Town of James Island sued over property tax refund checks

Mayor Bill Woolsey

A suit filed against the town of James Island argues that the municipality must issue refunds to homeowners for more than $2 million in local option sales tax money.

The LOST funds have accrued since the town was successfully incorporated in 2012.

“It’s just a matter of frustrating the intent of the Legislature which was to give some relief on property taxes,” said Trent Kernodle, an attorney for the plaintiffs in the case.

The case is set for summary judgement next month, which means Circuit Judge Markley Dennis will rule from the bench after weighing arguments from both sides.

“We’re either right or we’re wrong. We might be totally wrong,” Kernodle said.

If the plaintiffs win the case, it would have implications for how LOST money is used in other towns, he said.

Charleston County is one of about 30 counties statewide that have passed the 1-cent local option sales tax to provide property tax relief.

Under the LOST program, the town of James Island has received $2.2 million for the property tax credit fund. That money has been set aside for a rainy day fund, Mayor Bill Woolsey said.

“If we decided we needed the money for something we could spend it,” Woolsey said.

He said that 44 municipalities have no property tax and are free to spend LOST revenue any way they choose, including Kiawah and Seabrook islands, Meggett, Hollywood and Rockville.

The plaintiffs, David Engelman, Betty Engelman and Robert E. Welch Jr., filed suit on behalf of themselves and other island homeowners because they said the LOST property tax credit fund revenue must by law be used to provide property tax relief. In court papers, the plaintiffs say that the town “has violated the LOST statute by failing to distribute Property Tax Credit revenues to James Island property owners as the LOST statute requires it to do.”

Woolsey disagreed. “Our position is that we are not required to do that,” he said.

David Engelman is the former chairman of the James Island Public Service District Commission. Betty Engelman is his wife. Welch is a former PSD commissioner, Woolsey said.

During its third incorporation from 2008 to 2011, the town issued LOST refund checks based on taxes paid to the James Island PSD, Woolsey said.

In the summer of 2010, the town sent out 8,581 checks to homeowners that averaged $99.58. Nearly 6,000 were for less than $100. Some 18 checks were for more than $1,000, including one for $6,100. The checks went to owners of real property, including homes, vacant lots, businesses and rental property, Woolsey said.

The suit brought by the Engelmans and Welch over LOST refunds was filed in April. In July, a majority of Council approved the first town property tax for James Island.

“It’s in the best interest of the town to do it that way,” Woolsey said.

Town of James Island tax notices go out next month, but homeowners will not be billed because the $2.2 million in the bank will be used as a credit against the tax liability, Woolsey said.

The plaintiffs charged in their lawsuit against the town that the Council approval of the property tax in July was a way for the town to control how the money was spent, which was contrary to what the local option sales tax statute requires.

Kernodle said that a majority of Town Council passed a “phantom tax” in July as a way of holding on to the $2.2 million rather than sending checks to property owners.

Municipal Association of South Carolina spokesman Scott Slatton said local option sales tax funds go into two pots of money. The property tax credit fund is 71 percent of the revenue received and the municipal revenue fund is 29 percent.

The state Attorney General issued an opinion last year that, until a court rules differently, towns that don’t have a property tax rate can keep all of the LOST money, including the biggest part: the property tax credit fund, Slatton said.

Dennis will rule on whether the town has violated the LOST statute in a request from the plaintiffs for “partial summary judgement,” Woolsey said.

No matter which side wins that ruling there are other related legal issues that must also be decided. And appeals can be filed, he said.

In addition to the $2.2 million the town collected in 2012 to 2014, it expects to receive another $840,000 in LOST funds this fiscal year, which began July 1, Woolsey said.

“The money that we have received so far is in the bank. The money that we anticipate getting in the next year we anticipate spending on the new Town Hall,” he said.