Union Pacific Railroad Company v. Wisconsin Department of Revenue

In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 19-1741
U NION P ACIFIC R AILROAD C OMPANY,
Plaintiff-Appellee,
v.
WISCONSIN D EPARTMENT OF R EVENUE ,
et al.,
Defendants-Appellants.
____________________
Appeal from the United States District Court
for the Western District of Wisconsin.
No. 17-cv-00897 — William M. Conley, Judge.
____________________
A RGUED SEPTEMBER 17, 2019 — D ECIDED OCTOBER 7, 2019
____________________
Before FLAUM, R OVNER , and SCUDDER , Circuit Judges.
FLAUM, Circuit Judge. The Wisconsin Department of Reve-
nue (the “Department”) disallowed the Union Pacific Rail-
road Company (“Union Pacific”) from claiming a property tax
exemption for the value of its custom computer software,
which under Wisconsin law is a type of intangible personal
property. Union Pacific refused to pay the tax on its custom

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2 No. 19-1741
software and filed suit, arguing that the tax singles out rail-
roads as part of an isolated and targeted group in violation of
Section 306 of the Railroad Revitalization and Regulatory Re-
form Act of 1976 (the “4-R Act”), codified at 49 U.S.C.
§ 11501(b)(4) (“subsection (b)(4)”). The defendants contend
that Wisconsin is permitted to grant non-railroads an exemp-
tion from its generally applicable ad valorem property tax
scheme for intangible property, even if railroads do not qual-
ify for the same exemption. The intangible property tax, how-
ever, exempts everyone except for an isolated and targeted
group of which railroads are a part. The district court entered
summary judgment for Union Pacific. We affirm.
I. Background
Chapter 70 of the Wisconsin Tax Code (“the Code”) gov-
erns the taxation of manufacturing and commercial compa-
nies aside from railroad and utilities companies. Chapter 76
governs the taxation of railroad and utilities companies, in-
cluding air carriers, pipeline companies, and water conserva-
tion and regulation companies. Wis. Stat. §§ 76.01–76.02. Tax-
payers under chapters 70 and 76 must pay taxes on their real
and personal property unless that property is exempt.
The Code contains several exemptions from the general
property tax for various classes of property, including an ex-
emption for “all intangible personal property,” which covers
custom computer software. Wis. Stat. § 70.112(1). Manufac-
turing and commercial taxpayers generally qualify for the in-
tangible personal property exemption, but railroad and utili-
ties companies do not. Compare id., with Wis. Stat. § 76.025(1).
The parties do not dispute that railroad and utilities compa-
nies are the only taxpayers that Wisconsin requires to pay
taxes on their intangible property, including custom software.

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No. 19-1741 3
For several years, Union Pacific claimed the value of its
custom software as exempt under Wis. Stat. § 70.11(39), which
applies to computers and certain types of software; however,
that exemption expressly does not cover custom software. The
Department audited Union Pacific and concluded that, for the
years 2014 and 2015, it owed $2,631,104.77 in back taxes and
interest after disallowing Union Pacific’s deduction of its cus-
tom software. Union Pacific filed suit against the Department
and its secretary, 1 contending that Wisconsin’s tax on Union
Pacific’s custom software violates subsection (b)(4) of the 4-R
Act.
The district court entered summary judgment for Union
Pacific, concluding that because railroads are “the only enti-
ties in Wisconsin who are taxed for their intangible personal
property -- including custom computer software,” the tax on
intangible personal property “is not one of general applicabil-
ity, but rather is one that appears to fall squarely, if not en-
tirely, on railroads ‘as part of some isolated and targeted
group.’” The defendants now appeal, arguing that Wisconsin
is permitted under subsection (b)(4) to grant exemptions from
its generally applicable ad valorem tax scheme, even if those
same exemptions are denied to railroads.
II. Discussion
This case comes to the Court on appeal of the district
court’s ruling on cross-motions for summary judgment with
1 Wisconsin’s current Secretary of Revenue, Peter Barca, has been sub-
stituted as a defendant for his predecessor, Richard Chandler.

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4 No. 19-1741
no disputed material facts. Accordingly, we review the dis-
trict court’s legal conclusions de novo. State Auto Prop. & Cas.
Ins. Co. v. Brumitt Servs., Inc., 877 F.3d 355, 357 (7th Cir. 2017).
A. The 4-R Act
Union Pacific asserts that Wisconsin “[i]mposes another
tax that discriminates against a rail carrier” in violation of 49
U.S.C. § 11501(b)(4) (“subsection (b)(4)”) by taxing railroads’
custom computer software while exempting custom com-
puter software for other taxpayers. The 4-R Act provides that
states and their subdivisions may not:
(1) [a]ssess rail transportation property at a
value that has a higher ratio to the true mar-
ket 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 com-
mercial and industrial property in the same
assessment jurisdiction[; or]
(4) [i]mpose another tax that discriminates
against a rail carrier providing transporta-
tion subject to the jurisdiction of the Board
under this part.

