State, Dept. of Finance and Admin. v. Staton

• Citation: 942 S.W.2d 804,325 Ark. 341
• Decision Date: 28 October 1996
• Docket Number: No. 96-215,96-215
• Parties: STATE of Arkansas, DEPARTMENT OF FINANCE AND ADMINISTRATION, Appellant, v. Debora STATON, Appellee.
• Court: Arkansas Supreme Court

Page 804

942 S.W.2d 804

325 Ark. 341

STATE of Arkansas, DEPARTMENT OF FINANCE AND ADMINISTRATION, Appellant, v. Debora STATON, Appellee.

No. 96-215.

Supreme Court of Arkansas.

Oct. 28, 1996. ^*

[325 Ark. 344] Beth B. Carson, Revenue Legal Counsel, Little Rock, for Appellant.

Michael A. Skipper, Little Rock, for Appellee.

DUDLEY, Justice.

In January 1994, Debora Staton purchased a car and an extended service contract on the car and paid State sales tax on the sale of both the car and the service contract. The State sales tax attributable to the service contract was $49.28. On April 21, 1994, Ms. Staton filed a claim with the Department of Finance and Administration for refund of the $49.28 on the ground that, under the language of the sales-tax statute, the tax did not apply to the extended service contract. The Department denied the refund.

On July 7, 1994, Ms. Staton filed suit in chancery court and asked for judgment of $49.28. In addition, she sought class certification for all other taxpayers similarly situated. On May 8, 1995, the chancellor certified a class of taxpayers under Ark. R. Civ. P. 23 as "all of those who have, since July 7, 1991, purchased vehicle service contracts, sometimes referred to as extended warranties covering motor vehicles within the State of Arkansas."

On November 21, 1995, the chancellor ruled that the service contracts were not taxable and that each class member could submit a claim to the chancery court for refund, dating back to 1991. The Department appeals to this court. Staton cross-appeals. We affirm the ruling that service contracts are not taxable and reverse the ruling certifying the class, causing the cross-appeal to be moot.

The Department argues that the chancellor erred in ruling that the service contracts were not taxable. It argues that Ark.Code Ann. § 26-52-301(3)(C)(i) and § 26-52-103(4) (Repl.1992), together, provide the basis for taxation. The chancellor ruled correctly. Arkansas Code Annotated § 26-52-301(3)(C)(i), in material part, plainly levies a "tax ... upon the gross proceeds or gross receipts derived from all sales to any person of ... service of ... and repair of motor vehicles." An extended warranty is not "service" of a motor vehicle. As the promised repairs are completely contingent upon events that may not transpire, the contracts cannot be said to be for service or repairs to automobiles. Consequently, we affirm this part of the chancellor's order.

We turn now to the Department's point for reversal that the chancellor lacked subject-matter jurisdiction to certify the class. In its argument, the Department contends that the doctrine of sovereign immunity prohibits taxpayers' suits against the State except when permission to sue has been granted, and at other limited times not material to this suit. The Department contends that permission to seek a refund of erroneously assessed and collected sales tax is governed by Ark.Code Ann. § 26-18-507(e)(2)(A) (Repl.1992), which allows a taxpayer to sue the sovereign for improperly collected sales tax only after a refund has been sought and the request is refused or when no response is made by the Department. The Department concludes that since Ms. Staton is the only taxpayer who had sought a refund and the only taxpayer whose request was denied, the chancery court did not have subject-matter jurisdiction over other members of the proposed class. The argument is well taken.

Article 5, section 20, of the Constitution of Arkansas cogently provides: "The State of Arkansas shall never be made defendant in any of her courts." This sovereign immunity may be waived only in limited circumstances. Arkansas Dep't of Human Servs. v. State, 312 Ark. 481, 850 S.W.2d 847 (1993); Arkansas Game & Fish Comm'n v. Lindsey, 299 Ark. 249, 771 S.W.2d 769 (1989). The doctrine of sovereign immunity is rigid. Austin v. Arkansas State Highway Comm'n, 320 Ark. 292, 895 S.W.2d 941 (1995).

Arkansas Code Annotated § 26-18-507(e)(2)(A) (Supp.1992) grants legislative permission to a taxpayer to sue the State after a claim for refund has been filed and refused or the Commissioner has not acted upon it. There must be full compliance with this type of statute before sovereign immunity is waived. Hercules, Inc. v. Pledger, 319 Ark. 702, 706-07, 894 S.W.2d 576, 578 (1995). Because Ms. Staton's claim for refund was the only one filed and rejected, sovereign immunity was waived in only that one case.

