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Tax Law

Oregon’s Taxation of Railroad’s Intangible Personal Property is Derailed by the 4-R Act

The U.S. Court of Appeals for the Ninth Circuit upheld a rail carrier’s authority to challenge the Oregon Department of Revenue’s taxation of its “accounting goodwill” pursuant to the federal Railroad Revitalization and Regulatory Reform Act, commonly referred to as the 4-R Act.

Oregon imposes tax on real and tangible personal property located in the state, and also imposes tax on intangible personal property for railroads and certain other commercial and industrial entities that are subject to central assessment by the Department. After the Department assessed tax on its goodwill, BNSF Railway Company (BNSF) challenged the tax under the 4-R Act, which prohibits states from unreasonably burdening and discriminating against interstate commerce by imposing taxes that discriminate against rail carriers. The Ninth Circuit agreed with BNSF that the assessment violated the 4-R Act, knocking down each of the Department’s three principal arguments in turn.

First, the Ninth Circuit rejected the Department’s argument that the specific provision of the 4-R Act relied on by BNSF did not apply to property taxes. Specifically, the Department contended that because three other subsections of the 4-R Act apply to property tax, the catchall provision pursued by BNSF for “another” discriminatory tax must necessarily apply only to non-property taxes. The Ninth Circuit cited several prior decisions spanning four other circuit courts of appeal rejecting this same argument.

Second, the Ninth Circuit rejected the Department’s assertion that its taxation of BNSF’s intangible property was not discriminatory because the tax on intangibles is a broadly applied tax, albeit one that exempts all non-centrally assessed taxpayers. In framing its tax scheme as being a tax exemption for non-centrally assessed taxpayers, the Department sought to fit the tax within the permissible exemption-based discrimination blessed by the U.S. Supreme Court in Department of Revenue of Oregon v. ACF Industries, Inc., 510 U.S. 332 (1994). The court disagreed with the Department’s characterization, reasoning that the tax on intangibles is not generally applicable; it is a “separate rule” that applies only to a very limited group of taxpayers. According to the court, the Department’s characterization of the tax on intangibles as one that applies broadly to all taxpayers “never leaves the station.”

Third, the Ninth Circuit disagreed with the Department’s contention that the comparison class for assessing discrimination should be limited to those other taxpayers that are centrally assessed. Rather, the court explained, based on the U.S. Supreme Court’s decision in CSX II, the appropriate comparison class is all other commercial and industrial taxpayers. See Ala. Dep’t of Revenue v. CSX Transp., Inc. (CSX II), 575 U.S. 21, 26 (2015). Having defined the appropriate comparison class, the court stated that BNSF is “obviously” treated differently that the rest of Oregon’s locally assessed commercial and industrial taxpayers.

BNSF Railway Co. v. Oregon Dep’t of Revenue, 965 F.3d 681 (9th Cir. 2020).