Judge lifts injunction that halted tuition tax credit processing by state

Private school scholarship funds made possible by state tax-credit programs were briefly in jeopardy because of a lawsuit stemming from what an organization said was a technical glitch at the Arizona Department of Revenue.

A court order issued in Pima County Superior Court last week put a temporary stop to the revenue department’s processing of private school tax-credit program applications. The injunction was lifted during a hearing Tuesday in Tucson.

That benefited dozens of school scholarship organizations that count on those tax credits to reward their corporate donors, who in turn donate money for scholarships for low-income and/or disabled children so they can attend private schools in the coming school year.

The department receives applications for the corporate tax-credits via email and they are processed on a first-come-first-served basis, meaning that applications received first have a better chance of being accepted for tax credits. The tax credits available through these programs for private school tuition total about $67 million and the agency stops processing applications after the cap has been reached.

The court order stems from a Georgia-based organization that sued the Arizona Department of Revenue after the organization said a glitch in the department’s email system led to its applications not being received as early as its CEO sent them.

According to the lawsuit, the AAA Scholarship Foundation’s applications never arrived at midnight July 1, when the application submissions began. But emails re-sent by the organization at about 6:30 a.m. successfully arrived at the state revenue department.

The foundation, which provides scholarships in several states, including Arizona, had applications for $12 million in tax credits on the line. Not getting its emailed applications accepted when the submission period opened left in doubt whether the organization would get the tax credits it was applying for.

“Its reputation as a school tuition organization will be irreparably harmed if it is deemed to have failed to deliver the application in a timely manner despite the fact that it did, in fact, submit the applications at midnight,” the organization’s complaint said.

But leaders of several other organizations also had money on the line, in some cases larger amounts than AAA, and were asking the state to resume processing applications.

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More than 20 school tuition organizations wrote a letter to Arizona Attorney General Mark Brnovich, saying that with the new school year and tax deadlines fast-approaching, families need scholarship funds now to secure their children’s spot in a school and that corporations need an answer on whether they’d receive tax credit for their donations.

The Arizona Leadership Foundation was seeking more than $20 million in corporate tax credits to provide scholarships to disabled and displaced children. Aaron Muth, the president, wrote in his letter, “Due to the injunction between AAA Scholarship Foundation and the Arizona Department of Revenue, thousands of students, their families and the private schools we serve throughout the state are forced to wait for scholarship funding.”

“This injunction is disrupting the whole system,” said Kimberly Cygan, an assistant attorney general, at a hearing Tuesday in Tucson.

School tuition scholarship organizations rely on the fast turnaround in these tax-credit programs’ processing.

James Susa, a Tucson attorney representing AAA, argued during the hearing for the temporary order to be extended, saying there is evidence the foundation had sent the emails, but that the revenue department did not receive them in a timely manner.

On that basis, AAA argued that its applications sent at midnight should be the ones processed by the revenue department, not the re-sent ones from 6:30 a.m., which are less likely to be accepted because dozens of other organizations had sent their applications before then.

“This is unprecedented, in my experience,” said Tim Keller, managing attorney for the Institute of Justice Arizona Office, which has been litigating school choice for nearly 20 years. To his knowledge, no other organization has tried to sue the revenue department over the processing of applications.

Jerry Fries, tax section chief for the revenue department, said at the hearing after the dissolution of the court injunction that the department would resume processing the applications and disbursing the tax credits.