The Bradley County Schools system has asked for a declaratory judgment on whether the city of Cleveland has correctly distributed liquor-by-the-drink tax funds.
City Manager Janice Casteel confirmed the paperwork was served Tuesday.
The Bradley County Chancery Court summons states the city has 30 days to respond and to provide documentation to Cleveland attorney James Logan who is representing the Bradley County Board of Education in the lawsuit.
In preparation for the potential litigation, the Cleveland City Council last month hired Cleveland attorney Doug Johnston to represent the municipality.
“We continue to believe we have distributed the liquor-by-the-drink tax in accordance with state law,” Casteel said after acknowledging the court summons had been received.
Casteel reiterated her position — stated in individual interviews, in statements to the media and in public government meetings — that audits have not found this to be an issue and her requests to the Tennessee Department of Revenue for verification have confirmed that the funds were distributed correctly.
The city has already returned $354 to the Bradley County Trustee’s Office after county leaders made payment on what they believed was the county’s portion of liquor-by-the-drink taxes [based on the county’s interpretation of state law]. The money was reportedly due to Cleveland City Schools for March 2014, according to county leaders.
This money is now sitting in an account separate from other county funds waiting for a legal decision by a Chancery Court judge, according to Bradley County Trustee Mike Smith. Smith’s establishment of the separate account came at the suggestion of state auditors.
“This is all based on a new interpretation of the law,” Smith said.
Previously, trustees across the state were told to place the educational portion of the liquor tax in a specific account that did not dictate sharing the county educational portion with the city. Recently, the state comptroller notified trustees across the state that the funds are to be placed in a different account than previously used.
Smith said the new account is one dictating funds be divided with the city schools.
Casteel said the city school system had not received any liquor taxes from the county in the past.
On Tuesday, Casteel refunded $39,101 to Bradley County “representing prior year liquor tax.”
Casteel stated in a letter to Bradley County Mayor D. Gay Davis that the “city does not agree with the county’s interpretation of the mixed drink tax distribution. “
With the declaratory judgment, Bradley County Schools is requesting a court decision stating the city owes the county system the unpaid funds, ordering the municipality to pay and requiring it to divide future revenue the same way county property tax is divided.
The education portion of the county property taxes is divided between the two school systems, based on average daily attendance.
The complaint also states that court costs should be charged to the city.
In a Bradley County Schools statement issued Tuesday in a press release, Bradley County Director of Schools Johnny McDaniel and board chairwoman Vicki Beaty stated, “We have attempted at every turn to work with the City of Cleveland to negotiate a resolution of the issues raised in our complaint for declaratory judgment. We believe it is in the best interest of students in Bradley County to receive a portion of the Liquor Tax revenue.”
The statement cites that if the county school system had waited the 120 days requested by the Cleveland City Council, then state legislation could have passed that would have changed the distribution totally.
“HB 1403 and SB 1464 would change the distribution of revenue proceeds from sale of liquor by the drink. We offered to delay the resolution of the issue on condition that the City agree they would be bound by the law as it exists. This was rejected by the City of Cleveland. We merely ask that the City of Cleveland follow the law as it is stated. If they will do so, the complaint for declaratory judgment will be dismissed immediately,” the press release stated.
An amendment to the legislative bill, if it is ultimately passed and signed by Gov. Bill Haslam, states “... If the proceeds originate from within a municipality that operates its own school system, then those proceeds shall be remitted to the city recorder, or other authorized official, to be distributed to the municipal school system in the same manner as other municipal tax revenues.”
According to Tennessee Code Annotated 57-4-306, half of the revenues from taxes on liquor by the drink are retained by the state and are used for education. The second half comes back to local governments.
State law dictates how this money will be divided. It cites, “... One-half of the proceeds shall be expended and distributed in the same manner as the county property tax for schools is expended and distributed (T.C.A. 57-4-306).”
Current law does not have a section dedicated to schools which operate their own school system. The bill was placed on the Senate’s regular calendar for today. HB1403 is on the Finance, Ways and Means Subcommittee calendar, also for consideration today.
Debate over whether the liquor-by-the-drink tax has been distributed correctly has been discussed locally and across the state for the past few months. Hamilton County recently requested a declaratory judgment. However, the situation in that county apparently differs from the Bradley County debate because Chattanooga no longer operates a separate school system.
Casteel and the City Council have maintained because the municipality operates its own school system it is not required to give any portion of the tax to the county school system.
Logan believes under current law municipalities operating a school system are not listed as an exemption. He said they are still required to divide the local education portion of the liquor tax the same way the education portion of county property tax is divided.