The Arkansas Supreme Court dramatically broadened state government's immunity from ad valorem property tax by applying the doctrine of sovereign immunity in Washington County v. Board of Trustees of the University of Arkansas, 2016 Ark. 34 (Feb. 4, 2016). The decision marks a departure from a prior case where state-owned property could be subjected to tax.
Like many college towns, Fayetteville faces the problem of having its primary industry, education, effectively exempted from property tax. The Arkansas Constitution provides an exemption from tax for "public property used exclusively for public purposes," as well as for certain educational, religious, or charitable uses. Ark. Const. art. 16, § 5(b). This language would seem to imply that property not being used exclusively for public purposes is not exempt. Indeed, in the recent case Arkansas Teacher Retirement System v. Short, 2011 Ark. 263, the Supreme Court allowed assessment of tax on a commercial shopping center held by a state retirement system on the basis that the property was not held exclusively for public purposes.
Perhaps inspired by Short, the Assessor of Washington County assessed tax on several parcels of real and personal property (apparently a book store and green space) owned by the University of Arkansas. The university appealed the assessments to Washington County Board of Equalization and lost, then it appealed to the Washington County Court and lost. But before the Washington County Circuit Court, the university finally prevailed on summary judgment, and the Assessor and local government units (collectively, "Fayetteville") appealed.
The Arkansas Supreme Court affirmed the Circuit Court in a 2-1 decision based on the principle of sovereign immunity. Before reaching the question of whether the property was exclusively used for public purposes, the university argued that sovereign immunity meant that the tax did not apply, and the court agreed. Relying heavily on cases from the late nineteenth century and early-to-mid twentieth century, the court held that the university's property was not "property subject to taxation" under article 16, section 5(a) of the constitution. Accordingly, it did not need to reach the question of exemption. Teacher Retirement System v. Short was distinguished as not having raised the sovereign immunity question, instead dealing solely with exemption. With the principle of sovereign immunity established, resolution of the case was straightforward: the University of Arkansas was considered an instrument of the state and therefore immune from property tax.
In a thoughtful concurrence, Special Justice Vandiver questioned the majority's reasoning in inferring broad state sovereign immunity from the language of the state constitution. However, he concurred in the result on the basis of limited sovereign immunity so long as the property is used for a public purpose.
The decision in University of Arkansas marks a substantial setback for local governments seeking to tax state entities; on the other hand, it will be a net benefit to state finances. While the outer limits of this sovereign immunity doctrine are untested—query whether the commercial leasing of a shopping mall in Arkansas Teacher Retirement System would have been exempt—the decision in University of Arkansas has substantially restricted local governments’ ability to tax state-owned property.
In response to the decision, Representative Micah Neal, who represents part of Washington County, has announced that he is drafting a bill to allow assessment of property tax on property used by state colleges and universities for commercial purposes or other nonpublic purposes.
Update: The Fayetteville School District requested rehearing on February 22, 2016.