Court Opinion

ID: 2811852
Source: CourtListenerOpinion
Date Created: 2015-06-25 15:04:44.760569+00
Date Added: 2024-06-11T11:30:22.612059
License: Public Domain

Cite as 2015 Ark. 285

                  SUPREME COURT OF ARKANSAS
                                       No.   CV-14-1056

GARY SANFORD; LINDA YEAGER;                        Opinion Delivered   June 25, 2015
WAYNE LILLEY; LILLEY PAINT CO.,
INC., AN ARKANSAS                                  APPEAL FROM THE PULASKI
CORPORATION; AND AIRMOTIVE,                        COUNTY CIRCUIT COURT
INC., AN ARKANSAS                                  [NO. 60CV-10-3462]
CORPORATION
                     APPELLANTS                    HONORABLE WENDELL GRIFFEN,
                                                   JUDGE
V.
                                                   AFFIRMED.

LARRY WALTHER, DIRECTOR,
ARKANSAS DEPARTMENT OF
FINANCE AND ADMINISTRATION
                     APPELLEE

                                  JIM HANNAH, Chief Justice

       Appellants, Gary Sanford, Linda Yeager, Wayne Lilley, Lilley Paint Co., Inc., and

Airmotive, Inc., appeal an order of the Pulaski County Circuit Court dismissing their

complaint brought against Richard Weiss, in his official capacity as Director, Arkansas

Department of Finance & Administration (“DF&A”),1 in which they alleged illegal-exaction

claims and due-process violations. We affirm the circuit court’s order.

       On November 1, 2013, appellants filed a “Second Amended & Restated Complaint

for Declaratory and Injunctive Relief Against Illegal Exactions Imposed by” DF&A.

Appellants alleged that DF&A’s method of imposing, levying, and collecting interest on

       1
           In January 2015, Weiss was succeeded by the current director, Larry Walther.
                                     Cite as 2015 Ark. 285

certain state tax-delinquencies is unlawful, unconstitutional, and usurious and constitutes an

illegal exaction in violation of article 16, section 13, of the Arkansas Constitution.2 DF&A

filed a motion to dismiss the second amended complaint pursuant to Arkansas Rule of Civil

Procedure 12(b)(1) and (6), alleging that appellants had failed to plead facts necessary to

establish subject-matter jurisdiction and that appellants had failed to plead facts on which

relief may be granted. The circuit court set forth the facts as follows that must be taken as

true in evaluating appellants’ second amended complaint:

       (a) Plaintiffs are taxpayers within the meaning of Arkansas law;

       (b) Plaintiffs are persons who are or have been indebted to the State of Arkansas for
       delinquent tax debts and against whom interest on such state tax debts has been
       imposed or collected by the Defendant;

       (c) Interest was assessed on some Plaintiffs prior to the filing of certificates of
       indebtedness;

       (d) Defendant filed certificates of indebtedness against the plaintiffs with respect to the
       tax delinquencies; and

       (e) Defendant assessed interest on Plaintiffs’ tax delinquencies after the filing of
       certificates of indebtedness.

       Following a hearing on the motion to dismiss, the circuit court entered an order

dismissing with prejudice appellants’ second amended complaint.

       2
         Count I(A)(1) of the second amended complaint alleged an illegal exaction based on
the violation of Arkansas statutes in the imposition of interest upon tax “underpayments,” as
that term is defined in Arkansas Code Annotated section 26-18-104(18) (Repl. 2012). Count
I(A)(2) alleged an illegal exaction challenging DF&A’s imposition of postjudgment interest.
Count I(B) alleged an illegal exaction based on the imposition of judgment interest upon
certificates of indebtedness in violation of the usury prohibitions in the Arkansas Constitution.

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       When reviewing a circuit court’s order granting a motion to dismiss, we treat the facts

alleged in the complaint as true and view them in the light most favorable to the plaintiff.

E.g., Downing v. Lawrence Nursing Hall Ctr., 2010 Ark. 175, at 6, 369 S.W.3d 8, 13. In testing

the sufficiency of a complaint on a motion to dismiss, all reasonable inferences must be

resolved in favor of the complaint, and the pleadings are to be liberally construed. E.g., Born

v. Hosto & Buchan, PLLC, 2010 Ark. 292, at 4, 372 S.W.3d 324, 329. Our rules require fact

pleading, and a complaint must state facts, not mere conclusions, in order to entitle the

pleader to relief. E.g., Biedenharn v. Thicksten, 361 Ark. 438, 441, 206 S.W.3d 837, 840 (2005)

(citing Ark. R. Civ. P. 8(a)(1)). In addition, we have made clear that we treat only the facts

alleged in a complaint as true for purposes of a motion to dismiss but not a party’s theories,

speculation, or statutory interpretation. E.g., Billy/Dot, Inc. v. Fields, 322 Ark. 272, 275, 908
S.W.2d 335, 336 (1995). Finally, our standard of review for the granting of a motion to

dismiss is whether the circuit court abused its discretion. E.g., Ark. Dep’t of Envtl. Qual. v.

