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1 Joseph Henchman, Supreme Court Considers Whether Sales Tax Exemptions Can Be Discriminatory Taxes 1 (2010)

handle is hein.taxfoundation/ffceexz0001 and id is 1 raw text is: °4 F~ M FOU~NDATIO JLL, , tx .., .,.n. . . .,xx ........ \' September 13, 2010 No. 244 'am k .'.. Supreme Court Considers Whether Sales Tax Exemptions Can Be Discriminatory Taxes By Joseph Henchman Summary If a state exempts particular businesses from paying sales tax but not their competitors, does that mean the tax system is discriminatory? On November 10, 2010, the U.S. Supreme Court will consider this question in the context of railroad taxation when it hears arguments in CSX Transportation, Inc. v. Alabama Department of Revenue, No. 09-520. The Tax Foundation's Center for Legal Reform has filed a friend-of-the-court brief in the case, which this report summarizes. The case involves the federal Railroad Revitalization and Regulatory Reform Act, colloquially known as the 4-R Act. Enacted in 1976, the 4-R Act prohibits discriminatory state tax policies against railroads, but in an 8-1 ruling in a 1994 case, Dep 't of Revenue of Oregon v. A CF Industries, Inc., the Supreme Court ruled that some pre-existing property tax exemptions are immune from challenge under the act. Incorrectly extending the reasoning in ACF to sales and use tax exemptions, the lower court in this case concluded that sales and use tax exemptions for CSX's competitors are not discriminatory against CSX, or at least that they can not be challenged under the 4-R Act. 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. To maintain the careful balance of states' taxing power against businesses' right to compete in the national market, the Supreme Court should reverse the decision of the lower court and specify that sales and use tax exemptions are discriminatory taxes and not immune to challenge under the 4-R Act. The author would like to acknowledge the research and editing contributions of Arushi Sharma and Steven Pahuskin, and the extensive assistance of James Markels, our counsel of record in the case. Joseph Henchman is Tax Counsel and Director of State Projects

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