Arkansas Supreme Court Opinion Suggests that Taxpayers May Be Unable to Litigate Tax Cases Against DFA

In an extremely troubling opinion today in a non-tax case, the Arkansas Supreme Court reversed existing case law on sovereign immunity. The apparent implication for taxpayers is to deny the right to sue the state. This may affect all taxpayers seeking judicial relief against DFA, and the right to sue over DFA refund claim denials seems particularly at risk. Potentially affected taxpayers should carefully evaluate their particular situations, risks, and options.

The case is The Board of Trustees of the University of Arkansas v. Andrews, 2018 Ark. 12 (Jan. 18, 2018). It is about an employee's overtime claims against the university system. But the university argued sovereign immunity from suit. (The university had scored a property tax success in 2016 based on sovereign immunity arguments.) Article 5, section 20 of the Arkansas Constitution provides that "[t]he State of Arkansas shall never be made a defendant in any of her courts.” The opinion notes that for a period from the 1930s the 1990s, the court treated this language as mandatory such that the state could not waive its sovereign immunity. But in two tax refund cases, Arkansas Department of Finance & Administration v. Staton, 325 Ark. 341 (1996), and Arkansas Department of Finance & Administration v. Tedder, 326 Ark. 495 (1996), the legislature's ability to waive sovereign immunity was recognized so long as the taxpayer followed the specified procedures.

The present Andrews case reinstates the pre-1996 case law and holds that the legislature cannot statutorily waive sovereign immunity. While the court does not expressly overrule Staton and Tedder by name, "[t]o the extent that other cases conflict with this holding, we overrule those opinions." 2018 Ark. 12 at 12. The opinion goes on to note that the Arkansas Claims Commission was the proper avenue for redress against state action for the aggrieved plaintiff in that case.

The decision in this case was 5-2. Justice Baker authored a thoughtful dissent highlighting the troubling implications of this decision for so many aspects of government, to which Justice Hart joined. Reading Andrews broadly, the Arkansas courts essentially could no longer act as a check on actions by state agencies.

It is conceivable, perhaps likely, that a petition for rehearing under Arkansas Supreme Court Rule 2-3 will be sought and various amici will weigh in given the troubling implications of Andrews. Convincing a 5-2 majority of their error, however, would appear to be an uphill battle. 

For Arkansas taxpayers, the implications are especially dire. With the apparent reversal of Staton and Tedder, the potential to litigate DFA refund claim denials is questionable. Indeed, the availability of any judicial remedy against DFA under Arkansas Code Annotated section 26-18-406 has been thrown into question. DFA Revenue Legal Counsel is currently evaluating the implications of Andrews and has not yet taken a position.

Conceivably, we could be looking at a situation where the administrative hearing and Commissioner's revision procedures under Arkansas code annotated section 26-18-405 are the last word in Arkansas tax matters. That would appear to particularly call for an independent tax tribunal. Or it may be the case that the existing judicial tax appeal procedures somehow can be reconciled with Andrews, at least in some respects.

This situation is fluid, and we will provide further updates about how Andrews will impact Arkansas taxpayers. Stay tuned. 

P.S. - And only recently Arkansas was recognized by the Council on State Taxation as being the "most improved" state when it comes to tax administration.... 

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