Arkansas DFA Reluctantly Claims Sovereign Immunity from Taxpayer Refund Claim Litigation

The question of Arkansas's sovereign immunity from taxpayer litigation is now before the Arkansas Supreme Court with the case of Walther v. Flis Enterprises, Inc., no. CV-17-240. The parties filed briefs on sovereign immunity yesterday, and in its brief the DFA framed the case as a refund claim barred by sovereign immunity. If sovereign immunity is applied to bar this taxpayer's case, then taxpayers cannot litigate refund claim denials or disputed assessments where the disputed tax has been prepaid.

As we have previously covered in depth, Flis Enterprises is about the tax base for Arkansas gross receipts (sales) tax on withdrawals from stock: Whether it is the materials cost or the sales price of the item, and particularly as applied to restaurant meals. The taxpayer is a Burger King franchisee, who prevailed in the circuit (trial) court, from which DFA made the present appeal.

While the Flis case was pending, the Arkansas Supreme Court issued its opinion in The Board of Trustees of the University of Arkansas v. Andrews, 2018 Ark. 12 (Jan. 18, 2018). While a nontax case, we covered how Andrews threatens taxpayers' right to litigate disputes with DFA, because it reads the Arkansas constitution to prohibit legislative waivers of sovereign immunity. This calls into question the availability of the judicial remedies offered to taxpayers under the Arkansas Tax Procedure Act.

A supplemental brief filed in the Flis case now has DFA reluctantly asserting sovereign immunity. At the outset it notes that "[a]s a policy matter, Appellant DFA supports a taxpayer’s ability to pursue judicial remedies in circuit court to challenge an assessment of tax or the denial of a refund." DFA goes on, however, to say that the taxpayer's suit is one for "money damages," that the waiver of sovereign immunity to allow litigation under the Tax Procedure Act is unconstitutional, and that taxpayer Flis "cannot surmount sovereign immunity in this case." In other words, DFA is asking the Arkansas Supreme Court for clarification and seems to believe that litigating refund claim denials is now in violation of the Arkansas constitution.

Before reaching the substance of the sovereign immunity question, the Arkansas Supreme Court will have to first decide whether sovereign immunity is a jurisdictional question that can be raised at any time or an affirmative defense that must be raised by the state in trial court. If only an affirmative defense, then it is too late for DFA raise the issue in the Flis case. The Supreme Court's precedents on the question of jurisdiction versus affirmative defense are split.

In addition, there is a procedural nuance that may distinguish Flis from true refund claim denials perhaps barred under sovereign immunity. As explained in the taxpayer's supplemental brief, this actually is a case where the taxpayer paid a disputed assessment under protest, not a refund claim. (Such a procedural posture is common in Arkansas, where a high 10% interest rate on both over- and underpayments encourages taxpayer prepayment of disputed tax amounts.) That distinction may be sufficient to avoid application of sovereign immunity--unless the court goes so broad as to prohibit all taxpayer litigation.

Oral argument in Flis will be in the morning of Thursday, February 8. This case will be highly significant in understanding what judicial remedies are still available to taxpayers. It also will be widely watched throughout the Arkansas legal and government world as one of the first post-Andrews cases to further address sovereign immunity.

In the meantime, taxpayers need to bear in mind that judicial remedies may be unavailable for disputes with DFA--at least in state court (perhaps federal court becomes a viable option in some instances). Refund claim or other postpayment remedies seem to be especially vulnerable, and so taxpayers should consider carefully before paying disputed tax amounts to DFA.

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