxes are no different from those created by discriminatory non-property taxes, namely that rail carriers will be forced to pay more than their non-rail competitors, putting them at a comparative disadvantage," Henchman said. "The incentives for states to discriminate against interstate rail carriers and favor intrastate competitors - promoting the local economy over the health of the nation's economy - haven't changed since the 4-R Act was passed in 1976. To maintain the careful balance of states' taxing power against business' right to compete fairly in the national market, the Supreme Court should reverse the lower court's decision." 

The Tax Foundation is a nonpartisan, nonprofit organization that has monitored fiscal policy at the federal, state and local levels since 1937.

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