Property Taxes Off the Rails: Illinois Property Tax Classification of Intermodal and Transloading Facilities as Railroad “Operating Property”
Since PT Barnum pioneered “piggybacking” in the 1870’s and the Chicago Great Western Railroad popularized commercial intermodal by modifying truck trailers and loading them onto trains in the 1930’s, intermodal has grown to become so intertwined with modern railroading that some statutes and court decisions offer intermodal and transload facilities the same favorable treatment as railroads under certain circumstances.
Where can railroads and their intermodal partners look to benefit from these statutes and decisions? Railroads and their partners operating in Illinois needn’t look too far. The Illinois Property Tax Code may offer favorable property tax treatment to intermodal and transloading facilities that qualify as railroad “operating property” – even if those facilities are owned and operated by non-railroad entities.
Railroad “Operating Property” Defined
The taxation scheme set forth in the Illinois Property Tax Code (“Code”) classifies all railroad property as one of two categories: “operating property” or “non-carrier real estate.” Non carrier real estate is subject to local assessment and taxation, while operating property is exempt from local assessment and taxation and instead taxed directly by the Illinois Department of Revenue (“Department”) pursuant to the Code. 35 ILCS 200/11-80.
The Code broadly defines railroad “operating property,” as “all tracks and right of way, all structures and improvements on that right of way … and all other property … connected with or used in the operation of the railroad.” 35 ILCS 200/11-70(b) (emphasis added). Under Department administrative decisions and case law, “operating property” generally “encompass[es] all real property owned or used by the railroad for railroad purposes, and includes structures and improvements used in the transaction of the railroad’s business.” Hynes v. Union Pacific, 95-RR 003 (Ill. Dept. of Rev. 1995) citing Chicago & A. R. Co. v. People, 98 Ill. 350, 358 (1881). Railroad tracks are not required to be present on a property for classification as “operating property.” Id.
“Non-carrier real estate” is everything else – it is “all land, and improvements on that land, not situated on the right of way of the railroad and not used as operating property.” 35 ILCS 200/11-70(d).
Intermodal and Transloading Facilities May Qualify as “Operating Property”
Intermodal and transload facilities used by a railroad may qualify as “connected with or used in the operation of the railroad.” 35 ILCS 200/11-70(b). Department administrative decisions have recognized the importance of transloading and intermodal facilities to modern railroading:
In order to fully function, railroad operations must consist of other facilities or equipment to facilitate continued use of the rails. The necessity of a loading and unloading facility for rail vehicles is essential for the continued operation of the railroads. Also, the modern day practice of “intermodal shipping” is necessary for the railroads to compete with over-the-road trucking of goods. Intermodal shipping is the procedure whereby freight is packed into containers which are piggybacked or shipped on flat railcars to a point of transfer and then transloaded to trucks for local delivery. Without the ability to make such transfers, the railroads would be limited to serving only those customers who maintained rail sidings on their premises. The transporting of goods by rail in containers is best accomplished by the intermodal system employed by the railroads today…
Union Pacific, 95-RR-003 (Ill. Dept. of Rev. 1995).
In Hynes v. Burlington Northern Railroad, et al., 94-L-50066 (Circ. Court of Cook Cty. 1994), a reviewing court affirmed a Department decision finding that railroad-owned properties leased to companies for transloading operations were properly classified as “operating property.” The court highlighted testimony in the record that “the leasing companies provide transloading services for the Railroads. In other words, they either load or unload products from the Railroad owned railcars to trucks, or vice versa, for delivery to the ultimate customer. [T]he major reason the Railroads lease the premises to third parties is to allow the Railroads to bring goods into the freight houses to increase rail traffic.” The court explained that railroad “operating property” is not limited to property owned and operated by railroads and that “the statutory language merely requires a connection with and use in railroad operations,” which the transloading facilities leased out by the railroad satisfied. Id.1
The Railroad Need Not Own a Property for it to be Classified as “Operating Property”
Taking this a step further, it is not railroad ownership of a property that is determinative of its classification; it is the property’s use. Burlington N. R.R., 94-L-50066 citing People ex rel. Thompson v. Illinois N. Ry., 248 Ill. 532, 539-40 (1911) (“the use to which the property is devoted, and not where the fee title rests, determines which of the assessing bodies … shall assess property in use by a railroad company for right of way purposes.”). The reviewing circuit court in Burlington Northern Railroad stated:
The statutory language is quite clear, improvements may be owned by a third party and still qualify as railroad operating property. The subject property, even if owned by another, qualifies for state taxation if used as operating property. To qualify as operating property, the improvements must be “connected with or used in the operations of the railroad.”
It is worth noting that a lease or other agreement that compels an intermodal operator to reimburse a railroad for property tax payments should not affect the property’s classification as “operating property” or “non-carrier real estate.” County of Cook v. C&NW R.R., 94-RR-10 (Ill. Dept. of Rev. 1994) (“[I]t is the character of the property, and not, as the County suggests, the identity of the one who ultimately bears the burden of payment of taxes which determines whether or not property is railroad operating property.”).
