LITTLE ROCK — A proposed class-action lawsuit filed Friday in Pulaski County Circuit Court alleges that the state is charging too much interest on tax debts owed by individuals and businesses, in violation of the state Constitution.
In Arkansas, “the maximum legal rate of interest on judgment liens is currently set at 5.5 percent,” according to the Deininger & Wingfield tax-law firm, which filed the suit with the Hatfield & Sayre firm on behalf of three Arkansans, one of whom is a business owner.
The state Department of Finance and Administration is charging 10 percent interest on judgments against Arkansas tax debtors, “and it is compounding the interest that is due on at least a weekly basis,” the Deininger firm said in a news release.
The high rate makes it more difficult for anyone who owes an income-tax debt, sales-tax debt or withholdingtax debt to catch up in a weak economy, said attorney Reba Wingfield of Little Rock.
“To charge usurious interest on top of the exorbitant penalties by the state and the IRS, it’s just not right,” she said.
Wingfield said that under Arkansas law, the interest rate on a judgment is to be either 10 percent or 5 percentover the prime rate, whichever is less.
When interest rates were high, the law helped Arkansans who owed tax debts by limiting the interest they were charged to 10 percent or less. But when interest rates fell, the state didn’t correspondingly change the amount of interest it charged to tax debtors, Wingfield said.
Now, the firm says, “interest rates are at an all-time low, and unemployment is soaring.” Yet while interest rates have steadily been less than 10 percent since 2007, Wingfield said, the state has held its interest rate at 10 percent.
“They got real comfortable at 10 percent, and they never changed it,” she said.
The rate is “significantly higher” than the 4 percent interest rate being charged by the IRS on federal tax debts “and significantly higher than the interest rates being charged by other states,” she said.
“While many people have little sympathy with tax debtors, most people know someone who has suffered a business failure in our weak economy or who has fallen behind on his or her tax bill due to unemployment or some other unforeseen event,” the news release said.
The illegal exaction suit names Richard Weiss, direc-tor of the Department of Finance and Administration, as the sole plaintiff. Neither he nor any other officials at the department could be reached for comment after 4:30 p.m. Friday.
The plaintiffs are Gary Sanford of Hot Springs Village, Linda Yeager of Summers in Washington County and Wayne Lilley of Plumerville in Conway County, as well as his business, Lilley Paint Co. of Plumerville.
Sanford owes back income taxes for tax years 2000, 2001, 2002 and 2003. Yeager owes income taxes for the 2001 tax year. Lilley owes income taxes for 2001, 2003 and 2006. His company is indebted to the finance department for payroll-withholding taxes for five months in 2003 and 2004.
Wingfield said the plaintiffs are seeking an injunction to stop the practice or at least to divert interest payments being collected into a fund to be held until the court decides the matter.
“We will try to get a hearing fairly quickly,” she said.
The lawsuit also asks for an accounting of the sums “illegally and unconstitutionally collected” and a refund to taxpayers in amounts equal to twice the amounts of interest imposed and collected.
The suit cites Amendment60 to the state Constitution. The amendment was adopted on Dec. 2, 1982, changing provisions of Article 19, Section 13 of the Constitution, which concerns maximum lawful rates of interest.
If granted class-action status, the named plaintiffs would represent a class consisting of individuals, trusts, estates, partnerships, limited liability companies and corporations.
Wingfield said attorneys haven’t discussed the matter with the finance department since spotting the problem. But, she said, “The more we look at it, the bigger the problem appears to be.”
The lawsuit is assigned to 5th Division Circuit Judge Ernest Sanders.
Arkansas, Pages 11 on 06/26/2010