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City facing possible whammy
in $85 million tax refund suit

By Chip Drago
Mobile Bay Times
The city of Mobile could be looking down the barrel of an $85 million tax refund to businesses in its police jurisdiction if it fails to prevail in a class action lawsuit currently wending its way through the state court system, according to court records and an attorney for the plaintiffs.

The Alabama Court of Civil Appeals earlier this year reversed a summary judgment in the city's favor and sent the case back to Mobile County Circuit Court. Presently, the matter awaits a ruling from the Alabama Supreme Court on a city petition, but the dispute appears likely to return for rehearing to the courtroom of Mobile County Circuit Judge James Wood.

"... there remains a genuine issue of material fact regarding whether the annual business-license tax was 'unreasonable or that the (taxing) ordinance was illegally adopted ..." the appeals court ruled. "The trial court's order denying Dixon (sic) Campers' motion to certify a class composed of business entities in the police jurisdiction that paid the city's monthly gross receipts taxes is also reversed, and the cause remanded for further proceedings."  

Steve Clements, representing Dickson Campers, the class's lead plaintiff, has argued that the city in collecting a gross receipts tax in the police jurisdiction failed as required by law to plan for and enact corresponding expenditures on public services in the areas just outside the city limits.

Former Mayor Mike Dow contended that the city did indeed provide services in the police jurisdiction equal to or in excess of the monies raised.

Under the law governing gross receipts license fees, municipalities can collect one-half of the levies in the police jurisdiction that it collects on businesses within the city's corporate limits. However, the amount "shall not be greater than the cost of services provided by the municipality within the police jurisdiction."

According to the court record, Dow acknowledged that the city budget included no line items that projected city spending on services in the police jurisdiction. He also stated that he knew at all times exactly how much revenue the city was generating in the police jurisdiction.

In deposition, Clements asked Dow how, in the absence of budgetary projections, he could be sure that revenues did not exceed expenses.

Dow: "Well, my understanding again was that we applied more and more services to the (PJ) as time went by to compensate (for rising revenues). We gave, I think, their money's worth.

Clements: "You said, 'I think,' That's my point. How did you know?"

Dow: "I might have been spending too much."

Clements: "How do you know that? That's my point. How do you know for a fact whether the City was spending too much or too little in the police jurisdiction if you didn't run the calculation to compare the income versus the expenses?"

Dow: "We had done those calculations in prior years. And when your philosophy is to spend more, you don't worry if you're spending less. You know you're spending more. And so we tried constantly to keep our expenditures (in the police jurisdiction) increasing as time went by to provide more and more services. And that was the executive yardstick that I used to guide the city."

The city hired Clemson University economics professor Dr. G. Richard Thompson, a former resident of Mobile, to assess the situation for purposes of its defense. He calculated that the cost of services in the police jurisdiction during the years in question were as follows:

Undisputed were figures on total revenues received from the police jurisdiction during those years follow:

City Finance Director Barbara Malkove, budget officer Bubba Young and City Council President Reggie Copeland, according to court records, all said they had never seen or calculated any specific relationship between revenues and expenditures within the police jurisdiction.

The city switched to a true sales tax in 2003.

Unlike law on gross receipts taxes, state law on sales tax revenues doesn't mandate that the cost of services provided reflect the amount of monies collected, according to Clements.

"The sales tax is under a completely different statute," he said. "It requires no balancing act on the revenues versus expenditures." 

According to Clements, Dickson Campers and other similarly situated businesses just outside the city limits are entitled to refunds on the gross receipts taxes and annual business license fees that they paid from 2001-2003 when the city adopted a true sales tax.

"What we are looking at (is a refund) for those three years and 10 months until the city changed its ordinance after we filed suit," said Clements. "We're due three years at full bore and 10 months partial repayment. It (the total amount due the class) is somewhere in the neighborhood of $85 million."

The amount of the judgment should the plaintiffs win will be easy to calculate, said Clements.

"It's a tax refund case," he said. "We can account for every dollar. We know who paid what and when."

City Attorney Larry Wettermark was in a meeting with the mayor and not immediately available to provide the city's perspective on the case.

It was not immediately clear whether the court would have the option to order a partial refund to be divided among the class members.

The city's neglect in the beginning to correlate the revenues and expenditures poisons its standing and should enable the plaintiffs to reclaim all the taxes paid, said Clements. 

"Our position is that the city never undertook any effort at all to relate the income to the expenses prior to the adoption of the taxing ordinances," he said. "That their failure to first determine the need for the tax is our first line of attack. If we prevail in that argument then the ordinances were void from their adoption and there is no need to make the calculations." 

If the state Supreme Court grants certification of the case, the parties will file briefs with the high court. Otherwise, the case comes back to Mobile to be reheard in light of the appellate court's ruling. In the latter event, it is not yet certain whether the proceeding would be a bench trial or a jury trial.

"We've never had our day in court," said Clements.

Clements said there were "hundreds and hundreds of Mom & Pop's (that) frankly this would mean more to than anybody" big like a Lowe's, a Home Depot or Wal-Mart where a large refund would be a mere drop in an enormous bucket.

"An interesting thing as part of a class, we had to provide actual notice and make sure (prospective class members) were told about the lawsuit," Clements said. "We had 11 that opted out. Eleven opted out of about 3,000. None of the car dealers, Lowe's or anybody like that said 'keep the money.'"

Clements is also the attorney representing three men who reside in the police jurisdiction in their lawsuit challenging the city's proposed annexation plan, set to go before about 1,900 west Mobile voters Sept. 18.

"Absolutely, these are cousin cases," Clements said. "In my view they're related. (The city) is looking at the very real possibility of losing this class action and having to pay $85 million and they don't have it right now."

If Area A -- generally Mobile Terrace plus the Schillinger Road commercial corridor, one of four areas where residents would vote on annexation into Mobile -- favors joining the city, Mobile would realize increased annual tax revenues of more than $10 million. The money would derive almost entirely from sales taxes at businesses along Schillinger Road which were attached to Area A under the city annexation plan.
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