Town Prevails in LOST Class Action

The class action suit against the Town of James Island filed in 2015 by former Mayoral candidate Trent Kernodle was dismissed due to lack of jurisdiction.   The class representatives working with Kernodle were former JIPSD Commissioner Rod Welch, former JIPSD Commission Chair David Engelman and current JIPSD Vice-Chair Sandi Engelman. 

The class action sought refunds of Local Option Sales Tax (LOST) monies received by the Town.  The Revenue Procedures Act (RPA) prohibits any class action for tax refunds and instead requires that taxpayers seek refunds from the county or state official that assessed the property tax.   Any dispute regarding a requested refund must be litigated using the State's administrative court system.    The RPA instructs any judge hearing a claim in circuit court to dismiss that action without prejudice.   Taxpayers seeking a refund may request a refund from the appropriate state or county official.

The Town levied a property tax starting in 2015 and has provided the required credit against that tax, resulting in no net municipal property tax liability.   The remaining dispute was over LOST revenue the Town received between 2012 and 2014, before it levied a property tax.   The Town's legal position is that it is not required to provide a credit against a tax that does not exist, so the Town did not collect any excess property tax that it must refund.   There are approximately forty municipalities in South Carolina without property tax receiving revenue from LOST.  None of them provide refunds of credits against a nonexistent tax. 

While the Judge dismissed this case, he rejected Kernodle's argument that taxpayers of the Town deserved a refund of a tax they did not pay.   In 2016, he added Charleston County as an additional plaintiff against the Town and eventually made it plain that he favored giving the Town's LOST money to Charleston County, who would then use it to provide property tax credits to all County taxpayers.   If that had occurred, approximately 2% of the benefit of that money would go to Town taxpayers.  Nearly all would have gone to those outside of the Town, mostly people living in Charleston, North Charleston, and Mount Pleasant.   Fortunately, Charleston County did not cooperate and supported the Town's position that the RPA required that the suit be dismissed.

There is good reason to believe that the Judge's theory was in error because the distribution of the revenue between municipalities and county government is set out in the statute.   In 1995, the City of Charleston made a more plausible argument that the municipal share of LOST revenue should solely be distributed among municipalities that have a property tax to provide a credit against.   While  I don't agree with that legal position and have no reason to believe the City of Charleston would pursue it again, I also believe it is safer for the Town to continue with a property tax and provide a credit against it.   The Town would be shielded from any harm due to legal action based upon that theory, and, in fact, would benefit if the revenues are directed solely to municipalities with a property tax.