Appeals court keeps sales tax agreement intact
by DAVID DAVIS, Managing Editor
Oct 31, 2012 | 1282 views | 0 0 comments | 5 5 recommendations | email to a friend | print
The Tennessee Court of Appeals determined that actions spoke louder than words Tuesday in its decision on the sales tax dispute between the city of Cleveland and Bradley County.

The court stated the city’s actions over a 25-year period confirmed its intent that a 1980 agreement controlled a sales tax increase in 1982. The opinion stated that the city could have questioned the validity of the agreement at any time, but chose to do so only when the agreement became more beneficial to the county than to the city.

The justices did reverse Chancellor Jerri Bryant on one of three questions by declaring that the city is entitled to receive those proceeds for the entire 2010 fiscal year, which began July 1, 2009, and ended June 30, 2010.

Bryant ruled earlier this year that the county could begin collecting its share of a 2009 sales tax on June 30, 2009. The Bradley County Trustee is holding $1,566,883 in disputed funds, which will apparently be transferred to the city.

City Manager Janice Casteel said this morning that based on her conversation with the city’s attorney, the matter could be appealed to the Tennessee Supreme Court. However, that decision is up to the City Council.

Attorney James F. Logan, James F. Logan, Logan-Thompson P.C., of Cleveland, who is representing Bradley County, said this morning that both local governments have important decisions to make.

He said the county’s decision is whether or not to appeal the determination of the effective date of termination of the city-only tax increase of 2009.

The city has to decide whether it will attempt to appeal the other two issues: the validity of the initial 1967 agreement; and, the issue of whether the 1967 agreement and 1980 amendment covers the 1982 property tax increase.

“This is a multi-multimillion dollar issue which would result in a sizeable property tax increase or decrease in service,” he said. “It is my thoughts and prayers that the city and county fathers come to an agreement without further litigation.”

He said no one should view the appellate court decision as a victory for one side or the other.

“There are no winners in this,” he said.

The panel of three appellate court judges in the Tennessee Court of Appeals, Eastern Division, Knoxville, heard oral arguments on Aug. 3 after the city appealed a chancery court ruling. Chancellor Bryant left intact the 1967 agreement between the two local governments.

“We hold that by its actions in close proximity to the 1980 Amendment and the 1982 adoption by the County of a tax increase and for approximately 25 years thereafter, the City has confirmed its intent that the Contract control distribution of the proceeds of the County’s 1982 tax increase,” Justice Charles Susano Jr., wrote in the 17-page document. Justices D. Michael Swiney and John W. McClarty agreed.

The justices stated the 1980 contract applied to the 1982 tax increase for a number of reasons. In one instance, the city admitted in chancery court that the 1980 Amendment made the 1967 contract applicable to the 1982 county tax increase.

“A party is not allowed to take one position in the trial court and then take a contrary position on appeal,” Susano wrote.

Douglas Johnston Jr., Barrett Johnston L.L.C., of Nashville, represented the city of Cleveland. He asked the court to rule on three questions:

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.

The court responded, “The judgment of the trial (chancery) court is affirmed in part and reversed in part. That part of the judgment upholding the validity of the Contract is affirmed as is that part of the judgment holding that the Contract controls distribution of the proceeds of the 1982 tax increase.”

n Is the 1967 contract void, voidable or terminable with reasonable notice as a perpetual contract?

Susano wrote, “We further held that the Contract contains a termination provision and is therefore not subject to attack as a perpetual contract. We also held, for two reasons, that the Contract was not against public policy for tying future City Council members to a contract that may not be in the City’s best interest during their future tenure. First, we held that the law in Tennessee clearly allows governing bodies of municipalities to enter into long-term contracts for the distribution of local option taxes. Second, we held that the City having received the benefit of its bargain in the early years of the Contract … is (now) obligated to honor its Contract with Bradley County during the period when Bradley County is receiving its benefit.”

n Is the city entitled to all proceeds of the 2009 tax increase collected within the city limits through June 30, 2010?

The justices ruled, “That part of the judgment holding that the City’s right under the 2009 tax county tax increase to the ‘same amounts’ it would have received under its own 2009 increase ended June 30, 2009, is reversed. The City is entitled to receive those proceeds for its 2010 fiscal year, which began July 1, 2009, and ended June 30, 2010.”

This latest dispute over sales tax distribution began at a joint city and county work session Oct. 21, 2008, in which discussion concerning the need to fund capital projects and the possibility of a referendum allowing the voters to decide to raise the sales tax by .5 percent was discussed.

The City Council approved an ordinance for a referendum on Nov. 24, 2008. County commissioners voted not to participate in a countywide referendum as they had on three previous occasions in 1967, 1972, and a failed referendum in 1980, which was presented again to voters and approved in 1982.

Cleveland voters approved increasing the city sales tax rate by .5 percent. The March 10, 2009, 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.

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.

The appeals court decision was important because Bradley County stood to lose more than $3 million annually if the revenue sharing agreement between the two local governments was nullified. On the other hand, the city is facing the loss of an additional $900,000 when the fire contract between the city and county fully expires June 30, 2013. The contract was phased out over a two-year period. The city lost $900,000 on June 30, after Bradley County opted to establish its own professional fire department instead of paying the city $1.8 million to protect the fringe area around the city.

The appellate court decision was also important because roughly 88 percent of the sales tax raised in Bradley County is generated in the Cleveland because the retailers, restaurants and other goods and services — and jobs — are in the city.

However, most students are educated by Bradley County and, as directed by state mandate, the first half of local sales taxes are paid to schools. 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. But, the May 10, 1967, agreement directs roughly two-thirds of sales tax revenue to the city general fund and the remaining one-third goes to the county general fund.

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.