In a Relief to Taxpayers, Arkansas Supreme Court Says Sovereign Immunity Is Not Jurisdictional

Today's Arkansas Supreme Court opinion in Walther v. FLIS Enterprises, Inc., 2018 Ark. 64, coupled with the Department of Finance and Administration's own restraint, provides substantial comfort that the doors to Arkansas courts remain open for taxpayers seeking judicial relief. The court held that sovereign immunity is an affirmative defense to be raised, rather than a jurisdictional requirement that the court should raise on its own. Given that the Governor and DFA have indicated that they will not raise sovereign immunity in tax cases, there is a high likelihood that Arkansas taxpayers can continue to proceed in state court.

For the past two months we have been monitoring and analyzing the potential implications of Arkansas's expanded sovereign immunity doctrine, which could potentially bar tax lawsuits in Arkansas courts, and particularly those for refund claims: We initially covered the nontax Andrews decision that raised the question, and then we closely followed briefing and oral argument in the FLIS case where DFA raised the sovereign immunity issue with the court. The substantive issue in FLIS involves the tax base for gross receipts (sales) tax on withdrawals from stock, and we will address it in a separate post.

The sovereign immunity question comes from article 5, section 20 of the Arkansas Constitution, which says that "[t]he State of Arkansas shall never be made defendant in any of her courts." This past January, in The Board of Trustees of the University of Arkansas v. Andrews, 2018 Ark. 12 (Jan. 18, 2018), the Arkansas Supreme Court reversed 20-year-old precedent and reinstated an interpretation that this provision of the Arkansas Constitution cannot be waived by legislation. The overturned precedents were tax cases that allowed refund claim litigation: Arkansas Department of Finance & Administration v. Staton, 325 Ark. 341 (1996); Arkansas Department of Finance & Administration v. Tedder, 326 Ark. 495 (1996). The troubling implication for taxpayers was that judicial remedies were no longer available, and particularly for refund claims. DFA sought clarification in FLIS about how this reinvigorated sovereign immunity doctrine applies to state tax cases.

The decision in FLIS squarely holds that sovereign immunity is an affirmative defense that must be waived by the state: "Therefore, we hold that sovereign immunity is not a matter of subject-matter jurisdiction, as it is not a limit on the court's authority to hear a particular type of case." Accordingly, the tax lawsuit by FLIS was not barred by sovereign immunity, since DFA had not raised the issue in the circuit (trial) court.

The decision in FLIS should provide comfort to taxpayers that the doors of the Arkansas courts remain open: The Governor's Office has instituted a policy that the state will not raise a sovereign immunity defense unless specifically authorized by the Governor's Office. Governor Hutchinson has said publicly that he wants to see courts remain open to tax cases, and I also have received informal oral assurances from DFA leadership that they will not be raising sovereign immunity as a defense in tax cases. Assuming that they stand by this policy, taxpayers should not see sovereign immunity issues when litigating their cases.

Taxpayers are not out of the woods yet: First, the treatment of sovereign immunity as an affirmative defense won only 4 of the 7 votes on the Arkansas Supreme Court, and this included a special justice sitting by appointment for that case only. Taxpayers in a true refund claim position, in particular, should be aware that two justices (Wynne and Hart) would have distinguished FLIS as a "paid under protest" situation rather than a true refund claim, and Justice Baker continues to disagree with Andrews but thinks that if applied literally sovereign immunity would be a jurisdictional bar rather than an affirmative defense. So it is not completely clear that at least 4 votes on a future court would exist to treat sovereign immunity as an affirmative defense rather than a jurisdictional bar.

Second, the Governor's Office and DFA could change their position on not raising sovereign immunity at any time, and particularly if faced with a big or controversial case. Or there could be a change of administration (the governor is up for reelection in 2018) and a new policy put in place. While Governor Hutchinson provides an exceptionally steady and pro-rule-of-law administration, you are still at the mercy of policy rather than the certainty of a defined legal framework.

Arkansas taxpayers considering litigation should monitor the legal landscape carefully and consult with counsel as to how best to proceed. In some instances it may be that a case could be filed in federal court, whether as a primary case or as a protective measure if sovereign immunity comes up in Arkansas court. In addition, this legal uncertainty should be taken into consideration for taxpayers evaluating whether to do an original return position or an amended return / refund claim approach to a potentially controversial issue.

We will continue to monitor and evaluate the sovereign immunity situation and particularly as it affects tax cases. It is likely that we will see a strong push for a constitutional amendment to fix this problem via a referral in the 2019 legislative session and voter approval in the 2020 general election.

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