South Carolina Property Tax Law Discriminates Against Railroads in Violation of 4R Act

The U.S. Court of Appeals for the Fourth Circuit held that a South Carolina law limiting increases in appraised values of most commercial and industrial real properties to 15% within a five-year period violated the 4R Act because it discriminated against railroad properties.  CSX Transp., Inc. v. S.C. Dep’t of Revenue, No. 19-1154 (4th Cir. May 20, 2020).

The Railroad Revitalization and Regulatory Reform Act, commonly referred to as the 4R Act, prohibits states and localities from imposing taxes that discriminate against railroads.  49 U.S.C. § 11501.  One prominent feature of the 4R Act is that federal courts have concurrent jurisdiction over 4R Act lawsuits.  When a railroad challenges a state or local tax under the 4R Act, the railroad bears the initial burden of establishing a prima facie case of discriminatory treatment.  The railroad must show that the law in question taxes similarly situated groups differently.  Significantly, federal courts apply a more liberal construction of “similarly situated” in the context of the 4R Act than they do in the context of the Equal Protection Clause, the idea being that the 4R Act would be superfluous if it did not offer more protection than the Equal Protection Clause.  If the railroad meets its burden, the burden shifts to the state or locality to offer a sufficient justification for the differential treatment.

The Fourth Circuit agreed with CSX that the appraised value cap treated similarly situated groups – (1) railroads, and (2) other commercial and industrial property taxpayers in South Carolina – differently.  The court rejected the Department of Revenue’s argument that the appropriate comparison class was not other commercial and industrial taxpayers, but rather South Carolina taxpayers who are subject to unit valuation (none of whom benefit from the 15% cap).  Citing U.S. Supreme Court precedent, the Fourth Circuit said that because CSX alleged the cap targeted railroads for worse treatment than local businesses in South Carolina, the appropriate comparison class was all other commercial and industrial taxpayers in South Carolina.

The Fourth Circuit also rejected the Department’s justifications for the differential treatment, both individually and cumulatively.  First, it disagreed with the Department’s assertion that a 20% equalization factor the state applies to railroad properties justified the differential treatment.  The court observed that the equalization factor only ensures that railroad properties are similarly situated to other commercial and industrial properties and manufacturing properties in the calculation of assessed value, the calculation of which occurs after the calculation of the appraised value.  By failing to apply the 15% cap in the calculation of appraised value, the disparity carries over into the calculation of assessed value, the court said.

Second, the court dismissed the Department’s argument that the combination of four different sales tax and property tax exemptions applicable to railroads justified the differential treatment.  The court concluded that the Department failed to prove that the exemptions were “roughly equivalent” to the benefit of the 15% appraised value cap.

Finally, the court rejected the Department’s contention that railroad properties change hands less frequently than other commercial and industrial properties and are therefore subject to reappraisal at fair market value less frequently than other commercial and industrial properties.  The court found the state’s argument speculative and, worse, inconsistent with the fact that non-railroad properties in South Carolina receive a 25% property exemption when they are reappraised after a transfer of an assessable interest.

The Fourth Circuit ultimately held that the 15% cap violated the 4R Act because the state failed justify the discriminatory treatment.  The court reversed and remanded the case without addressing remedies.  It therefore remains to be seen how South Carolina will remedy the discrimination against the railroads.