Oil Producers of Ark., 2009 Ark. 297, at 5, 318 S.W.3d 570, 573. As to issues of law presented,

our review is de novo. E.g., Dollarway Patrons for Better Schs. v. Dollarway Sch. Dist., 374 Ark.
92, 94, 286 S.W.3d 123, 125 (2008).

                                       I. Illegal Exaction

       Appellants first contend that the circuit court erred in dismissing their complaint

because they pled viable illegal-exaction claims under article 16, section 13, of the Arkansas

Constitution. DF&A responds that, absent an actual challenge to the underlying tax,

appellants may not avail themselves of the constitutional class-action provisions of an illegal

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tax type of illegal exaction. To resolve this issue, we must answer the following question:

       Does an action for an illegal exaction arise under article 16, section 13, of the Arkansas
       Constitution when an Arkansas taxpayer claims that the interest imposed, levied, or
       collected on a tax delinquency is illegal but does not claim that the underlying tax
       itself is illegal?

       An illegal-exaction suit is a constitutionally created class action. Article 16, section 13,

of the Arkansas Constitution states that “[a]ny citizen of any county, city or town may

institute suit, in behalf of himself and all others interested, to protect the inhabitants thereof

against the enforcement of any illegal exactions whatever.” An illegal exaction is defined as

any exaction that either is not authorized by law or is contrary to law. E.g., Brewer v. Carter,

365 Ark. 531, 534, 231 S.W.3d 707, 709 (2006). Two types of illegal-exaction cases can arise

under article 16, section 13: “public funds” cases, in which the plaintiff contends that public

funds generated from tax dollars are being misapplied or illegally spent, and “illegal tax” cases,

in which the plaintiff asserts that the tax itself is illegal. E.g., Bowerman v. Takeda Pharms.

U.S.A., 2014 Ark. 388, at 4, 442 S.W.3d 839, 842.

       Appellants contend that this court has defined illegal exactions in a variety of forms

and has recognized that illegal-exaction suits are not limited to matters of “taxation” or

“expenditure of public funds.” The cases they cite, however, do not support their

contention. See, e.g., City of North Little Rock v. Graham, 278 Ark. 547, 647 S.W.2d 452

(1983) (holding that a three-dollar “public safety fee” added to residents’ water bills that was

exacted to raise revenue to pay additional money for services already in effect was a “tax” and

not a “fee”); Starnes v. Sadler, 237 Ark. 325, 372 S.W.3d 585 (1963) (holding that, under

article 16, section 13, a taxpayer was entitled to injunctive relief for the illegal spending of

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public funds when members of the General Assembly violated the dual-officeholder

prohibition in article 5, section 10, of the Arkansas Constitution).

       Alternatively, appellants contend that, even if their action may be maintained only by

challenging an illegal tax,3 then the interest charged by DF&A constitutes an illegal tax.

Relying on this court’s decision in City of Hot Springs v. Vapors Theatre Restaurant, Inc., 298
Ark. 444, 769 S.W.2d 12 (1989), appellants claim that interest, like a tax, is a “burden

imposed by a government upon a taxpayer for the use and benefit of that government.”

Citing Harris v. City of Little Rock, 344 Ark. 95, 40 S.W.3d 214 (2001), appellants contend

that, even though the exaction at issue is labeled “interest,” the exaction is really a tax

because the government imposes the interest for general revenue purposes. Finally, appellants

point to provisions in the Arkansas Code to support their contention that the General

Assembly defines both taxes and interest as revenue for taxation purposes. See Ark. Code

Ann. § 26-18-208(8) (Repl. 2012) (stating that “[a]ll penalties or additions to tax and interest

imposed by any state tax law are assessable and collectible by the director as a part of the tax

due and owing”); Ark. Code Ann. § 19-6-102 (Repl. 2007) (referring to taxes, licenses, fees,

permits, assessments, royalties, leases, rents, fines, interest, and penalties for the support of the

state government and its agencies, institutions, boards, and commissions as revenues or other

income that are required by law to be deposited into the State Treasury).

