According to the chancellor’s ruling, the city did not have to share the 1/2-cent sales tax generated from a 2009 referendum. However, the 1967 and 1980 agreements still remain in effect.
Bryant wrote in her decision, “The court holds the city did not have to share any property (sales) taxes with the county until such time as the county passed its own referendum.
“At that point in time, pursuant to statute, the city was allowed to collect its own sales tax through that current fiscal year which ended June 30, 2010.
“After that appointed time and absent any agreement between the parties, the statute sets the basis for which the sales tax is to be divided.”
According to Cleveland City Manager Janice Casteel, under the statute, sales tax distribution is “situs” based, or distributed to the local government where the tax is collected. More than $845,300 of disputed collections held by Bradley County Trustee Mike Smith will be distributed to the city. The money was held in trust from July 1, 2009, until Wednesday.
City Manager Janice Casteel said Wednesday the tax increase resulted in an additional $1.7 million in annual receipts. The city will collect an additional $500,000 annually.
The money generated from the half cent will be used only for capital projects, as promised. It will not be used for operations. Casteel wants the money to be placed in the paving budget, but the final decision is up to the City Council.
Bradley County Mayor D. Gary Davis said legal action in Chancery Court was necessary to determine how the 1/2-cent sales tax was to be distributed.
“Two years ago when the city of Cleveland and Bradley County passed separate sales tax referendums, it was unclear how the tax would be divided,” he said. “The county Trustee’s Office asked for guidance on how to divide the money. The county then petitioned Chancery Court for a summary judgment, or clarification.
“The court has issued a six-page ruling which my staff and I, as well as attorneys for the county are reviewing for clarification. The city and county are partners in several areas and it is good to put this issue behind us and move on.”
In part, Bryant agreed with the city that the 1972 amendment to the 1967 agreement, and the 1980 agreement, basically contained the same language. The actions of the city and county were verification that with each new tax, a new agreement was drawn. Otherwise, the 1980 amendment would have been unnecessary.
The county argued the words “any additional taxes” in the agreements meant all future taxes ever passed by the two governing bodies.
“However,” she wrote. “The word ‘future’ was not used in describing taxes in this contract.”
She said under the law, “the conduct of the parties is the strongest evidence of their original intent. When reading the document as a whole, it speaks specifically to the tax being raised at that time, and there is not indication of any intention to bind all future sales tax increases with one agreement. The parties conducted themselves in that manner. They intended each action (1972 and 1980 contracts) to be meaningful.”
Bryant heard the case on April 21 and issued the ruling dated July 1.
Attorney Douglas Johnston, of Nashville, who represented the city, said Wednesday afternoon he would be pleased to work with the county to get the matter resolved. By that he meant, “anybody can file a motion to amend the order or file an appeal within 30 days.”
The sales tax dispute is important to both city and county budgets. Roughly 88 percent of the sales tax raised in Bradley County is generated in the city because the retailers, restaurants and other goods and services — and jobs — are in the city. However, most students are educated by Bradley County.
The first half of local sales taxes are paid to schools as required by state mandate. City schools get roughly one-third of the sales tax revenue and county schools get roughly two-thirds, based on average daily attendance.
Also, according to state mandate, the remaining half is supposed to be distributed between city and county based upon the jurisdiction in which it is collected.
However, the May 10, 1967, agreement between the city and county directs roughly two-thirds to the city general fund and the remaining one-third goes to the county general fund.
In the month after the agreement was struck, the city passed a 1 percent sales tax. Prior to June 1967, there was no local option sales tax in Bradley County. The agreement was amended when the sales tax was increased to 1.5 percent in 1972 and again in the early 1980s when the sales tax was increased to 2.25 percent. Both increases were approved by voters in countywide referendums.
The March 2009 referendum to raise the sales tax from 2.25 percent to 2.75 percent was a city-only election. Initially, county commissioners opted not to participate in the referendum. After it was approved by city voters, the Commission reversed its decision at its March 16, 2009, meeting and held a referendum May 14, 2009, to increase the sales tax in rural Bradley County.
The county resolution authorized the tax increase to fund schools and to meet capital needs and operations of the county.
The county filed suit in June 2009 to force the city to abide by the 1967 agreement.
The current dispute is not the first time the sales tax agreement has been tested in court. The city tried to break the agreement in 1996, but Bradley County Chancellor Earl Henley ruled in favor of the county, leaving the agreement between the city and county on sales tax disbursement in place. Both the city and the county appealed Henley’s decision to the Tennessee Court of Appeals; it was finally settled in April 1999.
According to the city’s counterclaim in the current lawsuit, the agreement was amended in 1972 and 1980. The contract amendment agreed to in 1972 governed only the local option sales tax increase approved by voters in 1972. The second sales tax increase was not approved in 1980, but, an identical referendum passed in 1982.
The city and county have litigated the issue of whether or not the 1967 contract and its amendments were terminable. The city argued the 1967 contract contains a termination clause that was wrongly decided by the Court of Appeals.
According to the city, there was no termination clause in the contract, but only changes in the method of distribution. A termination clause is required in a legal contract. The city claims the April 1999 appeals court decision does not address that and other central issues in the current case.
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Below is a timeline of events leading to the lawsuit filed in Bradley County Chancery Court:
Jan. 5, 2009 — Bradley County Commission voted not to approve a countywide referendum and any increase in the county sales tax.
Feb. 8, 2009 — Notice of Election was published by the city in the Cleveland Daily Banner. The notice included the ordinance in its entirety and a summary which stated, in part; “If approved, all proceeds collected from this additional one-half percent (0.5 percent) sales tax shall be designated and used for capital projects and capital equipment of the City of Cleveland and Cleveland City Schools.”
March 10, 2009 — The referendum on the ordinance was approved by the voters.
March 16, 2009 — The Bradley County Commission reversed itself and voted to hold a county referendum on May 14, 2009, to increase the county sales tax by .50 percent.
May 1, 2009, or about — the city began collecting the tax increase authorized by the voters.
May 14, 2009 — Bradley County conducted an election which excluded all voters who resided within the city limits. Voters of Bradley County, who reside outside the city, voted to approve the county resolution.
Voters inside the city were denied the opportunity to vote despite the fact the purposes of the city and county tax increases were different and such differences were included in the respective authorizations and Notices of Election.
