Title: ACW, Inc. v. Weiss

State: arkansas

Issuer: Arkansas Supreme Court

Document:

ACW, INC.; Phillips Development Corporation;
and United Wholesale Florists, Inc., On
Behalf of Themselves and All Others Similarly
Situated v. Richard WEISS, Director of
Department of Finance & Administration, and
John Theis

96-894                                             ___ S.W.2d ___

                    Supreme Court of Arkansas
                 Opinion delivered June 30, 1997

1.   Statutes -- legislative use of emergency clauses in taxation -
     - what constitutes emergency. -- The Arkansas Constitution, in
     Article V, section 38, requires that the passage of an act be
     in response to an emergency thereby allowing imposition of a
     tax by a three-fourths vote of each House of the General
     Assembly; in interpreting emergency clauses, the supreme court
     has given great deference to legislative determination as to
     whether an emergency exists; emergency clauses must state not
     only a grave problem, but, because the effect of the clause is
     to allow an act to become effective upon passage, there must
     also be a showing of a need to promptly begin a response to
     the circumstances that have generated the emergency; it is not
     essential that the emergency be suddenly discovered or that
     the remedy be immediately effective; legislative emergencies
     are those situations where the common good or public interest
     is legislatively declared to be paramount to individual
     interests. 

2.   Statutes -- emergency legislation -- facts must show necessity
     for immediate action. -- Emergency legislation is enacted for
     the purpose of alleviating grave conditions; if legislation
     shows a remedial purpose, it will be given generous
     construction; the facts must show a necessity for immediate
     action. 

3.   Statutes -- presumed constitutional -- burden of proof is on
     challenger. -- Statutes are presumed constitutional, and the
     burden of proving otherwise is upon the challenger of the
     statute. 

4.   Taxation -- public policy of state clearly favored sustaining
     public schools and defraying necessary expenses of government
     -- act complied with provisions of Ark. Const. art. V,  38 --
     emergency found to have existed. -- Pursuant to Ark. Const.
     art. V,  38, and the express public policy of the state, an
     emergency was found to exist, enabling the General Assembly to
     pass Act 1052 of 1991 by the extraordinary vote of three-
     fourths of the entire membership of each House of the General
     Assembly; the stated goal was to provide access to all
     segments of the population so that fourteen years of education
     will be available by the year 2000; the supreme court noted
     that the length of time required to address the problem was in
     itself a strong and rational basis for getting started toward
     a solution in that many years of inadequate support of
     education may be required before there is a legislative
     realization of an emergency that has resulted from the
     economic and societal impact of that inadequate education;
     educational problems cannot be corrected immediately; the
     state's public policy clearly favored sustaining public
     schools and defraying necessary expenses of government. 

5.   Taxation -- appellant's argument without merit -- overhead
     costs to be expected. -- Appellants' argument that the measure
     must fail because three percent of the revenues from the act
     will be allocated to the Constitutional Officers Fund and the
     State Central Services Fund was without merit; the application
     of revenues to be derived from this tax is subject to review
     and legislative action during the years in which the revenues
     are realized; some overhead costs can be expected, and once
     the threshold question of the existence of an emergency was
     resolved, the trial court lacked the authority to substitute
     its priorities for those expressed in the statute.

6.   Statutes -- adoption of emergency clause does not negate right
     to refer measure to popular vote. -- The adoption of an
     emergency clause does not deprive the people of their rights
     to refer any measure to a popular vote. 

7.   Statutes -- when ambiguous -- statute found ambiguous. -- A
     statute is ambiguous where it is open to two or more
     constructions, or where it is of such obscure or doubtful
     meaning that reasonable minds might disagree or be uncertain
     as to its meaning; Ark. Code Ann.  26-51-205 was found to be
     internally inconsistent and ambiguous where it first appeared
     to say that corporations shall pay taxes on the first $100,000
     of net income according to a graduated scale and then added
     language that seemed to tax companies making over $100,000 at
     a flat six-and-one-half percent, including the first $100,000.

8.   Statutes -- ambiguous statute -- how effect given to
     legislative intent. -- When a statute is ambiguous, the
     supreme court must give effect to the legislative intent; to
     determine legislative intent, the court looks to such
     appropriate matters as the legislative history, the language,
     and the subject matter involved; the manner in which a statute
     has been interpreted by executive and administrative officers
     may also be considered, and will not be disregarded unless
     clearly wrong.


9.   Taxation -- tax cannot be imposed except by express words
     indicating purpose -- any doubts must be resolved in favor of
     taxpayer. -- A tax cannot be imposed except by express words
     indicating that purpose, and any ambiguity or doubts must be
     resolved in favor of the taxpayer.  