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No. 19-1741 5
49 U.S.C. § 11501(b). Railroads “are easy prey for State and
local tax assessors in that they are nonvoting, often nonresi-
dent, targets for local taxation, who cannot easily remove
themselves from the locality.” W. Air Lines, Inc. v. Bd. of Equal-
ization of State of S.D., 480 U.S. 123, 131 (1987) (citation and in-
ternal quotation marks omitted). The 4-R Act “restricts the
ability of state and local governments to levy discriminatory
taxes on rail carriers.” CSX Transp., Inc. v. Ala. Dep’t of Reve-
nue, 562 U.S. 277, 280 (2011).
In Dep’t of Revenue of Or. v. ACF Indus., Inc., railroad car
lines brought a 4-R Act challenge to Oregon’s tax scheme,
which exempted several classes of non-railroad property but
did not exempt railroad cars. 510 U.S. 332, 335 (1994). The Su-
preme Court held that a tax upon railroad property is not
“subject to challenge under subsection (b)(4) on the ground
that certain other classes of commercial and industrial prop-
erty are exempt.” Id. at 338–39. The Court went on to explain
that the case was not one
in which the railroads—either alone or as part
of some isolated and targeted group—[were]
the only commercial entities subject to an ad
valorem property tax.… If such a case were to
arise, it might be incorrect to say that the state
“exempted” the nontaxed property. Rather, one
could say that the State had singled out railroad
property for discriminatory treatment.
Id. at 346–47. In providing this explanation, the Court cited
Burlington N. R.R. Co. v. City of Superior, 932 F.2d 1185 (7th Cir.
1991), as an example of a case where a rail carrier was one of
the only commercial entities singled out for discriminatory
treatment. ACF, 510 U.S. at 346. The tax challenged in City of

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6 No. 19-1741
Superior was an occupational tax imposed on “owners and op-
erators of iron ore concentrates docks.” 932 F.2d at 1186 (in-
ternal quotation marks omitted). Although the tax was
framed broadly, in practical effect it applied only to the one
railroad company that operated the only three such docks in
the state. Id. Because the state was “levying a tax on an activity
in which, in Wisconsin anyway, only railroads engage,” the
iron ore docks tax could not stand. Id. at 1188.
The ACF holding does not apply, therefore, where the “ac-
tual tax levied is a general tax in name only and is in fact a tax
on railroads” or a targeted group of which railroads are a part.
Burlington N. R.R. Co. v. Wis. Dep’t of Revenue, 59 F.3d 55, 58 &
n.2 (7th Cir. 1995). Notwithstanding the ACF holding, subsec-
tion “(b)(4) might be violated if a railroad was ‘singled out’
for unfavorable treatment in the form of inability to benefit
from property tax exemptions given to other taxpayers.” CSX
Transp., Inc. v. S.C. Dep’t of Revenue, 851 F.3d 320, 331 (4th Cir.
2017). Indeed, “[t]he most obvious form of tax discrimination
is to impose a tax on a class of rail transportation property that
is not imposed on other nonrailroad property of the same
class.” Ogilvie v. State Bd. of Equalization of State of N.D., 657
F.2d 204, 210 (8th Cir. 1981).
Following ACF, two of our sister circuits have held that
intangible personal property taxes that were imposed on tar-
geted and isolated groups of which railroads were a part ran
afoul of subsection (b)(4). In Burlington N. R.R. Co. v. Huddle-
ston, the Tenth Circuit considered Colorado’s intangible prop-
erty tax exemption, concluding that “[u]nlike the tax exemp-
tion at issue in ACF, Colorado’s intangible property tax ex-
emption applies to all commercial and industrial taxpayers
other than ‘public utilities,’” thereby “singl[ing] out Plaintiff

