IP appeals tax lawsuit against county
Published 2:33 pm Monday, September 2, 2019
Supreme Court panel may hear oral arguments this fall
International Paper has petitioned the Supreme Court of Virginia for an appeal of Judge Carl E. Eason’s November 2018 dismissal of the company’s machinery and tools tax lawsuit against Isle of Wight County.
According to attorney Craig D. Bell of Richmond-based firm McGuire Woods LLP, who had served as lead counsel for IP during the M&T trial last year, a writ panel consisting of three or four justices will likely convene sometime this fall to decide whether the full body will hear IP’s case. The next dates for petitioners to make oral arguments, Bell said, are Oct. 15 and Dec. 3.
“I anticipate the IP petition will be assigned on one of these two dates,” he said.
The lawsuit, which IP filed in Isle of Wight County Circuit Court in August 2017, had alleged that the county, by virtue of substantially raising its M&T tax rate for the 2017-2018 fiscal year, had effectively defied a previous court order granting IP M&T tax refunds for fiscal years 2013, 2014 and 2015. The company had, at the time, sought $2,742,741 in damages, plus the abatement of all then-remaining 2017 taxes the county had subsequently assessed on IP.
In late February 2017, Judge Eason had ruled in favor of IP in a previous suit the company had filed in 2014 against the county, which had also concerned M&T taxes. That suit, titled “Application for Correction of Erroneous Assessments of Machinery and Tools Taxes,” had contended that the county’s tax assessment of the Franklin paper mill and its equipment over the past several fiscal years was overly high because it had not taken into account the equipment’s depreciation.
Nearly three months after Judge Eason’s February 2017 ruling, the county’s Board of Supervisors voted to increase the county’s M&T tax rate for 2017-2018 from $1.75 per $100 of assessed value, to $4.24 per $100, an increase of approximately 142 percent. Then, in the summer of 2017, the Board voted to set aside funds for an economic development retention grant program. This program had provided tax breaks to M&T taxpayers, ensuring that they paid no more and no less than the amount of any refunds received received during fiscal year 2016-2017, plus what would have been owed for 2017-2018 had the tax rate remained flat.
Following a three-day trial in November 2018, however, Judge Eason had ruled that the Board had acted legally in raising taxes to cover a general fund shortfall, which had resulted from the February 2017 court-ordered refund paid to IP following the company’s initial lawsuit, and from refunds paid to other M&T taxpayers when the county’s commissioner of revenue, Gerald Gwaltney, adopted a new methodology for current and future M&T assessments in October 2016. In the final order, which Eason signed on Jan. 29, 2019, the judge ruled that the county’s decision to raise its M&T tax “does not violate IP’s vested rights in the prior refunds,” and that the economic development retention grants were not “nonuniform in the sense of unconstitutional or otherwise in violation of Virginia Code 58.1-3984.” As for IP’s claim that the tax increase effectively defied a court order, Eason ruled that “the County made political decisions for which those politicians are answerable to the electorate, but those decisions do not constitute a violation of the separation of powers.”
According to Bell, the reason this matter has gone all the way to the Supreme Court of Virginia, rather than Virginia’s Court of Appeals, is because the Court of Appeals does not have jurisdiction to hear tax cases. Per the rules of the Supreme Court, which require a notice of appeal to be filed within 30 days after the entry of a final order, in the trial court in which the case was initially heard, Bell filed such notice on Feb. 15, 2019, in Isle of Wight County Circuit Court.
IP’s petition for appeal, which Bell filed with the Supreme Court on April 29 of this year, states, “This Petition for Appeal asks the Court to determine whether a locality may raise taxes to seize legally mandated and court-ordered tax refunds,” and that Isle of Wight County “raised taxes on International Paper Company (‘IP’) for the explicit goal of recapturing amounts that had been refunded to IP.”
“These refunds were lawfully due to IP because of over-assessments by Isle of Wight’s Commissioner of Revenue Gerald H. Gwaltney, who recommended the tax increase,” Bell writes in the appeal’s introduction. “Although the same revenue could have been raised from other sources, Isle of Wight decided that taxpayers should pay for their own refunds … the trial court struck IP’s evidence … and blessed this transparent attempt to both nullify a judgment and evade constitutional and statutory limits because it was accomplished through taxation.”
IP’s appeal also takes issue with Judge Eason’s ruling on the county’s economic development retention grants, stating, “This Petition also asks whether a locality giving credits (called ‘grants’) that were involuntary, unfunded, for one year only, and only reduced tax liability, for the purpose of redistributing the machinery and tools (‘M&T’) tax burden, violates uniformity or exceeds taxing authority.”
It further alleges, “As a natural result of trying to raise taxes only on those M&T taxpayers who had been given refunds, Isle of Wight imposed an array of effective tax rates — from $4.24 to $1.76 — on M&T.”
The introduction concludes, “This Court should grant the Petition for Appeal in order to affirm that special damages awarded against a taxing locality cannot be reversed by its legislative action, and that the requirement of uniform direct taxation under the law is one of constitutional substance, not a matter of form that a locality may easily slough off.”
Isle of Wight County has likewise retained many of the same members of the legal team who defended the municipality in IP’s 2018 M&T trial, including Andrew R. McRoberts of the Richmond-based firm Sands Anderson PC, who had served as lead counsel; former County Attorney Mark Popovich; and current County Attorney Bobby Jones Jr.
According to the Supreme Court of Virginia’s online appellate case management system, the county filed a brief in opposition to IP’s appeal on May 20 of this year.
“The trial court got this decision right,” McRoberts said, when asked for comments on IP’s efforts to appeal last year’s ruling. “After days of trial, International Paper simply had no case, and the court was right to strike it.”
The county’s brief in opposition argues that allowing IP’s appeal to move forward would “eviscerate the ability of localities across the Commonwealth to set tax rates, balance their budgets, and/or appropriate funds for well-settled public purposes.” Regarding the 2018 trial, it states that “no cause of action under the Virginia Constitution or Virginia Code Section 58.1-3984 was proven because no evidence of any illegal, erroneous, or non-uniform assessment was introduced.”
“In short, IP did not like its taxes being raised, and asked for a de facto injunction against the Board doing so,” McRoberts writes. “The Trial Court properly refused.”
Jenny Dixon, spokeswoman for IP’s Franklin mill, confirmed on Thursday that IP had appealed the dismissal of its M&T tax lawsuit against the county, but said that she could not comment on the matter further due to pending litigation. Don Robertson, assistant county administrator and spokesman for Isle of Wight, said on Friday that he had not yet received confirmation from the county attorney that IP had filed an appeal.
“If there is an appeal, we really don’t comment on pending litigation,” Robertson said.