10.  Taxation -- statute found to impose graduated tax applicable
     to all corporations for first $100,000 of net income -- flat
     tax applied to entire net income over $100,000. -- Based upon
     the supreme court's review of legislative intent and
     consistent with decisions relating to the interpretation of
     tax measures, the supreme court found that Ark. Code Ann. 
     26-51-205 imposed a graduated tax applying to all corporations
     for the first $100,000 of net income, and a flat tax of 6«% on
     the entire net income above $100,000. 

11.  Taxation -- tax rate uniformly applied to all corporations --
     confiscatory taxation and equal protection arguments resolved.
     -- The supreme court's determination that Ark. Code Ann.  26-
     51-205 intended a uniform application of tax rates on all
     corporations resolved the issues of confiscatory taxation and
     alleged violations of equal protection guarantees raised by
     appellants.

12.  Taxation -- when sovereign immunity waived in taxation cases -
     - trial court acquires no jurisdiction where suit is against
     state and sovereign immunity is not waived. -- Suits against
     the state are prohibited under Ark. Const. art. V,  20;
     however, sovereign immunity may be waived in certain limited
     circumstances; a taxpayer may sue the state for an improperly
     collected tax only after that taxpayer has requested a refund
     and that request has been denied; only the taxpayer who has
     requested and has been denied a refund under this statutory
     provision has obtained a waiver of sovereign immunity; a trial
     court acquires no jurisdiction where the suit is one against
     the state and there is no waiver of sovereign immunity.  
     
13.  Courts -- order granting certification of class reversed --
     chancellor lacked authority to certify members of class who
     had not filed refund claims. -- Because there was no waiver of
     sovereign immunity, the chancellor lacked authority to certify
     the members of the class that did not file refund claims; the
     order granting class certification was reversed where only the
     named plaintiffs had followed the procedure outlined in Ark.
     Code Ann.  26-18-507(e)(2)(A) by applying for a refund; the
     named plaintiffs were the only persons for whom sovereign
     immunity had been waived. 


     Appeal from Pulaski Chancery Court; Ellen B. Brantley,
Chancellor; affirmed in part; reversed and remanded in part;
reversed on cross appeal.
     Timothy Davis Fox, Richard E. Holiman, and Gregory M. Hopkins,
for appellants.
     Beth Briscoe Carson, Chief Counsel, for appellees Richard A.
Weiss and John H. Theis. 
     Ray Thornton, Justice.
     Appellants are the named plaintiffs in a certified class of
approximately 3,100 corporations seeking a refund of corporate
income taxes levied by Act 1052 of 1991.  Each of the named
plaintiffs, ACW, Inc.; Phillips Development Corporation; and United
Wholesale Florists, Inc., filed Arkansas state income-tax returns
reporting Arkansas net taxable income in excess of $100,000.  Each
paid corporate income tax at the flat rate of 6«% on their entire
net income.  After seeking refunds individually, the named
plaintiffs filed a verified claim for repayment of overpayment of
taxes on their first $100,000 of net taxable income, on behalf of
themselves and others similarly situated.  They contended that the
proper assessment would be a graduated rate on the first $100,000,
as is applied to corporations with net taxable income of $100,000
or less.
     After exhausting their administrative remedies, appellants
filed a complaint in chancery court, which alleged: (1) Act 1052
violates the provisions of Ark. Const. art. V,  38; (2) the Act
requires application of graduated rates on the first $100,000 of
income, or in the alternative, that it is ambiguous; (3) if the Act
unambiguously levies a 6«% flat rate on the first $100,000 of
income, it violates equal protection; (4) the Act results in a
confiscatory tax.  They requested class certification pursuant to
Ark. R. Civ. P. 23 and Ark. Const. art. XVI,  13, and asked for
refunds, injunctive relief, and the establishment of a common fund.
     The trial court granted class certification, but affirmed the
decision of the Commissioner imposing the flat rate and denied the
requested relief.  It found that the Act was subject to the
provisions of Ark. Const. art. V,  38, which requires that the
passage of the Act be a response to an emergency allowing the
imposition of such a tax by a three-fourths vote of each House of
the General Assembly, and that an emergency had been stated. 
Regarding the ambiguity argument, the trial court acknowledged that
the language of the statute could be read to reach three divergent
results, but concluded that the interpretation offered by
appellees, the Department of Finance and Administration and the
Commissioner of Revenues, should prevail.  Finally, the court found
that the statute did not violate equal protection.  
     On appeal, appellants contend that (1) there was not an
emergency allowing the passage of the tax as provided by Ark.
Const. art. V,  38; (2) the statute is ambiguous and should be
resolved in favor of the taxpayer; and (3) the Department's
interpretation of the Act results in a confiscatory tax and
violates equal protection.  We agree with the trial court's finding
that the requirements under the Arkansas Constitution for adoption
of the statute had been met, and affirm on this point.
     While we agree with the trial court's finding that the statute
could be read to reach divergent results, we disagree with its
ruling that the Department's interpretation should prevail; and we
reverse on this point.
     Finally, we consider appellees' cross-appeal, contending that
the doctrine of sovereign immunity invalidates the certification of
a class of taxpayers seeking refunds in this case.  On the basis of
our recent decisions in State v. Tedder, 326 Ark. 495, 932 S.W.2d 755 (1996), and State v. Staton, 325 Ark. 341, 942 S.W.2d 804
(1996) (substituted opinion granting rehearing), we agree with
appellees that no class certification should have been ordered, and
reverse the certification.

