On appeal from the Tax Court of New Jersey, 4036-2000, 3779-2002, 5545-2002, 6337-2003 (CSX), and 4026-2000, 5594-2002, 6364-2003 (Norfolk Southern) which opinion is published at 22 N.J. Tax 399 (Tax 2005).
The opinion of the court was delivered by: Winkelstein, J.A.D.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Before Judges Cuff, Winkelstein and Baxter.
Plaintiffs, CSX Transportation, Inc. (CSX) and Norfolk Southern Corporation (Norfolk Southern), are the operators of railroads in New Jersey and elsewhere. CSX appealed to the Tax Court from the Railroad Franchise Tax (RFT) assessments imposed by the Director of the New Jersey Division of Taxation (Director) for tax years 2000, 2001, 2002, and 2003, and Norfolk Southern challenged the assessments for tax years 2000, 2002 and 2003. The tax is based on a calculation of each railroad's New Jersey-derived net operating income as a percentage of the net income the railroad derives operating world-wide. N.J.S.A. 54:29A-13 to -15. On cross-motions for summary judgment, the Tax Court affirmed the assessments. CSX Transp., Inc. v. Dir., Div. of Taxation, 22 N.J. Tax 399, 421 (Tax 2005).
To compute the percentage of each railroad's net income attributable to its operations in New Jersey, the Director multiplied a fraction against each railroad's nationwide net income. Id. at 405. As the numerator of the fraction, he used the miles of track over which the railroad operated within this State, and as the denominator, he used the miles of track over which the railroad operated nationwide. Ibid. He then applied the statutory ten percent tax rate, see N.J.S.A. 54:29A-13, to the railroad's income attributed to its New Jersey operations to arrive at the RFT payable for each tax year. C.S.X., supra, 22 N.J. Tax at 405; see also N.J.A.C. 18:23-4.1(a) (setting RFT at "the rate of 10 per cent of [the railroad's] net railway operating income adjusted and allocated on the basis of the percentage of all track miles operated within the State to the total track miles operated everywhere by such railroad"). In affirming the Director's assessments, the Tax Court upheld his apportionment formula. 22 N.J. Tax at 419.
On appeal to this court, plaintiffs maintain that the Director's formula is facially unconstitutional and unconstitutional as applied to their railroad operations; and that summary judgment in favor of the Director was not warranted as genuine issues of material fact remain in dispute.
CSX raises an additional issue. It claims that the ten percent annual franchise tax rate imposed by N.J.S.A. 54:29A-13 is a violation of 49 U.S.C.A. § 11501, the Railroad Revitalization and Regulatory Reform Act of 1976 (4-R Act). CSX, supra, 22 N.J. Tax at 420. The 4-R Act prohibits a state from imposing a tax "that discriminates against" a railroad. 49 U.S.C.A. § 11501(b)(4). CSX claims that the State has violated the 4-R Act because the ten percent RFT tax rate exceeds the nine percent Corporate Business Tax rate imposed on other corporate franchises. See CSX, supra, 22 N.J. Tax at 420; N.J.S.A. 54:10A-5(c)(1) (setting tax rate at nine percent for corporations that are not New Jersey S corporations); N.J.A.C. 18:7-3.6(a)1 (same).
We affirm the Tax Court's determination that the ten percent RFT tax rate does not violate the 4-R Act. Though we agree with the Tax Court's conclusion that the Director's apportionment formula is not unconstitutional on its face, we reverse summary judgment as to the tax assessments in favor of the Director because we conclude that plaintiffs presented sufficient evidence to establish a genuine issue of fact as to whether the formula is unconstitutional as applied to their New Jersey railroad operations. We remand for further proceedings on that issue.
In 1998, the Surface Transportation Board (STB), which is a governmental body within the United States Department of Transportation that regulates, among other things, railroad trackage rights, see 49 U.S.C.A. §§ 701, 721; 49 CFR § 1180 (2006), approved plaintiffs' joint application for authority to operate the routes and assets of Consolidated Rail Corporation (Conrail). As a result of that approval, plaintiffs each acquired the use of certain Conrail track, some of which is located in New Jersey. On June 1, 1999, plaintiffs entered into operating agreements with Conrail, which permitted them to commence operations in New Jersey.
All railroads that operate in New Jersey are required to file annual reports with both the STB and the State. See 49 U.S.C.A. § 11145(a); 49 C.F.R. § 1241.11(a) (2006); N.J.A.C. 18:23-8.1. Those reports recount the total mileage the railroad operated both in New Jersey and worldwide. The Director used plaintiffs' mileage statistics as reported to the government agencies in preparing his allocation formula. CSX, supra, 22 N.J. Tax at 405.
In arriving at the numerator of the formula, the Director construed "the number of miles of all track over which the railroad or system operates in this State," N.J.S.A. 54:29A-14, to mean the miles of track each railroad is entitled to operate in New Jersey. That calculation includes the miles of track the railroad owns or leases, as well as the miles of track that, pursuant to the operating agreements, it has the right to use. The railroads, on the other hand, argue that "the number of miles of all track . . . operate[d] in this State" refers only to those miles of track they actually use in this State, regardless of their right to use additional track. More significantly, they claim that other measures of their operations in New Jersey, rather than track-miles, provide a more accurate reflection of income they actually earned in this State.
The following tables summarize the calculations by the Director and each plaintiff for the respective tax years. They show the differences in percentage apportionment and tax assessed depending upon which formula is used. The Director used track-miles, and the railroads used ton-miles, which, as we will explain, is a measure of income a railroad typically uses to measure its operations.
DIRECTOR'S APPORTIONMENT AND TAX
NORFOLK SOUTHERN CSX
Percentage ApportionmentTax AssessedPercentage ApportionmentTax Assessed
NORFOLK SOUTHERN APPORTIONMENT AND TAX
Tax YearPercentage Apportionment Ton-MilesTax Assessed
In addition to ton-miles, CSX also used track-miles as did the Director; but, CSX used the miles of New Jersey track over which it actually operated, rather than the miles of track over which it had the right to operate, as the numerator in the fraction.
CSX APPORTIONMENT AND TAX
Tax YearPercentage Apportionment Track UsedTax AssessedPercentage Apportionment Ton-MilesTax Assessed
As each table shows, the railroads' calculations resulted in a substantially lower assessed tax than did the Director's calculations.
The trial judge characterized plaintiffs' claims as follows:
The essence of taxpayers' claims is twofold:
(1) the statutorily-prescribed RFT allocation formula should be interpreted to require the allocation to be calculated on a proportion of shared use or by use of a revenue ton-mile, and that (2) New Jersey's track mileage allocation formula, as applied to the taxpayers, violates the Commerce Clause, Art. I, § 8, cl. 3, and Due Process Clauses of the Federal Constitution. [CSX, supra, 22 N.J. Tax at 403 (footnotes omitted).]
In sustaining the Director's assessments, the judge ruled that plaintiffs provided insufficient information with respect to their earnings arising out of their New Jersey operations to prove that the Director's track-mileage ...