Was a regional rail commission's use of passenger rail cars exempt from California use tax because its service connected to interstate transportation?

Plain-English summary

A joint-powers regional commission planned commuter rail service between two California points. It argued that taxing its passenger cars would violate federal rail-tax law because the service connected with Amtrak, airports, interstate freight tracks, and interstate freeways.

The Board found no California exemption. Section 6368.5 covered rail freight cars used in interstate or foreign commerce. These were passenger cars used in intrastate commerce on an intrastate line. A passenger's ability to transfer to an interstate carrier did not turn the commission's line into interstate transportation.

The Amtrak case did not control because Amtrak was federally created and used its vehicles on actual interstate lines in interstate commerce. The commission's California use of its passenger cars was taxable and federal law did not bar the tax.

What this means for you

Transit agencies, rail operators, procurement teams, and tax advisers

Connections and broader traffic effects do not determine the exemption. Focus on the equipment type, the entity using it, and whether the actual line and use are interstate or intrastate.

Common questions

Q: Did sharing tracks with interstate freight make the service interstate?

A: No. The commission's own passenger operation remained intrastate.

Q: Did connections to Amtrak or airports change the result?

A: No. Access to an interstate carrier did not change the character of the commission's line.

Q: Why did the rail-freight exemption fail?

A: The vehicles were passenger cars, not freight cars, and were used intrastate.

Citations and references

• California Revenue and Taxation Code § 6368.5
• California Government Code § 6500 et seq.
• National Railroad Passenger Corporation v. State Board of Equalization, 652 F. Supp. 923 (N.D. Cal. 1986)
• The federal Railroad Revitalization and Regulatory Reform Act, identified in the opinion as the 4R Act

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 505.0602
• Original supporting opinion: 505.0602 PDF

Original ruling text

505.0602

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

LEGAL DIVISION (MIC: 82)
450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0082)
Telephone: (916) 445-5550
FAX: (916) 323-3387

JOHAN KLEHS
First District, Hayward
DEAN ANDAL
Second District, Stockton
ERNEST J. DRONENBURG, JR.
Third District, San Diego
BRAD SHERMAN
Fourth District, Los Angeles

December 16, 1996
REDACTED TEXT

KATHLEEN CONNEL
Controller, Sacramento
E. L. SORENSEN, JR.
Executive Director

Dear REDACTED TEXT,
This is in response to your letter dated October 22, 1996 regarding the application of use tax to the use of passenger rail vehicles by REDACTED TEXT Commission. You explain: “REDACTED TEXT Rail Commission is a Joint Powers Agency organized pursuant to § 6500 et. seq. of the California Government Code. The primary purpose of the Commission is to institute rail service between two California points. The service is estimated to begin in approximately one year. REDACTED TEXT. "Freight Impacts "Freight rail transport will be impacted by the service. Since REDACTED TEXT lines will be utilized for the service, scheduling and other issues have to be resolved between the Commission and the railroad. Large amounts of interstate freight will be moving on these same tracks at various times and must be accounted for. "Passenger Movement "The service route will connect multi-modal stations from REDACTED TEXT including stops in REDACTED TEXT, to name just a few. The REDACTED TEXT system and AMTRAK’s trains will be readily accessible from our system. Ample parking will allow drivers to park and ride. A traveler could use our service as a means to travel nationally or even internationally through passenger trains, or the airports served by REDACTED TEXT. "Freeway Impacts "Interstate freeways will be affected by our service. The interstate freeways known as REDACTED TEXT will stand to lose traffic volume as a consequence of this service. Each commuter who has to travel to the region for work as it stands today, must drive to reach their destination. A successful REDACTED TEXT commuter rail service could eliminate thousands of trips daily on these arteries. The current level of commute hour congestion on portions of

these freeways is tremendous due to trans-REDACTED TEXT travelers [sic]. A commuter rail service would positively impact interstate trucks and busses which do not have a commuter rail option. Additionally, air pollution would be reduced with fewer automobile trips." You believe that a use tax imposed on the Commission's use of the vehicles would be a discriminatory tax in violation of the 4R Act as applied in the case of National Railroad Passenger Corporation v. State Board of Equalization (N.D. Cal. 1986) 652 F.Supp. 923. The only exemption possibly applicable to the Commission's purchase and use of the subject vehicles is Revenue and Taxation Code section 6368.5. That exemption is limited to the use of rail freight cars in interstate or foreign commerce. The Commission's use of the subject vehicles in California does not qualify for this exemption since the vehicles are not rail freight cars and since the vehicles will be used in intrastate commerce on an intrastate line. That a passenger may access an interstate carrier from the Commission's lines does not make the Commission's lines interstate in character. We believe that the case you cite does not apply to the situation involved here. In National Railroad, the consumer of the passenger rail vehicles was Amtrak, an entity created by the United States Government, and Amtrak was using the subject vehicles on actual interstate lines in actual interstate commerce. As noted above, the Commission will be using the vehicles in intrastate commerce on an intrastate line. In summary, we conclude that the Commission's use of the rail passenger cars in California is not entitled to an exemption under California law, and that California's tax on the Commission's use of the vehicles is not barred by federal law. If you have further questions, feel free to write again. Sincerely,

David H. Levine
Supervising Tax Counsel