By Matthew Boch and Michael Pollock
In a landmark development for the Arkansas tax system, Governor Hutchinson has signed Act 586 (HB1468) to establish an independent Arkansas Tax Appeals Commission. The legislation was sponsored by Rep. Joe Jett and Sen. Blake Johnson and also closely supported by Sen. Jonathan Dismang. The Commission will provide a neutral panel of experienced tax professionals to hear and resolve taxpayer disputes with the Department of Finance and Administration (DFA). It will be established by July 2022 and will begin hearing cases in January 2023.
Background: The Current DFA Appeal Process
Arkansas taxpayers currently appeal a DFA proposed assessment or claim denial to the DFA Office of Hearings & Appeals, where the case is heard by an administrative law judge (ALJ). DFA audit and legal positions are sustained more than 90% of the time by the DFA ALJs. There is also a secondary internal appeal to the Secretary of DFA, the Secretary's Revision, which is typically heard in practice by the Commissioner of Revenue. This two-step DFA internal appeal process will be replaced by the Tax Appeals Commission.
A precursor to this 2021 enactment was Sen. Johnson's effort in 2019 with SB560, which had passed the Senate and stalled in the House.
The Independent Tax Appeals Commission Act
Act 586 creates the Independent Tax Appeals Commission Act, codified at Ark. Code Ann. §§ 26-18-1101 through -1120. The Act is based loosely on the American Bar Association Model Administrative Tax Tribunal Act. A companion bill, Act 593 (HB1705), provides conforming technical changes to other parts of the Arkansas tax code including judicial appeals. Act 588 (HB1567) is the Commission's appropriation.
Within the state executive branch, the Tax Appeals Commission will be housed within the Department of the Inspector General. While part of that agency, it will independently decide its cases. The Commission will be based in Little Rock.
A Three-Member Commission of Tax Experts
Three commissioners will make up the Tax Appeals Commission: a chief commissioner and two additional commissioners. The chief commissioner will be dually-licensed as a CPA and lawyer. Of the other two, one must be a CPA and the other a lawyer. The commissioners will be selected by the governor from shortlists provided by the Arkansas Supreme Court, the Arkansas Society of CPAs, and the Arkansas Bar Association. Governor Hutchinson's initial three selections will be from a pool of nine candidates, three from each of these organizations. Going forward the Supreme Court will shortlist three candidates for the chief commissioner (double CPA and lawyer), the Society of CPAs will shortlist three candidates for the CPA commissioner, and the Bar Association will shortlist three candidates for the lawyer commissioner. There is also a requirement that the chief commissioner have been engaged in the private practice of law or employed in the private sector for at least five of the ten years preceding appointment to the Commission.
The commissioners will have staggered nine-year terms. They cannot serve more than two terms. Salary and benefits will be comparable to state district judges.
The Chief Commissioner will carry out administrative duties and exercise commission powers, and will be answerable to the Arkansas Legislature through required annual reports.
To assist the commissioners, the Commission will employ, among others, a staff attorney to help draft decisions and an accountant with experience in tax issues related to manufacturing and business.
The governor must appoint the three commissioners by July 1, 2022. The Commission must promulgate rules by December 1, 2022. Appeals from DFA proposed assessments, claim denials, or other actions made on or after January 1, 2023 shall be to the Commission. Protests pending before DFA Hearings and Appeals may be transferred to the Commission if no hearing or prehearing has been held. DFA Hearings and Appeals will wind down and close by June 30, 2023.
Proceedings Before the Commission
Proceedings before the Commission should take approximately one year: A taxpayer may bring an action before the commission by protesting a notice of proposed assessment or a refund claim denial within 90 days of their issuance by DFA. The Commission must notify DFA within 15 days of the taxpayer's petition. Within 60 days of that notice and service, DFA must answer. The taxpayer has the option of making a reply to DFA's answer within 30 days. The Commission then has 30 days from the date of the taxpayer's reply or the deadline for the reply to schedule a hearing which is to be held within 90 days. After the hearing (and any post-hearing briefs), the Commission has 90 days to issue a decision. For appeals of permit cancellations or other time-sensitive matters, there are expedited schedules and proceedings.
Cases may be heard by a single commissioner or all three commissioners, depending on the nature and significance of the proceedings. Cases where the dispute is under $25,000 of tax generally will be heard by a single commissioner. Cases where the disputed tax exceeds $250,000 generally will be heard by all three commissioners en banc.
There is no prepayment requirement: A taxpayer's case must be heard before having to pay any tax amount in dispute. The proceedings occur before DFA issues a final assessment, so proceedings generally should precede DFA collection efforts.
Rules of evidence applicable in Arkansas civil cases do not apply to Commission hearings. The Commission is to admit relevant evidence, including hearsay, if it is probative of a material fact in controversy. The parties may not issue discovery. The taxpayer and DFA are required to make every reasonable effort to stipulate all relevant and nonprivileged facts to the fullest extent that agreement may be reached.
Hearings may be held at the Little Rock office or virtually. The Commission might also offer in-person hearings elsewhere in the state. And there is an interesting option to have the Commission conduct on-site observation of a taxpayer's property or activities. So in a manufacturing machinery and equipment exemption case, for example, a commissioner might visit the facility at issue and inspect the machinery personally.
Much like current Hearings and Appeals proceedings, cases before the Commission are confidential. Decisions will be published with taxpayer information redacted.
Decisions of the Tax Appeals Commission may be appealed into the Arkansas courts. For taxpayers, it is essentially unchanged: bring suit in circuit court in Pulaski County or the taxpayer's home county. Appeal generally is directly to the Supreme Court. DFA also can appeal commission decisions basically the same way. If DFA brings suit in Pulaski County, the taxpayer can transfer the case to the taxpayer's home county.
Enactment of the Independent Tax Appeals Commission Act is just the first step in making the Commission an independent and impartial decider of Arkansas tax cases. Much work remains to be done in 2021 and 2022, including selection of commissioners, establishment of operations and hiring of staff, and promulgation of Commission rules of practice and procedure. Taxpayers should monitor these developments and anticipate being able to appeal to the Commission in the near future.