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CSX Transportation, Inc. v. South Carolina Department of Revenue

United States Court of Appeals, Fourth Circuit

March 17, 2017

CSX TRANSPORTATION, INCORPORATED, Plaintiff - Appellant,
v.
SOUTH CAROLINA DEPARTMENT OF REVENUE; RICK REAMES, III, Agency Director of the South Carolina Department of Revenue, Defendants-Appellees.

          Argued: January 26, 2017

         Appeal from the United States District Court for the District of South Carolina, at Columbia. Margaret B. Seymour, Senior District Judge. (3:14-cv-03821-MBS)

         ARGUED:

          Stephen Dorr Goodwin, BAKER, DONELSON, BEARMAN, CALDWELL & BERKOWITZ, PC, Memphis, Tennessee, for Appellant.

          Milton Gary Kimpson, SOUTH CAROLINA DEPARTMENT OF REVENUE, Columbia, South Carolina, for Appellees.

         ON BRIEF:

          James W. McBride, BAKER, DONELSON, BEARMAN, CALDWELL & BERKOWITZ, PC, Washington, D.C.; John C. von Lehe, Jr., Bryson M. Geer, NELSON MULLINS, Charleston, South Carolina, for Appellant.

          Nicole M. Wooten, SOUTH CAROLINA DEPARTMENT OF REVENUE, Columbia, South Carolina; Thomas Parkin C. Hunter, SOUTH CAROLINA ATTORNEY GENERAL'S OFFICE, Columbia, South Carolina, for Appellees.

          Before TRAXLER, DIAZ, and THACKER, Circuit Judges.

          OPINION

          TRAXLER, Circuit Judge:

         CSX Transportation, Inc. ("CSXT") appeals a judgment following a bench trial in its action brought under the Railroad Revitalization and Regulatory Reform Act of 1976 (the "4-R Act"). See 49 U.S.C. § 11501(b)(4). Because we conclude that the district court's basis for awarding judgment against CSXT was invalid, we vacate the judgment and remand for further proceedings.

         I.

         A. Determination of Property Tax for South Carolina Property

         This case concerns the differences between how ad valorem taxes are determined in South Carolina for railroad property and how they are determined for most other commercial and industrial property. For each group, the determination is a multi-step process.

         In the first step, all property subject to taxation in South Carolina is appraised for assessment purposes at its purported "true value, " which is "fair market value."[1] S.C. Code § 12-37-930. The methods used for such appraisals vary, however. See, e.g., SC Code § 12-4-540(B). South Carolina law specifically provides that railroads are assessed under the "unit valuation" method. See S.C. Code § 12-4-540(B). Under that method, an appraiser values the operating properties of an interstate company as an integrated whole without regard to the value of its component parts. South Carolina generally calculates railroad system values based on the income the property is earning.[2] Once the total value of all of a railroad's real and personal property throughout the United States is determined in this fashion, the next step in the unit valuation process is to allocate the portion of the system value that represents the value of the railroad's property in South Carolina.[3] Finally, property that has already been taxed or that is tax-exempt is subtracted, yielding an "appraised value."

         Once South Carolina has determined the appraised value of a taxpayer's property in the state, the next step in the tax-calculation process is the application of a statutory assessment ratio. See S.C. Code § 12-43-220. The South Carolina General Assembly has established statutory assessment ratios that apply to various types of property, and for railroad property, the ratio is 9.5%. See S.C. Code § 12-43-220(g). Applying the statutory assessment ratio to the appraised value of a taxpayer's property yields the "assessed value, " against which the property tax rate is generally applied and property taxes are levied and collected.

         However, in the case of property owned or leased by transportation companies for hire, including railroads, there is an additional step that precedes the application of the property tax rate. To the assessed value of such property, South Carolina applies an "equalization factor, " which is a reduction that these companies receive to help negate disparities between the fair market valuation of their properties and those of other commercial/industrial and manufacturing properties. See S.C. Code § 12-43-220(g). Once the appropriate equalization factor is applied, the resulting assessed value is distributed to the various South Carolina counties and cities in which the company operates and these entities in turn apply their local tax rates to determine the taxes the railroad must pay.

         The primary focus of this appeal is the South Carolina Real Property Valuation Reform Act ("SCVA"), which the South Carolina General Assembly enacted in 2006. See S.C. Code §§ 12-37-3110 et seq. The SCVA generally limits increases in appraised values of commercial and industrial real properties to 15% within a particular five-year period.[4] See S.C. Code § 12-37-3140(B). The SCVA does not apply, however, to "[r]eal property valued by the unit valuation concept." S.C. Code § 12-37-3140(D). Because railroad property is valued by that method, railroads do not benefit from the 15% cap. It is that difference between the way South Carolina law treats railroad property and the way it treats other commercial and industrial property that is the subject of the present case.

         B. 4-R Act

          In 1976, Congress enacted the 4-R Act to "restore the financial stability of the railway system of the United States, " among other purposes. § 101(a), 90 Stat. 33. In order to achieve this goal, Congress targeted state and local taxation schemes that discriminate against railroads. See Burlington N. R.R. Co. v. Oklahoma Tax Comm'n, 481 U.S. 454, 457 (1987). The portion of the 4-R Act at issue here, now codified at 49 U.S.C. § 11501, bars states and localities from engaging in four categories of tax-related conduct.

Under § 11501(b), states (or their subdivisions) "may not":
(1)[a]ssess 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) [l]evy or collect a tax on an assessment that may not be made under paragraph (1) of this subsection[;]
(3) [l]evy 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 ...

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