Douglas Johnston Jr., representing Barrett Johnston L.L.C., of Nashville, presented his argument on behalf of the city and James Logan, Logan-Thompson P.C., of Cleveland, argued on behalf of Bradley County in the Tennessee Court of Appeals, Eastern Division.
Johnston was optimistic an opinion could come in a matter of weeks since the justices scheduled the hearing so soon. But, he said, it could be months.
Logan was equally hesitant to guess. He said the questions asked by judges John McClarty, Charles Susano Jr., and D. Michael Swiney showed the three jurists were knowledgeable of the dispute. It is possible, he said, that the judges could quickly issue a one-page opinion in a day or it could take months for a more lengthy document.
Johnston was given 15 minutes to raise three questions on behalf of the city of Cleveland:
n Did the city and county amend the 1967 contract to extend its sales tax distribution formula to the 1982 local option sales tax increase? If not, the proceeds of the 1982 sales tax increase should be divided pursuant to Tennessee Code rather than the formula per the 1967 contract.
n Is the 1967 contract void, voidable or terminable with reasonable notice as a perpetual contract?
n Is the city entitled to all proceeds of the 2009 tax increase collected within the city limits through June 30, 2010?
Concerning the third question, the county position is that the fiscal year is determined by when the sales tax was adopted. The city argues the fiscal year is determined by when the county is able to receive the tax.
Johnston said that according to Tennessee Code, the county could not receive tax money until the first day of the month, more than 30 days after the tax was adopted. Bradley County voters approved the sales tax May 14, 2009. Since June 1 was within 30 days, the earliest date the county could receive taxes would have been July 1, 2009, which is the first day of the next fiscal year; therefore, the city should not have been required to share with the county until July 1, 2010. That is the way Chancellor Jerri Bryant initially ruled on Feb. 29, but in a clarification in March, she decided the county could collect the tax beginning July 1, 2009.
Logan stated Johnston’s argument was hypothetical since the city collected the tax increase from the date of adoption through the end of the fiscal year on June 30, 2009.
Judge Swiney asked, “Under your theory, and I’m not looking for a dollar amount, what would the city get in fiscal 2009?”
Logan responded that the city received the portion of the sales tax based on Tennessee Code, which states that the tax is received where it is collected at the point of sale. He said the 1967 contract benefitted the city even though most of the sales were generated in the county at that time.
About the 1982 contract, Johnston said the chancellor ruled that the 2009 sales tax would be divided according to Tennessee Code, not the 1967 agreement.
“The logic that lead her to that determination is exactly the same for the 1982 tax increase. Everything about it is exactly the same and the result should be exactly the same,” Johnston said. “She found correctly, that each tax increase required a separate amendment.”
He said there is nothing in 1982 to indicate the city and county intended to extend the contract.
“There is no writing. There is no amendment. There is nothing that tells us what they intended in 1982,” he said. “What is important is what they intended in 1980 and what they intended in 1980 is made clear by language of amendment number two which makes specific reference to the tax increase that was to occur in 1980 and not to any other.”
Continuing, he said the only difference between 1972 and 1980 is that it did not pass in 1980.
The city tried unsuccessfully in 1999 to break the 1967 agreement and appealed a chancery court decision.
In response to another question from the bench concerning the 1999 appellate court decision, Logan cited Tennessee Supreme Court Rule 4G, which basically states that an unpublished opinion (not reported in the official reporter) is considered the controlling authority when that decision is relevant to a case involving the same defendant unless it is designated “not for citation.”
Logan said all of the tax issues that could and should have been presented were considered in the 1999 decision of the appeals court. Also, the Tennessee Supreme Court refused to hear the case on two occasions.
“You talk about a place where stability is significant as a matter of public policy — it is in governmental revenue and expenditures for education and roads, libraries, museums, garbage pickup and those kinds of things — there’s no place more that the rule of finality between the parties is more significant,” Logan said.
He said there is no indication other than both the city of Cleveland and Bradley County intended the contract to continue forever, which is allowed by statute.
Johnston said there is very little Tennessee case law covering perpetual contracts, but the question comes down to the fundamental issue of public entities and the even more fundamental issue of taxation of the citizens of those entities.
“Is it right that both parties are ensnared in a contract that will go on forever, that the city can never get out of ever in any circumstances? I don’t think so,” he said.
Johnston argued that the 1982 contract was not part of the 1999 decision.
“The issue in front of the court in 1999 had nothing whatsoever to do with whether or not the amendment to the contract applied to subsequent tax increases,” he said. “If in fact the 1999 decision applies to the 1982 issue, then it applies to the county bringing the 2009 issue as well because it is exactly the same and that would leave us in an absurd situation because neither party would know how future tax increases would be properly divided.”
The dispute over sales tax distribution began at a joint city and county work session on Oct. 21, 2008, during which the topic of funding capital projects and the possibility of a referendum allowing voters to decide whether or not to raise the local option sales tax by .5 percent.
The City Council approved an ordinance to put it to a vote of the people on Nov. 24, 2008. County commissioners opted against participating in a countywide referendum as they had previously done in 1967, 1972 and 1980. The 1980 failed, but voters approved an identical resolution in 1982, but without a new contract extension.
The city of Cleveland went forward with the referendum and city voters approved increasing the city sales tax rate by .5 percent on March 10, 2009. The ballot referenced the ordinance, which limited the funds for capital needs of the city and Cleveland City Schools.
Bradley County commissioners changed their position and voted 9-5 to approve a referendum for voters residing outside the city of Cleveland on May 14, 2009. The referendum passed by county voters did not restrict the use of funds solely for capital needs.
Chancellor Jerri Bryant ruled in March that the sales tax from the 2009 increase would go to the government jurisdiction where the tax is collected and the rest of the local sales tax will be divided based on a 1967 agreement.
She determined the city is not entitled to sales tax collected from previous years and no money already given to Bradley County Schools would be affected.
The Cleveland City Council voted May 14 to appeal the latest court ruling in an effort to break the 1967 sales tax agreement with Bradley County.