The majority of Arkansas legislators are utilizing a so-called “third-party” when they submit an invoice to the state for reimbursement of expenses. Many are using an LLC, and others are using a DBA status. We will explain both of these situations below, and then explore why this is a problem.
What does LLC mean?
According to the IRS.gov website, “A Limited Liability Company (LLC) is a business structure allowed by state statute. LLCs are popular because, similar to a corporation, owners have limited personal liability for the debts and actions of the LLC.”
What is DBA?
DBA, or Doing Business As, is simply another way of saying fictitious, or false, name. As an example, if you run a bakery out of your home and you are the sole owner of the business, the legal business name is your legal name. But you can register a DBA and name your bakery “Sally’s Bakery.”
Why are Arkansas legislators using LLCs and DBAs?
If you read the page titled What The Constitution Says then you know the Arkansas state constitution forbids a member of the General Assembly from having any income other than their salary, for their services as a legislator. In other words, a legislator is not able to profit from their expense fund. If you have checked out the Background Paper page on this site, you already understand that Amendment 70 of the Arkansas constitution was written and sold to the voters as a way to prevent abuse of expense accounts due to a previous issue with an Arkansas Attorney General.
Many of our legislators have found a way to work around this issue on a technicality. Some are already business owners, some set up an LLC or DBA shortly after winning an election, and the vast majority are billing for legislative services through this third party. In other words Legislator John Doe can file with the state to set up John Doe’s Political Consulting LLC and then offer a monthly invoice to the state showing his LLC as a provider of services for a flat-rate, maximum expense reimbursement each month. This is technically a third-party and several of these third-party businesses are in the name of the legislator’s spouse. The thinking, we are sure, is that a spouse being paid income from the state isn’t an abuse of the expense system. But think about it. If you were elected to the state legislature and were limited by law and by the constitution in how much income you could draw (to over $2500 a week for the time the legislature is in session), would you think it was right to funnel money to your immediate family through your spouse? Apparently many in our legislature think this is okay. And the bottom line is a cost to the taxpayers of the state of Arkansas in excess of $2 million per year.
We find this to be a transparent attempt to take in more income using what is seen as a technical loophole in the constitutional and legal requirements for legislative expense reimbursements. Furthermore, we find this practice to be unethical and not in the spirit of Amendment 70 or the law of the state of Arkansas.
To help illustrate this concept of income versus expenses, take a look at this document. (click the document to see a larger version)
Representative John Edwards entered into a contract with his law partnership. We obtained copies of legislators’ contracts through a Freedom of Information Act request.
Keep in mind the Arkansas constitution forbids income, outside of salary, in an attempt to prevent personal profit through expense reimbursements. Now read the next to last sentence in this contract, written by this law firm. “It is understood by the Provider that any and all amounts paid under this contract shall be considered taxable income and must be reported as such to all proper authorities.”
Here is what was going on: Representative Edwards was using his law firm as that “third party” through which expense money is funneled (since he couldn’t take it directly, as that would violate the constitution). But his law partners insisted that he note that any of the money paid through them be regarded as taxable income. But our legislators are prohibited by the constitution from having state income other than their salary! Uh oh! Representative Edwards’ partners have said it is income, and the constitution prohibits that. This is a huge problem, pointing directly to a violation of the state law and the constitution.
We also found where Representative Edwards revisited this issue in March of 2011 and decided to discontinue taking this expense money. We commend him for this decision and his respect for the Constitution of the State of Arkansas.
If you have not yet done so, we recommend reading the following pages on this site:
If you’re ready to view documents and see what your Representative and Senator are doing with respect to expense reimbursements, please visit this page: Expense Reports