Richland sales tax probe worries some counties, prompts new state rules

Richland County’s transportation penny sales tax program is the only one in South Carolina being investigated by the state’s tax agency even though three other counties have similar programs as much as seven years older than Richland’s.

But officials in each of those counties are watching closely the confrontation between Richland and the state. Are they next? What kind of scrutiny could they see after so far having a hands-off relationship with the Department of Revenue?

The Richland case already is about to affect them.

On Thursday, after nearly a year of poring over details of Richland County’s contracts and spending, DOR director Rick Reames told The State newspaper that because of spending problems his agency has seen with the county, DOR is writing new regulations to spell out the proper way for counties to administer and spend transportation penny monies.

In an unprecedented move, the DOR, citing the problems and the county’s failure to fix them, is withholding Richland’s money collected through the tax. Richland, meanwhile, has an attorney studying whether the county should sue to unfreeze the money. And now the county is facing a lawsuit filed by a county resident and an Upstate government watchdog foundation that cites the same issues as DOR and asks a judge to force the county to fix them.

What happens next will determine the future of Richland’s penny tax, approved by voters in 2012 to repair and build roads, trails and bike paths and to provide steady funding for the county’s bus system.

What happens next also could be a cautionary tale for the state’s other counties with the tax – and counties that are considering the tax in a state that is struggling over what to do with its deteriorating roadways.

Audits are crucial, DOR says

At the heart of the penny tax dispute are the Revenue Department’s allegations that its audit of Richland turned up “millions of dollars” of misspending.

Reames’ agency has criticized the county for conflicts of interest, how it has awarded no-bid contracts as well as questionable spending on both a small-business enterprise program and public relations work.

DOR also says the county can’t spend penny money to manage the program in its entirety, only on specific projects. And it said the county must audit penny spending separately from all other county expenses.

Revenue investigators turned over some of their findings to the State Law Enforcement Division, which is investigating possible criminal behavior.

Charleston County’s half-penny program dates to 2005. It has never been audited by the state, deputy county administrator Jim Armstrong said last week.

Perhaps that’s because Charleston County conducts two annual audits of its program – one by an in-house auditor and one by an external auditing firm.

Richland County has yet to audit its 3-year-old penny program that has generated $156.8 million so far – except as part of the overall countywide audit that is conducted yearly of all county agencies.

Reames told the county in February that its failure to conduct an audit of the program violated the county’s own law. Reames wrote in a Feb. 24 letter: “Had the required audits been conducted, perhaps the county could have identified and addressed many of the problems ... .”

Richland says it is addressing its problems. But it takes issue with much of DOR’s criticisms. If the county sues, it will in part argue that DOR does not have the authority to stop the flow of tax money to a county.

Reames’ department says the Legislature has given the agency broad authority to collect and monitor local option sales tax programs. “We are very comfortable that we have the authority to do this,” Reames told The State newspaper last week in his first interview about the fallout from the dispute.

Asked to point to the provision in state law that grants DOR the power to cut off the tax revenue, agency spokeswoman Ashley Thomas cited only several statutes dealing broadly with local option sales taxes.

Meanwhile, in addition to the four that have a sales tax for transportation, two counties are considering it and have asked the agency for guidance, Reames said. He would not name the counties.

Counties that have other kinds of local option sales taxes also have sought and received direction from his department, he said.

Thomas said she’s unaware of Richland ever asking for assistance in administering the tax or in writing the referendum that voters approved in 2012.

The inquiries from the unnamed counties and the troubles in Richland prompted the rewrite of the regulations, which should be ready sometime this year, Reames said.

“We want to nip it in the bud,” he said. “We just want to have rules that everybody can play by.”

Ripple effects

Richland County officials have said they believe the revenue agency is targeting the county.

Reames said the county caught the Revenue Department’s attention because of media reports that questioned how the program was operating. News outlets began reporting complaints within six months of the enactment of the additional sales tax in Spring 2013.

“Unfortunately, these concerns proved justified, as the investigation has uncovered millions of dollars of potential fraud, waste and abuse,” Reames said. “We found (what) ... we felt were some pretty egregious problems.”

Still, some support Richland’s position that DOR might be overreaching. And some wonder if other types of penny sales taxes – not just for transportation – could be targets, too.

Florence County has had local option sales taxes since 1996. They generate about $40 million yearly, said Kevin Yokim, the county’s longtime finance director.

“Based on DOR’s current actions,” he said. “I would be concerned as to whether DOR has the authority to unilaterally audit the expenditure of those funds and/or to withhold those funds.

“What happens if a disgruntled taxpayer in Charleston does not like the way the county is spending their money?” Yokim said. “Does that mean DOR is going to come calling to Charleston to say, ‘Show us how you’re spending the money?’ ”

Reames assures other counties they have nothing to worry about.

“We have absolutely no desire to micromanage a county’s operations,” he said. “This is about ensuring that if a tax is enacted for a specific purpose, it needs to be spent that way.

“If counties are spending their money on transportation projects, there’s not going to be a problem,” he said. “It’s as simple as that.”

Charleston, York penny experiences

Only six of the Palmetto State’s 46 counties do not have some form of a local option sales tax. Richland, Charleston, Berkeley and Dorchester have transportation penny programs. Beaufort County had one until late in 2012.

Charleston County’s 11-year-old program not only has never been audited by DOR, it hasn’t been issued any directives, said Armstrong, who oversees the county’s program.

Like Richland, Charleston initially hired private design and management consultants, especially for its most expensive projects, Armstrong said. County staffers worked alongside the consultants with the goal of absorbing the whole program into the county’s work force. The county now has 17 employees, including Armstrong, whose salaries are at least partially paid for by penny sales tax proceeds.

Asked if the scrutiny Richland County’s program is undergoing might signal that DOR will look more closely at other counties, Armstrong said, “I would certainly hope that the state Department of Revenue would not be unnecessarily critical of counties that have successful programs.”

York County, which soon might embark on its fourth round of penny projects for brick-and-mortar improvements, has had difficulties managing the tens of millions of dollars its tax has raised. But changes in the program have been dealt with by county officials – not DOR.

York’s penny program is for capital projects, so it doesn’t have a “transportation penny.” But York has used most of the tax revenue for road improvements.

Oversight of York’s road projects began in 1997 with the county hiring private consultants. During the early years, York’s program had a $38 million shortfall that wasn’t disclosed publicly until voters had approved the first extension of the tax, according to Rock Hill newspaper accounts.

Doubts about the consulting firm, Capital Management and Engineering, came to a head in 2007 when the firm’s projection of a $300,000 surplus exploded into a $22 million shortfall, according to The Herald newspaper.

In 2009, the county took over management of the transportation program, and at least one project was completed at $1 million under budget, the newspaper reported.

However, an audit released last month, conducted by a private firm hired by the county, was critical of both ways of managing the program, though the auditor reported an improvement since the county took over.

This story was originally published May 8, 2016 at 4:30 PM with the headline "Richland sales tax probe worries some counties, prompts new state rules."