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Isle of Wight ordered to repay $5.4 million

A judge, on Aug. 4, ordered Isle of Wight County to repay $5.4 million to International Paper after ruling the locality’s efforts to recoup a previous court-ordered machinery and tools tax refund to the company unconstitutional.

In February 2017, Isle of Wight’s Circuit Court had ordered the county to repay International Paper $2.4 million in machinery and tools taxes it had collected from the company after ruling in IP’s favor when the company had argued the county, over the past several fiscal years, had not been taking the depreciation of the Franklin paper mill’s equipment into account.

About three months after the 2017 ruling, Isle of Wight’s Board of Supervisors voted to hike the county’s machinery and tools rate 142% for a single fiscal year — raising it from $1.75 per $100 of assessed value to $4.24 per $100.

Then, in the summer of 2017, the Board voted to set aside funds for what it termed an “economic development retention grant” program, which provided International Paper with the exact amount needed to ensure the company owed the entirety of the $2.4 million refund, plus what it would have owed for the 2017-2018 fiscal year had the county’s machinery and tools rate remained flat.

IP then sued Isle of Wight again, arguing the county had effectively defied the 2017 court-ordered refund by raising its machinery and tools taxes. In October 2018, Isle of Wight’s Circuit Court, this time, sided with the county, ruling that Isle of Wight had acted legally in raising taxes to cover a general fund shortfall that had resulted from the prior court-ordered refund.

In 2019, IP appealed the ruling to the Supreme Court of Virginia, which resulted in the high court ruling unanimously in 2020 that IP be given a new Circuit Court trial. The Supreme Court sided with the county in once again dismissing IP’s claim that the tax hike defied the 2017 court order, but sided with the company that the so-called grants violated the constitutionally mandated requirement that machinery and tools taxes imposed by a locality be uniform.

The new Circuit Court trial, held June 24, 2021, resulted in a ruling in IP’s favor. The court’s final order, issued Aug. 4, states IP has “established by a preponderance of the evidence that there was clear linkage between the tax rate established, and the economic development retention grant program” and that “these two legislative acts produced an unconstitutional effect.”

Under Virginia law, when a court rules a tax assessment erroneous, all taxes paid under that assessment must be refunded in their entirety, the order states. Since IP paid Isle of Wight $2.7 million on Aug. 7, 2017 under the $4.24 machinery and tools rate, and another $2.7 million Dec. 5, 2017, the county owes IP a total of $5.4 million, plus interest in the amount of 10% per year for a period spanning 2017 to 2021.

According to Craig Bell, the McGuire Woods LLP attorney who served as IP’s lead counsel during the initial lawsuit and the appeal, the interest Isle of Wight has accrued amounts to roughly $2.5 million. Combined with the $5.4 million refund, the county now owes IP roughly $7.9 million in total.

Isle of Wight has until early September to appeal the trial court’s judgment.

“Interest continues to accrue until the judgment is paid by the county,” Bell said.

Assistant County Administrator Don Robertson said Isle of Wight has filed an appeal, but declined to comment further “as this is ongoing litigation.”

Jenny Dixon, spokeswoman for the Franklin mill, also declined to comment on the matter.