By: Steven D. Hamilton, Principal, Steven D. Hamilton, CPA

January 23, 2015 2:35 pm EST
Natural Straw Hat

This appeal arises from a dispute of ad valorem taxes.

Thus begins the Arkansas Supreme Court decision in Outdoor Cap Co v Benton County.

Outdoor Cap Company (Outdoor Cap) makes – as you can guess – caps and other headwear. They are located in Bentonville, where Walmart is headquartered.

Benton County, Arkansas

Ad valorem taxes are paid on the value of real or personal property. An example is property taxes assessed on business equipment; another example would be the annual property taxes a Kentucky resident pays on his/her car.

Outdoor Cap has been paying property taxes since 1976. In 2011 it filed for a refund of its 2008 and 2009 taxes. It wanted a refund of over $247,000.

The reason for the refund? They made a mistake. They paid taxes on their inventory and (some of) that inventory was entitled to a “freeport” exemption.

This is a term we have not discussed before. The easiest way to understand the freeport is to think of port cities. Products arrive on very large ships, are unloaded, cataloged, organized and prepared for continued transit.  It would be bad practice to levy customs and duties simply because the products arrived at that particular port. It would make more sense to allow the products to pass through without assessment, to instead be taxed at their ultimate destination.

Substitute property taxes for customs and duties and you have the “freeport” exemption.

So Outdoor Cap made a mistake when it filed its personal property taxes and now wants some of its money back.

Benton County said “no.”

Outdoor Cap kept pursuing this until it wound up in the Arkansas Supreme Court.

The first thing that occurred to me is that perhaps Outdoor Cap was outside the refund period – you know: the “statute of limitations.” You have to get a refund claim in within a certain period of time, because to keep the claim period open indefinitely would impair the administration of the tax system.

I was wrong. This was not about the statute of limitations. This was about whether Outdoor Cap paid something that the state was required to repay.

Outdoor Cap made three arguments:

(1) The property was exempt from taxation.

The property is not taxable because of the freeport, but does that mean that the property is “exempt?’.

And we now enter the legal swamp of wordsmithing. Technically, under Arkansas law (Ark Code Ann 26-26-1102) a freeport does not mean that the property is not taxable. There are two steps before property can be taxed: first, the property must be taxable; second, the property must be located in Arkansas.

The Court determined that the freeport addressed the second test only: Arkansas did not consider the property as being in Arkansas. Had it been, it would have been taxable.

This is a fine weaving of words, but there it is. Outdoor Cap lost argument one.

(2) The property was erroneously assessed.

Arkansas law (Ark Code Ann 26-35-91) allows refunds only for erroneously assessed property.

Outdoor Cap of course argued that the property was erroneously assessed.

On first impression, this seems solid ground. Outdoor Cap argued that the property was misclassified and taxes were erroneously paid on it. Taxes have to be assessed before they can be paid. Otherwise, the tax would be paid voluntarily, which is nonsensical.

The Court made a distinction between an excessive assessment and an erroneous assessment. Outdoor Cap reported its property without claiming the freeport. There cannot be an erroneous assessment under law because the company did not provide all the information that Arkansas would need to realize that there was an error. Yes, the assessment was “excessive,” but it was not “erroneous.”

Outdoor Cap lost argument two.

(3)  Since tax was not actually due, the payment was a voluntary payment and the company wants its payment refunded.

Arkansas apparently allows for voluntary payments. What it won’t do is give you the money back, unless you can show that you are otherwise entitled to a refund.

This gets us back to what we said in argument (2): to get money back, one has to show that the taxes are “recoverable.” Arkansas allows only one definition of “recoverable”: there must have been an error in assessment.

Surely taxes can be recoverable if there was a mistake?

The principle is an ancient one in the common law, and is of general application. Every man is supposed to know the law, and if he voluntarily makes a payment which the law would not compel him to make, he cannot afterwards assign his ignorance of the law as a reason why the State should furnish him with legal remedies to recover it back.

In desperation Outdoor Cap tried a “Hail Mary,” arguing that it paid it taxes under “coercion,” because, if taxes were not paid, the County had the authority to take and sell the property.

… the argument is without merit because every taxpayer would have been ‘coerced’ according to Outdoor Cap’s argument because every taxpayer would be subject to penalties if its taxes weren’t paid.

The “Hail Mary” fell to the ground.

The Court decides that Outdoor Cap …

… voluntarily paid its taxes for the years 2008 and 2009, and did not claim a manufacturer’s exemption for those years. It is presumed to have known the law and its rights under the law. Accordingly, we do not find error in the circuit court’s application of the voluntary payment doctrine….

Outdoor Cap lost argument three.

The Court finally decided there was no refund for Outdoor Cap.

 

My thoughts?

Technically, the Court was correct. It was an affront to common sense, however. I have been at this for thirty years, and I have yet to meet the first person who paid taxes “voluntarily.” I guess I could put it on my bucket list, along with “play in the NFL.”

As I have gotten older, I have come to view the presumption that one “know the law” to be the drool of a political overclass.  An army of attorneys could not keep track of every mandate, ordinance, diktat or regulation these politicians strew upon society. It might be more honest if they simply said “I win and you lose, because I say so.”

I think Outdoor Cap Company got hosed.

The views and opinions expressed herein are those of the author(s). Core Compass’s Terms Of Use applies.

About the author

Steven D. Hamilton is a career CPA, with extensive experience involving all aspects of tax practice, including sophisticated income tax planning and handling of tax controversy matters for closely-held businesses and high-income individuals.

ad valorem taxesArkansasproperty taxesfreeport exemption
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