The Existence of an Emergency
     We first address the trial court's determination of the
existence of an emergency.  Appellants argue that the tax imposed
by Act 1052 of 1991 must fail because it was not a response to an
emergency allowing passage of the tax by the votes of three-fourths
of the members of each house of the General Assembly.  We agree
with the trial court that the emergency clause did state an
emergency sufficient to meet the requirements of the Arkansas
Constitution under art. V,  38.  Section 9 of Act 1052, the
emergency clause of the Act, provided the following:
It is hereby found and determined by the General Assembly
that additional funds are necessary to provide higher
quality educational programs which are accessible by all
segments of the population in the state; that recent
studies have shown that in the year 2000, workers must
have a minimum of fourteen (14) years of education to
function in the work force; that the state is in
desperate need of training, retraining and upgrading the
work force; that this act will provide the funding
necessary to provide every citizen with an opportunity to
participate in vocational-technical training or college
transfer programs; and that it is necessary for this act
to become effective immediately to provide the funding
needed for these programs as soon as possible. 
Therefore, an emergency is hereby declared to exist and
this act being necessary for the immediate preservation
of the public peace, health, and safety shall be in full
force and effect from and after its passage and approval.
     For a thorough understanding of the provisions and
requirements of Ark. Const. art. V,  38, a brief review of its
historical background is required.  At the time the article was
adopted as Amendment 19 in 1933, Arkansas was in the throes of
financial emergency.  More than 165 million dollars of highway and
road improvement bonds were in default, and checks drawn on the
state treasury were nearly worthless.  The regular session of the
General Assembly of 1933 cut state spending in half, established a
sinking fund to pay off checks, and proposed a constitutional
amendment limiting the issuance of bonds or other evidence of
indebtedness.  That amendment, together with Amendment 19, were
proposed by the legislature, and adopted by overwhelming majorities
at the general election on November 6, 1934.
     Among its other provisions, and with a notable exception for
paying the just debts of the state, Confederate pensions, and
expenditures for educational and highway purposes, Amendment 19
prohibited expenditures exceeding two and one-half million dollars
during any biennial period "unless approved by the votes of three-
fourths of the members elected to each House of the General
Assembly."
     Amendment 19 also provided that:
     None of the rates for property, excise, privilege or
personal taxes, now levied shall be increased by the
General Assembly except after the approval of the
qualified electors voting thereon at an election, or in
case of emergency, by the votes of three-fourths of the
members elected to each House of the General Assembly.
We observe that this amendment does not require either an emergency
or an extraordinary vote to adopt new classes of taxes.  The
limitations of the amendment apply only to increased rates for
property, excise, privilege, or personal taxes in existence at the
time the amendment was adopted.  Other taxes, such as sales and use
taxes, or other means of increasing revenues, such as the repeal of
deductions applicable to the computation of tax liabilities on
income taxes, may be adopted without any declaration of emergency,
and without an extraordinary majority vote.  For example, while we
have decided that higher rates of income taxes are included in the
class of taxes requiring an extraordinary three-fourths majority
for adoption under Amendment 19, Hardin v. Fort Smith Couch &
Bedding Co., 202 Ark. 814, 152 S.W.2d 1015 (1941), we have also
determined that a three-fourths vote is not necessary to repeal a
deduction or an exemption from federal taxes used in computing
state income taxes, Morley v. Remmel, 215 Ark. 434, 221 S.W.2d 51
(1949).
     The selective targeting of certain specific classes of tax
increases by Amendment 19 may perhaps express a preference for
other means of raising revenues, but does not establish a public
policy opposed to raising revenues for significant and appropriate
public purposes, such as education, highways, and the payment of
public debts.  To the contrary, the public policy of our state
clearly favors sustaining public schools and defraying necessary
expenses of government.  For example, as long ago as 1927, we held
that the maintenance of institutions of higher education was a
necessary expense of government that did not require an
extraordinary majority vote from both houses of the General
Assembly.  Hudson v. Higgins, 175 Ark 585, 299 S.W. 1000 (1927).
     In a long line of cases interpreting emergency clauses adopted
in accordance with Amendment 7's provision on initiative and
referendum matters, we have given great deference to legislative
determination whether an emergency exists.  Such emergency clauses
must state not only a grave problem, but because the effect of the
clause is to allow an act to become effective upon passage, there
must also be a showing of a need to promptly begin a response to
the circumstances that have generated the emergency.  However, it
is not essential that the emergency be suddenly discovered or that
the remedy be immediately effective.  In Priest v. Polk, 322 Ark.
673,