City, county plan dueling suits over sewer tax

Spokane County officials are asking a judge to force the city of Spokane to stop taxing some county sewer customers.

The lawsuit, filed in Spokane County Superior Court after a year of negotiations between the two local governments failed to resolve the conflict, also seeks repayment of more than $2 million the county contends was improperly charged. The city is planning a counter suit.

“We’re engaged in one of the worst aspects of government, which is entity suing entity,” said Spokane Deputy Mayor Jack Lynch. “I think both sides would have been better served if we were able to reach a compromise.”

The county is suing for about $2 million worth of payments made over six years, and the city plans to file its own suit, seeking $1.625 million in utility taxes the county has not paid for the past two years, plus 12 percent interest.

“We’ve come to a point where it’s a big enough financial issue for the county and the city that we wanted a neutral third party to make a decision,” said Spokane County Utilities Director Bruce Rawls.

Airway Heights officials are watching the case, too, Lynch said, adding that city will likely want its own utility taxes back if the county wins.

“We’ll let the court settle it once and for all,” said Spokane County Commissioner Phil Harris.

At issue is a Spokane tax charged to its independent water and sewer utilities to pay for general fund departments like police, fire, libraries and streets.

The stakes are particularly high for the city because of its reliance on utility taxes to balance its budget.

So far the city sewer utility has continued to pay the county’s portion of the tax to Spokane’s general fund, said Lynch. But if the city loses its battle with the county, the general fund will have to pay that money back to the utility, and that could make an impact on public safety and other general-fund departments.

City officials contend the tax is charged to the utilities themselves, not ratepayers, and thus can be included in the rates it charges the county’s sewer customers.

But the county claims that a city cannot impose a tax on a wholesale customer like the county.

Though the city charges the tax to its wastewater utility, that particular tax is factored into the rates paid by direct city customers, and by wholesale customers like the county.

The county already has set a precedent, said Lynch, because it “has always paid this (tax) at one level or another.”

Neither side is disputing the inclusion of the tax in rates charged to Spokane’s direct retail customers, including some who live outside the city limits. The lawsuit applies only to those customers who are billed by the county, which in turn pays the city to treat its sewage.

Should the county prevail, its customers won’t receive checks for their portion of the tax. That money will be used to pay for improvements to the county’s sewer system, Rawls said.

As it gears up to take on the county in court, the City Council is expected to approve a contract with a Seattle law firm that has expertise in utility-tax law. A resolution slated for consideration Monday would authorize the council to spend up to $290,000 for that purpose .

City officials said they hope to limit legal arguments in the suit to keep down the cost. Roger Flint, director of public works and utilities, said the city will seek reimbursement from the county for its legal fees.