Boone asks N.C. Supreme Court to take up town’s tax fight with Watauga County

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  • The Town of Boone wants the N.C. Supreme Court to take up its sales tax squabble with Watauga County.
  • Boone argues that an illegal sales tax distribution change made in 2013 costs the town $2 million a year while giving the county a $1 million windfall.

The Town of Boone is urging the N.C. Supreme Court to consider a lawsuit challenging Watauga County’s distribution of local sales tax revenue. Town officials filed a petition Tuesday with the state’s highest court.

Boone challenges Watauga County’s decision in 2013 to change its sales tax distribution method. The town argues that county commissioners adopted an illegal “kickback system” that costs Boone $2 million each year.

“This case raises the question whether any town or taxpayer can question county and municipal misconduct when the violations of law are causing millions of dollars of damage,” wrote attorneys representing the town and resident Marshall Ashcraft.

State government collects sales tax in North Carolina, then returns a portion of the revenue to county governments. The county then distributes a portion of that money to cities and towns.

“Balancing how much to give to each local government requires a choice,” Boone’s lawyers wrote. “The General Assembly allows this choice to be made from a menu of exactly two methods of distribution: per capita and ad valorem. The state will either remit the sales tax based on the proportion of population living in each part of the county (per capita), or else the state will remit in proportion to the property tax value in each part of the county (ad valorem).”

“The General Assembly has decided that either choice is permitted, but only these choices.”

Watauga County used the per capita method from 1987 to 2013, “since that method most filled the County’s coffers. The County then realized it could do even better if it concocted a third entrée that the state had not put on the menu,” according to Boone’s petition. “But to pull it off, the County would need cooperation from others.”

Calling its new system a “net” ad valorem tax method, Watauga County switched away from per capita distribution. As part of the new system, the county required three towns — Beech Mountain, Blowing Rock, and Seven Devils — to return more than half of the funds they would be entitled to receive under a pure ad valorem system. Initially, the towns forfeited 60% of the additional revenue from the switch. “Several years later, the County required the three towns to increase the kickback to 70%,” according to the petition.

“Unsurprisingly, the towns said yes to this kickback scheme,” Boone’s lawyers wrote. “The towns did not come out as much ahead as the General Assembly intended by the ad valorem method, but they still did better than they had under the existing per capita method.”

Beech Mountain would have received $1.5 million from 2014 to 2018 under the old system. Under a standard ad valorem system, it would have seen its sales tax revenue jump to $7.7 million during the same time period. Given the deal with Watauga County, Beech Mountain ended up with $3.8 million.

“The County, however, realized a windfall,” according to the petition. “The County leveraged its decision-making power to create a kickback scheme, which routed millions of extra sales tax dollars to itself. By creating its own system of sales tax distribution, different from either of the choices given by the state, the County came out way ahead.”

From 2013 to 2018, Watauga County gained nearly $5.7 million more from the new arrangement than the old per capita system. County government pocketed $7.4 million more than it would have collected under a standard ad valorem system, according to Boone’s petition.

The new arrangement hurt Boone, the petition argued. “The County’s gains came out of Boone’s pockets,” Boone’s lawyers wrote. “Since the County’s switch to its own home-brewed allocation scheme, Boone has lost out on over $10 million in sales tax revenues. This loss was all caused by the County’s illegal allocation scheme. As the record shows, but for the kickback scheme, the County would never have switched from the per capita allocation.”

The N.C. Court of Appeals ruled on Nov. 15 that neither Boone nor Ashcraft had legal standing to challenge Watauga County’s decision. Boone argues that appellate judges got that decision wrong.

“If the decision below stands, it will embolden other counties to enrich themselves to the detriment of their municipalities,” Boone’s lawyers wrote. “The choice between ad valorem and per capita allocation will always create winners and losers. The decision below teaches counties how to create those winners and losers, all the while ensuring that the county itself always wins.”

“Watauga has flouted the statute’s plain language and thus the General Assembly’s intent,” according to the petition. “The General Assembly intended for counties to select from a limited menu, rather than fashion their own dishes. Counties have unlimited discretion to pick either the ad valorem or per capita method, but no discretion for anything else.”

The three-judge Appeals Court panel’s decision was unanimous. The state Supreme Court faces no obligation to take the case.