Next steps will come at Richland taxpayers’ expense in penny tax dispute

It could cost Richland County taxpayers millions if county leaders follow the state’s demands to overhaul the accounting structure of the county’s transportation penny sales tax, at least one County Council member says.

Meanwhile, county leaders continue to question the state Department of Revenue’s authority to demand the changes it has and to withhold the county’s penny tax revenue, which the revenue department said this week it now will do.

And whatever the county does next will cost taxpayers money.

County Council could consider seeking a declaratory judgment from a court saying DOR can’t do what it’s doing to the county, council Chairman Torrey Rush said Thursday. Not all council members, however, are ready to take that step.

“We’ve got to come to a resolution very quickly ... and not have this shadow cast over this program,” Rush said.

In December, DOR called into question the legality of some of the county’s uses of its 1 percent sales tax for transportation projects, alleging possible corruption, fraud and misuse.

After months of back-and-forth discussions between DOR and county leaders, DOR director Rick Reames on Wednesday told the county his department would be withholding further allocations of penny tax revenue collected by DOR on behalf of the county.

“We are ready to work with them to assist them in coming to a resolution, and we are hopeful that the program will be brought into compliance,” DOR spokeswoman Ashley Thomas said Thursday.

In the past, DOR has dealt with counties on issues concerning local option sales taxes, such as the establishment and collection of the tax. But this is apparently the first time in memory DOR has dealt with issues surrounding expenditures from those taxes, Thomas said.

Negotiation has been the county’s tactic since February, when DOR laid out a list of demands and a deadline for the county to take action.

“Why would we want to pick a fight with a state agency?” council Vice Chairman Greg Pearce said. “Why wouldn’t we rather negotiate? And that’s what we’ve been trying to do in good faith. ... This is what the payoff has been for us.”

Three options

Beyond further negotiation, Pearce said the county has basically three options to deal with the penny tax dispute at this point.

Option one: Do as Reames says. This would mean overhauling the county’s established accounting procedure, which officials say is widely used by local governments.

In its stead, DOR demands the county adopt federal spending guidelines for the penny tax program to ensure that “there should be no money expended out of the Penny Tax Fund for costs other than those costs that are considered capital costs of a specific transportation-related project,” a DOR attorney recently wrote to a county attorney.

The effect of the accounting change would be that some costs currently paid by the penny tax, such as the county transportation director’s salary, Pearce noted, would have to be paid out of the county’s general fund. The salaries of other managers, as well as other expenses, might be affected, too. And that, Pearce said, could potentially require the county to collect millions more from taxpayers over the life of the 22-year tax.

“At this point in time,” Councilman Seth Rose said, “we don’t know what the financial implications are of bringing the program into compliance. But state law must be adhered to.”

Option two: Take legal action. County Council members could ask a judge to declare that the revenue department has overstepped its bounds in making the demands that it has and in withholding the county’s penny tax collections.

A declaratory judgment itself, however, cannot force an action by a party. If the county sought a judgment and received a favorable one, it would have to be accompanied by an actionable remedy such as an injunction.

Councilman Jim Manning, for one, isn’t ready to take the legal step just yet, he said.

“I don’t think we’re at the point of no other recourse yet,” Manning said, as the county continues to work out how it might change its accounting procedure to satisfy DOR.

Option three: Do nothing, which would mean the end of penny tax revenues for the county.

As it is, the county has penny tax money in the bank to carry out active contracts, including for construction, engineering and right-of-way acquisition, at least until its next scheduled payment from DOR in July, Rush said.

Even if current contracts could be paid off for the work done to date, it would mean millions had been paid for planning for projects that would never physically hit the ground.

But an end to the penny tax, Manning said, is something “I certainly don’t see.”

He said he believes the county and the DOR are “very close” to reaching a resolution, save for working out the details of the possible change in the accounting procedure.

‘We’ve been singled out’

Whichever path of action county leaders choose, taxpayers will bear the burden of Reames’ demands, Pearce said, “for reasons only he knows.”

“Nobody has yet to show me in a book where there’s a state law we have violated. What we’ve done is violate Rick Reames’ law,” Pearce said. “It looks to me like he didn’t want to negotiate from the get-go. It seems like this was the end game in the cards from the get-go.”

What’s more, Pearce said, the hammer being brought down on Richland County is likely to set a precedent for other counties with similar sales tax programs. Eighteen South Carolina counties currently collect a local-option transportation or capital project sales tax, or both.

“We’ve been singled out to create a template for (Reames) to use somewhere else,” Pearce said. “The bigger issue is letting a state agency run a county, which is in effect what is going to happen here.”

In response, DOR spokeswoman Thomas said, "Director Reames believes that the millions of dollars in no bid contracts unrelated to specific transportation projects violate state law. Given that a criminal investigation is ongoing, further comment is inappropriate."

This story was originally published April 28, 2016 at 6:41 PM with the headline "Next steps will come at Richland taxpayers’ expense in penny tax dispute."