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 counties based upon the jurisdiction in which it was 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.
At that time, County Commissioner Ed Elkins said raising the sales tax countywide was the only way the county could share in the revenue.
But, since the county did not choose to participate in the referendum in the first place, the city had no plans to honor the 1967 agreement that directs a share to the county general fund.
In April 2009, former Commissioner Ben Atchley said he did not think the city ever intended to compromise on its position. Commissioner Jeff Yarber, 5th District, urged commissioners to continue working together, but urged the City Council to “step up and be the bigger person.”
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 appeal court decision does not address that and other central issues in the current case.
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 that the purposes of the city and county tax increases were different and such differences were included in the respective authorizations and Notices of Election.