Accusations fly in DOR-Richland penny sales tax court battle

The S.C. Department of Revenue is attempting an “unprecedented” and illegal power grab in trying to control how Richland County is spending the millions raised by the county’s penny sales tax, a lawyer for the county argued Tuesday before a state judge.

“If DOR has the power it claims it has, it would become the single-most powerful agency” in state government, charged Benjamin “Ned” Nicholson, the private attorney who argued the county’s case to state Judge Thomas G. Cooper of Camden.

The case is being watched closely in Richland County, where residents are wondering if millions of their tax dollars are being misspent, and across the state, as other counties wonder if DOR also will find them out of compliance.

“DOR has the authority to collect taxes – not to say how they are spent,” Nicholson argued, telling the judge that the tax agency has a mechanical function – to collect the millions from Richland’s penny sales and then automatically turn the money over to the county.

But DOR attorney Rep. James Smith, D-Richland, fired back, telling the judge that just because the law says that DOR must return penny tax proceeds, “that does not mean we blindly pass money to the county.”

If DOR learns that money raised by the penny sales tax is being unlawfully spent, DOR “has a duty to withhold the funds,” Smith said.

“It’s about spending the money in accordance with the law in a way that gives confidence to the citizens,” Smith told Cooper.

It’s a matter of “Home Rule,” the county countered repeatedly, referencing the state law that gives broad authorities to local governments.

Cooper made no decision. However, given that Cooper asked Smith and Nicholson to give him proposed orders in the case by noon Wednesday, a decision could come by as early as late this week or next. The losing side likely will appeal to the S.C. Supreme Court.

The core question at Tuesday’s hearing in the suit brought by the county: Does state law give DOR the authority to impound penny sales tax revenues due Richland if DOR determines the county is spending the money in an unlawful way?

Under the penny sales tax approved in 2012 by Richland voters, and begun in 2013, DOR collects millions each month from retail outlets in Richland County. Each quarter, DOR turns over those millions to county government. The money is supposed to go to transportation-related projects. More than $1 billion is expected to be raised over the life of the 22-year project.

However, after a 2015 audit by DOR of Richland penny sales tax expenditures, DOR concluded the county was spending millions on non-transportation items, including public relations and management of the program.

Earlier this year, DOR warned the county it would begin freezing payouts to the county unless the county paid back the money it purportedly spent improperly and began spending the money solely on transportation-related matters.

In response, the county sued DOR, asking the court to find that DOR had no authority to freeze the money and to order DOR to turn over some $17 million in penny sales tax due as the next payment, in mid-July.

At stake if the penny tax stops flowing to the county are millions of dollars in open transportation contracts, the county’s ability to borrow money for future transportation projects and the operation of the Central Midlands Regional Transit Authority bus system, which receives nearly a third of the penny tax revenue, Nicholson told the judge.

Even the public bus system that provides low-cost ($3) rides for the disabled and wheelchair-bound, called DART, for Dial-A-Ride Transit, would have to cut back its services, Nicholson said.

“People rely on those services,” he said, adding that cutting funds would cause the “near-destruction of the bus system.”

In his argument to the judge, Smith named three county penny sales tax projects – a small business economic development initiative, a costly public relations initiative about which few details were available and a mentor-mentee program – that he said cost millions but had no transportation justification.

These projects “may be a great idea, your honor, but it’s not about funding transportation,” Smith said.

Smith also said DOR was taking a common sense approach. Although the agency believes the major public relations initiative where millions is being spent has little accountability, DOR does not object to transportation programs having accountable public relations programs, he said.

When Judge Cooper asked Smith what authority in state law allows DOR to freeze the money and determine if Richland’s programs are unauthorized, Smith replied, “Your honor, that’s a great point. If not us, there is no one. ... There is no way for citizens to bring a case for fraud, waste and abuse.”

Consequently, it is up to DOR, “as trustee of those funds, to ensure they are being spent according to the law,” Smith said. “What the county wants you to do, judge, is say, ‘You can spend it however you want to, even outside what is permitted by law – and you can’t stop it’.”

Cooper also asked Nicholson, “If, as (DOR alleges), there has been misuse of the penny tax funds, if not them, then who or what would have any jurisdiction to prevent such activity?”

Nicholson answered that the county’s taxpayers and voters would hold their elected officials accountable with their votes or, as one citizen watchdog group has done, by filing lawsuits. And, if criminal wrongdoing occurred, “those people would be prosecuted by the criminal laws of this state,” Nicholson said.

DOR, in auditing the county, has turned over information it found to the State Law Enforcement Division for a criminal investigation.

Among the more than 60 people on hand watching Tuesday was Hayes Mizell, who is chairman of Richland’s Transportation Penny Advisory Committee (TPAC). County Council created the TPAC as a supposed citizen’s watchdog group over how the county’s penny sales tax revenues were spent but gave it no staff and little authority to fulfill its role.

While watching the hearing, Mizell said, “I kept on thinking how all this could have been avoided if there had been created an entity that a separate independent oversight body that had some authority to ensure, or try to find out, if funds were being spent appropriately.”

Councilman Greg Pearce after the hearing was highly critical of DOR.

“They keep throwing out stuff like ‘illegal,’” he said. “Well, if something illegal’s gone on, indict someone. Put somebody in jail. But continuing to make accusations about us and that we’re doing things outside of the law are just accusations. They’re not proven, and they had no place (in the hearing), to me.”

Richland County Council Chairman Torrey Rush said he’s ready for a ruling.

“The sooner we get an answer to the question of whether DOR has the authority, the better,” Rush said. “That way we can put all that to rest and give everyone confidence that Richland County is doing business and building roads. ... I think we’ve got the checks and balances in place to make sure we’re spending the dollars correctly.”

This story was originally published June 28, 2016 at 1:57 PM with the headline "Accusations fly in DOR-Richland penny sales tax court battle."