       City of Hot Springs v. Vapors and Harris v. City of Little Rock do not support appellants’

       3
       It is undisputed that appellants are not pursuing a “public funds” type of illegal-
exaction claim.

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position that “interest is a tax for illegal-exaction analysis.” The issue in Vapors was whether

the City of Hot Springs (City) could collect a 3 percent hospitality tax pursuant to an

ordinance enacted by authority of Arkansas Code Annotated section 26-75-602 (1987), in

addition to the customary 10 percent mixed-drink tax collected by the City under authority

of Arkansas Code Annotated section 3-9-213 (1987). The trial court ruled that it could not

impose the hospitality tax in addition to the mixed-drink tax. The City argued on appeal that

the trial court erred because “the [hospitality] tax is not a tax.” 298 Ark. at 446, 769 S.W.2d

at 2. Its argument was based on section 2 of Act 976 of 1985, not codified, but mentioned

in the publishers notes to Arkansas Code Annotated section 26-75-602, which provides,

“This tax is not a ‘tax’ as ‘taxes’ are ordinarily understood and intended for governmental

services and support, but is a special levy paid by persons, and collected by entities, peculiarly

associated with and benefited by tourism.” Id. at 446–47, 769 S.W.2d at 2. We rejected the

City’s contention, stating, “The statutory language is farcical. Any burden imposed by a

government upon a taxpayer for the use and benefit of that government is a tax, whether

labeled tax, levy, duty, custom, gabelle, or anything else.” Id. at 447, 769 S.W.2d at 2. Thus,

despite the attempt by the General Assembly to characterize the hospitality tax as something

other than a tax, this court recognized that the hospitality tax, which was imposed by the

City upon taxpayers for the use and benefit of the City, was indeed a tax.

       In Harris, a taxpayer contended that an illegal exaction occurred when the City of

Little Rock (Little Rock) raised its user fees at its recreational facilities and pledged their

proceeds to repay the bonds for the William Jefferson Clinton Presidential Park. She argued

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that the increase in fees was not related to the services provided and that the fees were

actually taxes that Little Rock lacked the authority to impose without prior voter approval.

In explaining the difference between a tax and a fee, we stated,

         “The distinction between a tax and a fee is that government imposes a tax for general
         revenue purposes, but a fee is imposed in the government’s exercise of its police
         powers.” City of Marion v. Baioni, 312 Ark. 423, 425, 850 S.W.2d 1, 2 (1993) (citing
         City of North Little Rock v. Graham, 278 Ark. 547, 647 S.W.2d 452 (1983)). A city may
         assess a fee for providing a service without obtaining public approval; however, a city
         cannot levy a tax unless it has received approval by the taxpayers. Barnhart v. City of
         Fayetteville, 321 Ark. 197, 900 S.W.2d 539 (1995) (citing Ark. Code Ann. § 26-73-
         103(a) (1987)). A governmental levy of a fee, in order not to be denominated a tax
         by the courts, must be fair and reasonable and bear a reasonable relationship to the
         benefits conferred on those receiving the services. Id.; Baioni, 312 Ark. 423, 850
S.W.2d 1. The fact that the ordinance labels the exaction a “fee,” not a “tax,” is not
         binding; rather, we look to the true character of the levy to determine whether it is
         a fee or a tax. [Baioni, 312 Ark. 423, 850 S.W.2d 1].

Harris, 344 Ark. at 105, 40 S.W.3d at 221.

         The instant case, of course, does not involve the issue of whether a certain exaction

is a fee or a tax. Still, even if we were to apply the “true character” test to the facts of this

case, we would reject appellants’ contention that its application mandates a finding in their

favor.

         Taxes and interest are not the same. “Taxes are enforced contributions exacted

pursuant to statutory authority.” Miles v. Gordon, 234 Ark. 525, 529, 353 S.W.2d 157, 160

(1962). Interest is a charge for the use of tax money that the government was deprived of

using due to late payment. See Jones v. United States, 371 F.2d 442, 450 (Ct. Cl. 1967); see also

Owens v. Comm’r of Internal Revenue, 125 F.2d 210, 213 (10th Cir. 1942) (stating that interest

is intended to compensate the government for delay in payment of the tax). Here, the “true

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character” of the exaction is to compensate the State for the delay in the payment of the tax.

       Unlike taxes, interest on state-tax delinquencies is not levied generally on all taxpayers

for the purpose of raising revenue. Although the proceeds of any interest paid on delinquent

tax debts are characterized as general revenue by the Revenue Stabilization Law, Arkansas

Code Annotated sections 19-5-101 through -1254 (Repl. 2007 & Supp. 2013), the interest

is not levied to pay for maintaining traditional government functions and services. And while

interest is assessable and collectable as a part of the tax, see, e.g., Ark. Code Ann. § 26-18-

208(8), “the interest on a tax is not a tax, but is something in addition to the tax,” see Penrose

v. United States, 18 F. Supp. 413, 415 (E.D. Pa. 1937).

