I Hear That Train A'Comin ... To Pay Tennessee Sales Tax

Judge Kevin Sharp recently decided to leave his Federal District Court judgeship in Tennessee after serving six years of a lifetime appointment. The Tennessean had a good piece on this, and I recommend it to your reading. See Why Kevin Sharp Left the Bench in Nashville.  

As Judge Sharp left the bench in early April, he dropped a little goodie for the Tennessee tax world, issuing a decision in the Tennessee version of CSX v. Alabama Department of Revenue, which was recently decided by the U.S. District Court in Alabama, upholding the Alabama statutes.

Judge Sharp, in the Tennessee Case, Illinois Central Railroad v. Tennessee Department of Revenue, No. 03:2010-cv-00197, not shockingly issued a ruling similar to the Alabama casein favor of the Tennessee Department or Revenue, concluding that the Tennessee tax structure for diesel is not discriminatory against railroads.

The issue that the Court grappled with was whether the "fuel-excise tax is the rough equivalent of ... the sales tax as applied to diesel fuel, and therefore justifies the motor carrier sales-tax exemption." The burden was on the State to prove a sufficient justification for exempting motor carriers from the sales tax, which is imposed on railroads.

Judge Sharp adopted the same reasoning as the Alabama district court that the rail carrier’s decision to use dyed diesel fuel, instead of clear fuel, was self-imposed discrimination. The court also determined that the sales tax on dyed diesel fuel was roughly equivalent to the excise tax motor carriers paid on their clear fuel purchases.

This decision along with the Alabama CSX decision are likely headed back to the Court of Appeals. Unless there is a split among the Circuits, that will likely be the end of the road for this issue, which has seen a storied path through the Federal courts. Many taxpayers are paying close attention to these cases as there are numerous refund lawsuits being held in abeyance in Tennessee pending the outcome of the Illinois Central case.

Also of note is an amendment to the Tennessee statute that occurred while the lead case was pending. The challenge to the amended statute is also pending and is proceeding separately in a case being litigated by BNSF Railway. 

As a side ruling, the Court also addressed whether the Taxpayer's expert, Professor Pomp, should be allowed to provide expert testimony in the case, an issue that has become more prevalent in recent years with the State opposing the use of Professor Pomp as an expert in numerous cases despite having themselves used him in a 2003 tax case involving Exxon Mobil. The Court concluded that Professor Pomp's testimony should not be excluded.

Professor Pomp = winner!