Arkansas Supreme Court justices debate taxing of flame-grilled burgers

Oral arguments at Arkansas' highest court Thursday delved into the process of making flame-grilled hamburgers -- and how to tax them -- but the justices appeared to have little appetite for revisiting their recent decision on sovereign immunity.

A tax dispute by central Arkansas' Burger King franchisee, Flis Enterprises, is the first case before the Arkansas Supreme Court in which lawyers, in filings, cited the court's Jan. 18 decision to declare that the state constitution provides immunity from suits allowed by legislative acts.

That earlier ruling, Andrews v. the Board of Trustees of the University of Arkansas, overturned two decades of precedent. A majority of the court said the plaintiff, a former bookstore manager, could not sue his employer, the university system, for back wages under the Arkansas Minimum Wage Act.

The Andrews decision prompted much uncertainty in the legal community about the scope of the ruling. Within a few days, attorneys for the Department of Finance and Administration filed notice with the court that they intended to bring up the Andrews ruling at oral arguments Thursday.

But when arguments took place, the state did not pursue the argument that Flis was barred from taking the finance department to court.

The court did not issue its final mandate in the Andrews case until Tuesday, after waiting to see if the plaintiff would ask the justices to reconsider, which he didn't. Joel DiPippa, an attorney for the finance department, said the uncertainty of the final outcome made it difficult to prepare arguments based on it.

Still, within the first minute of DiPippa's argument, Justice Rhonda Wood asked how the Andrews decision affected the Burger King tax case before the court.

DiPippa said the justices could revisit their own ruling and clarify whether sovereign immunity applied -- but he was not asking the judges to do so.

"It's really only in front of us if you're asking us to do that," Wood said.

Instead, DiPippa focused most of his time -- and fielded the most questions -- on the finance department's "bread and butter" issue: tax law.

Flis' 16 Burger King restaurants owe the state sales taxes on the retail prices of the meals the company gives its managers once a shift, DiPippa said. Arkansas' tax code, he noted, allows businesses to get a tax exemption for goods that are "manufactured, compounded, processed, assembled or prepared" into final products. The state then collects taxes on the final products sold to the public.

Michael Thompson, an attorney for Flis, said the restaurants should only have to pay taxes on the wholesale price of the free meals. Because the restaurants get a tax break on the buns, lettuce and patties, Thompson explained that the company only owes taxes on those ingredients when they are taken out of stock, preventing the state from collecting at the final point of sale.

The difference between taxes applied to the wholesale and retail prices of years worth of managers' meals amounts to more than $33,000, according to court filings.

Thompson said the dispute over tens of thousands of dollars could have more costly ramifications across the state's restaurant industry, where many businesses offer discounted or free meals to employees.

With a chance to query both attorneys, several of the justices seemed to want to know what makes a meal.

For example, Wood wanted to know what tax should apply to prepackaged salads that are simply opened onto a plate. Justice Josephine Hart said the process of cooking a hamburger and putting it on a bun appeared to be "minor."

"They haven't changed anything other than they may have heated some meat," Hart said.

"It's a flame-broiled Whopper," DiPippa said, evoking Burger King's old advertising line. (The company changed its marketing phrase to "flame-grilled" in 2003).

Regardless of how much effort goes into making a Burger King meal, Thompson said the law leans in the company's favor. He noted that when meals are at a discount or with a coupon, taxes are collected at the lower sale price. He said the state cannot determine a "hypothetical" retail price for a free meal.

"We win on the salads, we win on the hamburgers," Thompson said.

Sitting in on the case, in place of the recused Chief Justice Dan Kemp, was Special Justice Lee Robert Watson. Kemp said he recused from the case because his daughter is a partner at Wright, Lindsey, Jennings, the firm representing Flis.

Justice Karen Baker served as chief justice in Kemp's absence.

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