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Union Pacific Railroad Co. v. Wisconsin Department of Revenue

United States Court of Appeals, Seventh Circuit

October 7, 2019

Union Pacific Railroad Company, Plaintiff-Appellee,
v.
Wisconsin Department of Revenue, et al., Defendants-Appellants.

          Argued September 17, 2019

          Appeal from the United States District Court for the Western District of Wisconsin. No. 17-cv-00897 - William M. Conley, Judge.

          Before Flaum, Rovner, and Scudder, Circuit Judges.

          Flaum, Circuit Judge.

         The Wisconsin Department of Revenue (the "Department") disallowed the Union Pacific Railroad 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 software and filed suit, arguing that the tax singles out railroads as part of an isolated and targeted group in violation of Section 306 of the Railroad Revitalization and Regulatory Reform 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 exemption from its generally applicable ad valorem property tax scheme for intangible property, even if railroads do not qualify for the same exemption. The intangible property tax, however, 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") governs the taxation of manufacturing and commercial companies aside from railroad and utilities companies. Chapter 76 governs the taxation of railroad and utilities companies, including air carriers, pipeline companies, and water conservation and regulation companies. Wis.Stat. §§ 76.01-76.02. Taxpayers 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 exemption for "all intangible personal property," which covers custom computer software. Wis.Stat. § 70.112(1). Manufacturing and commercial taxpayers generally qualify for the intangible personal property exemption, but railroad and utilities companies do not. Compare id., with Wis. Stat. § 76.025(1). The parties do not dispute that railroad and utilities companies are the only taxpayers that Wisconsin requires to pay taxes on their intangible property, including custom software.

         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 custom 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 entities 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 applicability, but rather is one that appears to fall squarely, if not entirely, 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 no disputed material facts. Accordingly, we review the district court's legal conclusions de novo. State Auto Prop. & Cas. Ins. Co. v. Brumitt Sews., Inc., 877 F.3d 355, 357 (7th Cir. 2017).

         A. The4-RAct

         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 computer software for other taxpayers. ...


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