A trial court acquires no jurisdiction where the suit is one against the State and there is no waiver of sovereign immunity. McCain v. Crossett Lumber Co., 206 Ark. 51, 174 S.W.2d 114 (1943); Pitcock v. State, 91 Ark. 527, 121 S.W. 742 (1909). Thus, the State is correct in its contention that the trial court had no subject-matter jurisdiction over the entire class. Subject-matter jurisdiction based on sovereign immunity is an issue that is always open, and it is the duty of an appellate court to raise the issue of its own volition. Crossett Lumber Co., 206 Ark. at 61-62, 174 S.W.2d at 120.

Interwoven with the doctrine of sovereign immunity in tax cases is sound fiscal public policy. Throughout the years, with one exception, we have written that a taxpayer must comply with the statutory requirements before sovereign immunity is waived. We have said that this procedure places the government on notice of the claim and informs it that it may be required to refund the money; consequently, it should make appropriate financial allowances. We fully discussed this policy in the recent case of Mertz v. Pappas, 320 Ark. 368, 896 S.W.2d 593 (1995), as follows:

We have consistently followed the common law rule that prohibits the recovery of voluntary paid taxes, except where a recovery is authorized by a statute, without regard to whether the payment is voluntary or compulsory. See, e.g., City of Little Rock v. Cash, 277 Ark. 494, 644 S.W.2d 229 (1982); Searcy County v. Stephenson, 244 Ark. 54, 424 S.W.2d 369 (1968); Thompson v. Continental Southern Lines, Inc., 222 Ark. 108, 257 S.W.2d 375 (1953). We follow this rule even when an illegal exaction claim is based on constitutional grounds. Cash, 277 Ark. at 504-05, 644 S.W.2d at 233. When recovery is authorized by statute upon payment "under protest," we literally require a payment "under protest". Hercules, Inc. v. Pledger, 319 Ark. 702, 894 S.W.2d 576 (1995). There is an exception for payment under coercion, see Cash, 277 Ark. at 505, 644 S.W.2d at 233; Chapman & Dewey Land Co. v. Board of Directors, 172 Ark. 414, 288 S.W. 910 (1926), but that exception is not applicable to the case at bar.

The reasoning underlying our cases is sound. When taxes are paid to a government they are deposited into that government's general revenues and ordinarily are spent within that tax year. However, when the government is put on notice that it may be required to refund those taxes, it can make the appropriate allowance for a possible refund. See Hercules, Inc., 319 Ark. at 707, 894 S.W.2d at 578. If we were to allow refunds for taxes voluntarily paid in previous years, it would jeopardize current and future governmental operations because current and future funds might be necessary for the refund.

Id. at 370, 896 S.W.2d at 594 (emphasis supplied).

In another case, one involving a claim for refund under the comparable income-tax statute, we wrote:

In enacting § 26-18-406, the General Assembly had in mind at least two reasons for requiring a taxpayer to designate specifically any payment as being under protest when seeking judicial review of a final deficiency assessment. First, § 26-18-406(c) mandates that all taxes and penalties paid under protest are to be held by the director in an escrow account denominated the "Tax Protest Fund Account," and that refunds are to be made from this account. While we agree with Hercules that the phrase "paying under protest" is not defined by the Act, these terms are not ambiguous or difficult to understand. Protest is commonly understood to mean a formal disapproval or objection issued by a concerned party. Here, under § 26-18-406, it is clear that the protest is intended to place DF & A on notice that the taxpayer's payment must be deposited into the Protest Fund account. Second, a taxpayer who has protested and pursued an earlier administrative review of a proposed assessment under § 26-18-404 may reasonably decide not to pursue further adjustments of the assessment or judicial review of the final determination. While a payment which is not made under protest is deposited into general revenues and becomes available for immediate use by the state, a payment made under protest only becomes available for the state's use after the taxpayer fails to file suit within the one year period or after judicial determination that the deficiency assessment was valid. See § 26-18-406(c)(3).

Hercules, Inc. v. Pledger, 319 Ark. 702, 707, 894 S.W.2d 576, 578 (1995).

Another case in which we recognized fiscal policy concerns was City of Little Rock v. Cash, 277 Ark. 494, 644 S.W.2d 229 (1982). In that case, which involved a tax that was illegal from its inception, we pointed out that, even though the tax had always been illegal, it had been collected and spent by the City; therefore, the class action could be maintained only from the date the suit was filed and the City was put on notice that it should make allowance before spending the money.

The anomalous case is Pledger v. Bosnick, 306 Ark. 45, 811 S.W.2d 286 (1991). In that case it was necessary for each member of the purported class of taxpayers seeking a refund of income taxes to file for a refund as a prerequisite for membership in the class. At issue there, as here, was Ark.Code Ann. § 26-18-507, the statute by which the State can waive sovereign immunity. We held that the statute did not require each member of the class to file a request for a refund. This court agreed with the argument that requiring strict compliance...