       We conclude that an action for an illegal exaction does not arise under article 16,

section 13, of the Arkansas Constitution when an Arkansas taxpayer claims that the interest

imposed, levied, or collected on a tax delinquency is illegal but does not claim that the

underlying tax itself is illegal. Therefore, we affirm the circuit court’s dismissal of appellants’

illegal-exaction claims. Consequently, we do not address appellants’ remaining illegal-

exaction arguments on appeal.

                                         II. Due Process

       We now turn to appellants’ argument that the circuit court erred in dismissing their

due-process claims. In Count II of their second amended complaint, appellants alleged that

DF&A violated their due-process rights as guaranteed by the Fourteenth Amendment to the

United States Constitution and article 2, sections 2, and 8 of the Arkansas Constitution,

through 42 U.S.C. § 1983 and the Arkansas Civil Rights Act, Arkansas Code Annotated

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sections 16-123-101 to -108 (Repl. 2006), by failing to provide a forum by which they could

challenge DF&A’s assessment of the allegedly improper percentage of interest. DF&A

responds that appellants failed to plead sufficient facts to demonstrate which deprivation of

rights or lack of due process occurred prior to the alleged deprivation.

               In procedural due process claims, the deprivation by state action of a
       constitutionally protected interest in “life, liberty, or property” is not in itself
       unconstitutional; what is unconstitutional is the deprivation of such an interest without
       due process of law. The constitutional violation actionable under § 1983 is not complete
       when the deprivation occurs; it is not complete unless and until the State fails to
       provide due process. Therefore, to determine whether a constitutional violation has
       occurred, it is necessary to ask what process the State provided, and whether it was
       constitutionally adequate. This inquiry would examine the procedural safeguards built
       into the statutory or administrative procedure of effecting the deprivation, and any
       remedies for erroneous deprivations provided by statute or tort law.

Zinermon v. Burch, 494 U.S. 113, 125–26 (1990) (internal citations omitted) (emphasis in

original).

       A valid due-process claim consists of four elements: action under color of state law;

a right, privilege, or immunity secured by the constitution such as property; a loss of property

amounting to a deprivation; and an absence of due process. See Parratt v. Taylor, 451 U.S.
527, 536–37 (1981). If there is an adequate remedy under state law, there can be no due-

process violation. See Hudson v. Palmer, 468 U.S. 517, 529–30 (1984) (stating that a person

does not have a § 1983 due-process claim if state law provides an adequate remedy).

       The Arkansas Tax Procedure Act, Arkansas Code Annotated sections 26-8-101 to -

1006 (Repl. 2012) (“TPA”), provides a procedure that satisfies due-process requirements. See

Ross v. Martin, 800 F.2d 808 (8th Cir. 1986). Under the TPA, certificates of indebtedness

shall be issued as soon as practicable after a final assessment has been made against the

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taxpayer. Ark. Code Ann. § 26-18-701(a)(1)(A). A final assessment of a tax delinquency is

issued at the conclusion of the administrative-hearing process or after the time to request

administrative relief from a proposed assessment has expired. Ark. Code Ann. §§ 26-18-401,

-403, -405. A taxpayer may protest the determinations of the director of DF&A before or

after a final assessment has been issued. A taxpayer may protest a proposed assessment under

the administrative procedures of the TPA. See id. § 26-18-404. After the issuance of a final

assessment of a final deficiency in tax that is not protested by the taxpayer or a final

determination of the hearing officer or director, a taxpayer may seek judicial relief from the

final determination or assessment. See id. § 26-18-406. In addition, a taxpayer may challenge

the filing of a certificate of indebtedness. See id. § 26-18-811.

       The TPA ensures that a hearing is available to taxpayers seeking to protest an

assessment prior to the filing of a certificate of indebtedness. Appellants did not show that

they were denied the ability to challenge the determinations of the director either

administratively or by seeking judicial relief as authorized under the TPA. The circuit court

correctly ruled that appellants failed to plead facts to support their due-process-violation

claims; therefore, we affirm the circuit court’s dismissal of those claims.

       Affirmed.

       HART, J., concurs.

      Deininger & Wingfield, P.A., by: Neil Deininger and Reba M. Wingfield; Hatfield & Sayre,
by: Eugene G. Sayre; and Stephen L. Curry, for appellants.

       Joel DiPippa, Attorney Supervisor, Revenue Legal Counsel, for appellees.

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