State immunity to figure in case by Burger King
Franchisee sues over taxes it pays on managers’ meals
Arkansas’ justices will hear a new set of arguments this week over their recent decision to render the state immune from lawsuits, and this case is a Whopper — as in, the signature sandwich at Burger King.
Burger King’s central Arkansas franchisee is suing the Department of Finance and Administration in a tax dispute over the free meals given to the restaurants’ managers.
The dispute, laid out in legal briefs, is as follows: Flis Enterprises, which owns 16 Burger King restaurants in central Arkansas, says it should pay taxes on the wholesale cost — the price of the buns, meat, cheese, etc. — of the free meals it gives its managers once a shift. The state argues that the meals should be taxed at retail cost, or the price the customer pays.
The difference, when accumulated over years of free burgers, is tens of thousands of dollars, according to court filings.
The case is set for oral arguments before the Arkansas Supreme Court on Thursday.
Both sides laid out their arguments in briefs filed with the court last fall, but in another filing made Jan. 23, state attorneys say they plan to raise an additional point: whether taxpayers have the right to take the state to court.
The filing, by Department of Finance and Administration attorney Joel DiPippa,
came just days after a split majority of the high court reversed previous precedent and said the Legislature may not waive the state’s sovereign immunity from lawsuits, as stated in the Arkansas Constitution.
That decision prompted many in Arkansas’ legal community to question how far-reaching the impact would be.
Private attorneys, piggybacking on the warnings of the two dissenting justices, said the decision could gut public record laws and civil liberties protections. State officials and lawyers downplayed the impact, saying the ruling would affect only monetary claims, which would simply be routed to the Arkansas Claims Commission. The commission is the agency designated to hear such cases, which up until now have sometimes been filed instead in state courts.
One leader of a legislative panel declared last week that the ruling had the potential to be the most consequential decision from the Arkansas Supreme Court in more than a decade.
The case of the free Burger King meals, officially Larry Walther Director of the Department of Finance and Administration v. Flis Enterprises Inc., will be the first time the justices hear new arguments based on their own sovereign
immunity ruling.
“This is of great concern,” said Anton Janik Jr., the editor-in-chief at The Arkansas Lawyer. Janik specializes in tax law at the Mitchell, Williams, Selig, Gates & Woodyard law firm. “Is the court saying all sovereign immunity waivers are bad, or just in certain instances?”
In its earlier ruling, the Supreme Court said Michael Andrews, a former bookstore clerk at a state community college, could not sue the University of Arkansas System for back wages, despite lawmakers passing a minimum wage law granting him the ability to do so.
That decision voided “legislative waivers” of sovereign immunity. Several attorneys have predicted that the next decision for the justices will be whether the courts can waive that immunity, for example, in disputes over tax assessments.
In light of the state saying it intended to raise the sovereign immunity decision, the Supreme Court ordered attorneys from both sides of the Flis case to file briefs addressing whether a sovereign immunity defense can be raised for the first time on appeal, and, if it can be raised, what the impact of the Andrews decision would be on those arguments.
Until the briefs are filed — they are due Monday — it is unknown whether the Department of Finance and Administration intends to argue that the agency is immune from tax lawsuits. An agency spokesman declined to say what arguments the filing would raise.
“I assume they’re going to argue some sort of lack of jurisdiction” of the courts, said John Tisdale, an attorney who represents Flis Enterprises. If the state makes that argument, he said he will counter that it is too late to raise such claims.
The tax dispute was first raised in 2013, after the state completed a nearly threeyear audit of Flis Enterprises and said the company owed $48,542 in taxes for “manager meals.” The company argued that it owed taxes of only $15,533 on the ingredients for those meals — which cost a little less than a third of the retail price. (Managers can order anything off the menu, according to court filings. To give one example, Burger King lists the price of a
Whopper at $4.19, so according to Flis’ costs, the ingredients are worth about $1.30).
First, the appeal went to an administrative law judge at the finance department’s office of hearings and appeals. The judge sided with the state.
The company then took the case to court, where a Pulaski County circuit judge sided with the restaurants’ assessment. The state appealed that ruling to the Supreme Court.
Before the state indicated that it would raise the Andrews case in its arguments, Flis Enterprises’ tax dispute was most relevant to tax lawyers, restaurateurs and manufacturers, said Matthew Boch, a tax law attorney for the firm of Dover, Dixon and Horne in Little Rock.
“For tax geeks like me, it’s interesting,” Boch said. If the justices rule that disputes of tax assessments cannot be taken to court, the case could have a much broader impact, he said after reading the most recent filing.
“Frankly, I think it would hurt the state’s competitiveness,” he said.
The high court also will be slightly different when it convenes this week to hear the Flis case. Chief Justice Dan Kemp, who wrote the majority’s opinion in Andrews, recused himself from the case, though he did not give a reason for doing so. Gov. Asa Hutchinson appointed Lee Watson of Fort Smith to sit in on the case in Kemp’s place.
“This is of great concern. Is the court saying all sovereign immunity waivers are bad, or just in certain instances?” — Anton Janik Jr., editor-in-chief at The Arkansas Lawyer and a specialist in tax law