Hamilton County Schools to sue Chattanooga for unpaid liquor taxes

Hamilton County Schools to sue Chattanooga for unpaid liquor taxes

March 21st, 2014 by Kevin Hardy in Local Regional News

Travis McDonough

Travis McDonough

Photo by Maura Friedman /Times Free Press.

The dispute between Hamilton County Schools and the city of Chattanooga over unpaid liquor taxes will now move to the court system.

Members of the Hamilton County Board of Education voted 8-1 Thursday evening to sue the city over the more than $11 million the city has failed to pay in liquor-by-the-drink taxes since 1998.

Board attorney Scott Bennett said he will file the suit seeking a declaratory judgment in Chancery Court in the coming days.

Board members said talks with the city were at a stalemate. And bolstered by a recent opinion from Tennessee Attorney General Robert Cooper, they said their message is clear: The city must pay what it owes.

"I vote yes and I say it's a shame it's come to this," said school board member David Testerman.

Before hearing about the school system's lawsuit, Chattanooga Mayor Andy Berke's Chief of Staff Travis McDonough said the attorney general's opinion was one lawyer's opinion. And he said he didn't see the city writing an $11 million check to the school system.

But he said city officials told Superintendent Rick Smith on March 5 that they would be willing to sit down with the school system and talk about a plan going forward. McDonough said no one from the school system followed up.

Smith says he was interested in working directly with Berke, but got no response from the mayor.

Berke's spokeswoman, Lacie Stone, said the city would not comment until they see the lawsuit.

On Thurday, school board member Jeffrey Wilson cast the only dissenting vote. He said he hoped the city and the school district could reach an agreement outside of the court system.

"I hate for governmental entities to get to this point," Wilson said.

On Feb. 26, the attorney general opinion found that county school boards can't waive any past-due liquor taxes. Cooper said there is no statute of limitations on the fees, and municipalities can't offset the costs with local-option sales tax revenue. But, Cooper wrote, municipalities don't have to pay it back all at once - they may agree on a payment plan.

When the former county and city school systems merged in 1998, Chattanooga's local sales tax rate was 2.25 percent, a half-cent higher than the countywide rate. For several years the city gave half the extra money to the county schools, and it also was supposed to give half its annual liquor-by-the drink tax revenue to the school system.

Hamilton County Schools headquarters

Hamilton County Schools headquarters

Photo by Staff File Photo /Times Free Press.

By law, half the sales tax collected at the countywide rate goes to schools. When the county and other cities raised their local sales taxes to match Chattanooga's, the city lost the advantage of that extra half-cent. Along the way, apparently officials forgot about the liquor tax revenues.

As reparations for the unpaid taxes, Berke's staff last year offered to donate the site of the former Maurice Poss Homes to the county schools and give a half-million dollars to start an early childhood education center. At the time, McDonough called it an appropriate solution. But that agreement was never finalized.

On Thursday, the superintendent said he has sought to meet with Berke directly, but has only heard back from the mayor's chief of staff.

"I am still very open to meeting with the mayor," Smith said. "I don't have an interest in meeting with his staff."

School board member Rhonda Thurman said the school district had no choice left but to sue.

"I don't know what else you do," she said. "It's not like they have a choice whether or not to pay it."

Many board members lamented that the dispute had escalated to a lawsuit. And school board member Joe Galloway said he's hopeful the city and the schools can still reach an agreement outside of court.

"I hate that we even had to file it," he said. "Folks that work in the same town need to be able to work together."

Staff writer Joy Lukachick contributed to this story.

Contact staff writer Kevin Hardy at khardy@timesfreepress.com or 423-757-6249.