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No. 19-1741 7
as part of an ‘isolated and targeted group’ for discriminatory
tax treatment in violation of [subsection (b)(4)].” 94 F.3d 1413,
1417 (10th Cir. 1996), abrogated in part on other grounds by Ala.
Dep’t of Revenue v. CSX Transp., Inc., 135 S. Ct. 1136, 1141
(2015). Similarly, in Burlington N. R.R. Co. v. Bair, the Eighth
Circuit held that Iowa’s intangible personal property tax vio-
lated subsection (b)(4) because it was imposed only “on rail-
roads and a handful of other interstate concerns” and there-
fore was not “generally applicable.” 60 F.3d 410, 413 (8th Cir.
1995). 2
B. Wisconsin’s Intangible Property Tax
Wisconsin’s intangible personal property tax singles out
railroads as part of a targeted and isolated group in violation
of subsection (b)(4). What Wisconsin refers to as its “generally
applicable property tax” is, functionally, generally applicable
only to real and tangible personal property. Manufacturing
and commercial companies generally must pay property
taxes on the value of their real and tangible personal property.
Only railroad and utilities companies, however, are required
to pay an additional tax on their intangible property. Hence,
Wisconsin does not simply exempt intangible property from
taxation; rather, it imposes an intangible property tax only on
railroad and utilities companies. The intangible property tax
2 Also, a district court in Oregon recently held that Oregon’s intangi-
ble personal property tax violated subsection (b)(4) because “intangible
personal property [was] not subject to taxation except for property owned
by” one of fourteen categories of taxpayers, including railroads. BNSF
Railway Co. v. Or. Dep’t of Revenue, 358 F. Supp. 3d 1129, 1138 (D. Or. 2018),
appeal docketed, No. 19-35184 (9th Cir. Mar. 7, 2019). An appeal of that de-
cision is now pending in the Ninth Circuit.

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8 No. 19-1741
“exemption”—for which railroad and utilities companies cat-
egorically do not qualify—reflects and operates as “another
tax that discriminates against a rail carrier” within the mean-
ing of subsection (b)(4) and thereby offends the 4-R Act.
ACF does not foreclose Union Pacific’s claim because the
question before the Court there was “[w]hether a tax upon
railroad property is even subject to challenge under subsec-
tion (b)(4) on the ground that certain other classes of commer-
cial and industrial property are exempt.” 510 U.S. at 338–39
(emphasis added). Here, the challenge is to the same class of
property being taxed differently based on the owner’s mem-
bership in a targeted and isolated group.
Moreover, the ACF holding does not apply where the “ex-
emption” is just a pretext for targeting railroads, either alone
or as part of an isolated group. “Practically speaking, if a state
exempts sufficient property from a particular property tax,
that tax no longer can be said to be one of general applica-
tion.” Bair, 60 F.3d at 413. Otherwise, “the anti-discrimination
purpose of the 4-R Act could be utterly eviscerated by a state
that ostensibly imposed a tax of general applicability but then
systematically exempted all but a targeted few taxpayers.” Id.
Wisconsin systematically exempts from its intangible prop-
erty tax all manufacturing and commercial taxpayers except
for railroad and utilities companies.
The effect of the intangible property tax challenged here is
functionally similar to that of the iron ore concentrates docks
tax the Supreme Court cited in ACF as an example of a tax
that runs afoul of subsection (b)(4), see City of Superior, 932
F.2d at 1188, and the taxes courts have regularly struck down
under subsection (b)(4) since the ACF decision, see, e.g., Hud-
dleston, 94 F.3d at 1417; Bair, 60 F.3d at 413; BNSF, 358 F. Supp.

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No. 19-1741 9
3d at 1138. The common defect with those taxes was that they
went beyond the state’s generally applicable tax by imposing
an additional tax on railroads or a targeted and isolated group
of which railroads were a part.
The defendants’ reliance on our decision in Burlington N.
R.R. Co. v. Wis. Dep’t of Revenue, 59 F.3d 55 (7th Cir. 1995), is
misplaced. In that case, we noted that even though 80% of
non-railroad property was exempt from taxation under Wis-
consin’s property tax scheme, railroads bore only a small pro-
portion of the overall property tax burden. Id. at 57–58. Wis-
consin’s entire property tax scheme was therefore not a “nom-
inally general tax which is in fact a tax only on railroads,” and
ACF precluded the plaintiff’s claim that Wisconsin’s taxation
of railroad property altogether violated subsection (b)(4). Id.
We did not, however, consider a challenge to the particular
property tax at issue here. The question here is whether Wis-
consin’s intangible property tax singles out railroads as part
of a targeted and isolated group in violation of subsection
(b)(4). We hold that it does.
“It is now well established that a showing that the rail-
roads have been targeted is enough to prove discrimination.”
Kan. City S. Railway Co. v. Koeller, 653 F.3d 496, 510 (7th Cir.
2011). The defendants have not provided a non-discrimina-
tory justification for imposing a targeted tax on the intangible
property of railroad and utilities companies, nor have they
contested the district court’s conclusion that the railroad and
utilities companies as defined in the Code are a targeted and
isolated group.

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10 No. 19-1741
III. Conclusion
For the foregoing reasons, we AFFIRM the judgment of the
district court.

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