Burlington N. R.R., 94-L-50066 citing 35 ILCS 200/11-70(b) (emphasis in original). Again, intermodal and transload facilities used in rail operations may qualify as “connected with or used in the operation of the railroad.”
In a 1994 administrative decision regarding two railyard-adjacent properties owned by a trust that contained a freight house used for transloading and intermodal activities performed by a third party, the Department suggested that classification as “operating property” under those facts may require an obligation to service the railroad. See C&NW R.R., 94-RR-10 (answering in the negative the question “Where a parcel is not owned by a railroad, and the railroad retains no possessory interest in the parcel, and the occupiers of the parcel have no obligation to service the railroad, can the parcel be properly classified as railroad operating property?”). On the record before it, the Department classified the two properties as “non-carrier real estate” and explained:
A freight house used by a railroad in its operations would be railroad operating property. In the instant situation, however, the personnel, equipment and appurtenances on the property are not at the disposal of the railroad, but at the disposal of the various subtenants, sub-subtenants and licensees. Both the statute and the regulations indicate that for a parcel to be railroad operating property, the railroad must make use of the parcel. The record is devoid of any evidence … indicating that the operating needs of the [railroad] are served by the present arrangement. Without some showing that the railroad itself is a user of the property, the parcel is ineligible for assessment as railroad operating property.
C&NW R.R., 94-RR-10. The very next year, the Department considered the classification of those same two properties with a new record. Union Pacific, 95-RR-003. The railroad did not introduce evidence of a direct contract between it and the third-party operator, as the earlier case suggested it should, but it introduced other evidence of the railroad’s actual use of the properties that was missing from the 1994 case. Among other new facts, the new record showed that the railroad moved 22,000 containers and trailer loads that were transloaded on the two properties and that 70% of the freight processed on the two properties either arrived or departed via rail. On the new record, the Department classified both properties as “operating property.” The 30% of the freight processed on the properties that arrived by truck and departed by truck was “merely incidental to the primary operations of the facility to service the freight rail cars of the UPRR.” Id.
A Property Need Not Be Used Exclusively for Railroad Operations to be “Operating Property”
Indeed, that some non-railroad activity, like trucking operations, might take place on a property does not disqualify the property from classification as railroad “operating property.” See Burlington N. R.R., 94-L-50066 (“To qualify as operating property, the improvements must be ‘connected with or used in the operations of the railroad.’ The language of the statute does not quantify the level of connection nor use… Case law indicates that if a minor or incidental use exists on property which is not a railroad operation, the property nonetheless may be classified as operating property.”). If the primary and principal use of the property is railroad operating property, the parcel will not lose its characterization as railroad operating property. Union Pacific, 95-RR-003 citing People ex. rel. Anton v. A.T.S.F. Rwy., 225 Ill. 593, 600 (1907).
No Penalty for Misclassifying Property as “Operating Property”
Importantly, there is no penalty for a railroad that classifies a property as “operating property” and that property is later determined to be “non-carrier real estate” subject to local assessment and taxation.
The Code and Department regulations set forth a specific process that must be followed by the railroad, the Department, and local assessors. 35 ILCS 200/11-80. Penalties are not contemplated by the Code, Department regulations, case law, or administrative decisions and railroads are “not to be subjected even to the mere possibility of having to pay their taxes twice.” Soo Line Railroad v. Hynes, 269 Ill. App. 3d 81, 90 (1st Dist. 1995).
Instead, under the Code, the railroad submits to the Department of Revenue schedules of its “operating property” and “non-carrier real estate.” The Department, in turn, transmits copies of the railroad’s schedules that list the railroad’s “non-carrier real estate” to local assessment officers. Within 30 days from the date of this transmittal by the Department, local assessors must file with the Department any objections to the railroad’s classifications of its properties. The Department then determines whether the property is “non-carrier real estate” or “operating property.” 86 Ill. Adm. Code 110.105. Any further hearings that may be necessary to resolve ongoing disputes also are provided for by the Code. 35 ILCS 200/8-35; see People ex rel. Brenza v. Chicago & N. W. R. Co., 411 Ill. 85, 92 (1951) (explaining process set forth in the Code). The local assessor, as the objector, has the burden of proving a non-operating use of the property in question. Union Pacfic, 95-RR-003 citing Chicago, Burlington and Quincy Railroad Co. v. People ex rel. Kreitz, 136 Ill. 660 (1891).
Mohan Groble Scolaro attorneys counsel railroads on tax classification issues that may benefit railroads and their intermodal and transloading partners and have experience representing railroads in property tax disputes involving local assessors, other local bodies, and the Department of Revenue, including certificates of error, appeals, and related litigation. Contact Matt or Lisa to discuss how you may be able to use the Property Tax Code and other statutes and regulations for your organization’s benefit.
