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Two Atlanta-based law firms have filed a class action lawsuit against the City of LaGrange claiming that the revenue the city makes on utility sales and uses to operate city operations is an illegal tax.

The lawsuit was filed on behalf of plaintiffs Ms. Lonnie Hollis and Mason’s World Bar & Grill, LLC in Troup County Superior Court on Jan. 10, 2023.

The city has not collected property taxes since 1998 and instead uses proceeds from utility sales to fund city operations.

According to a press release from the attorneys, proceeds from utility sales are tantamount to an illegal tax because the city makes more than operational expenses and transfers the excess funds to its General Fund for a variety of purposes.

The attorneys referred to the city’s use of utility sales to run the city as a “utility/taxation scheme” that unfairly targets the poor.

“One major difference between property taxes and the utility/taxation scheme imposed by the City of LaGrange is that the utility/taxation scheme is a regressive tax that unfairly targets the City’s poor,” said the press release.

The lawsuit alleges that the city violated state law by using proceeds from utility sales to operate the city rather than using lawful taxes.

The lawsuit seeks a refund of the profits from utility sales to be returned to the purchasers and a court order to stop the city from imposing excessive utility charges in the future.

“It is clearly a violation of state law that the City of LaGrange charges outsized utility fees to residents and businesses that are then transferred to cover the city’s General Fund for general governmental uses other than payment of utility service costs,” said Craig K. Pendergrast of Continuum Law Group.

According to the lawsuit, from FY2017 to FY2021, the city transferred $70,156,000 from municipal utility funds to the general fund, which equates to a profit margin of 17.2%. The proceeds have allowed the city to operate and maintain reserve funds of at least $45 million over the last three years.

The lawsuit claims that the excess charges constitute taxes under Georgia law, citing Bellsouth Telecomm., LLC v. Cobb County, which concluded that 911 charges are a tax.

City leaders have proudly acknowledged that LaGrange uses profits from utility sales to fund city operations for more than 20 years.

“This practice is an illegal regressive tax under Georgia law,” said Brian J. Sutherland of Hall & Lampros.

The lawsuit says that instead of using profits from utility sales, LaGrange should reimpose the city property tax that was suspended in 1998, just like taxes that Troup County and Troup County School System currently impose.

“Under a property tax, property owners are taxed on the value of the property they own, so that those with higher value property pay more and those with lower value property pay less. In contrast, collecting excessive revenues from those who have no choice but to buy their electricity, natural gas, and water & sewer services from the City is a regressive tax that falls disproportionately on those who are less able to bear the burden of the payments,” said the attorneys in the release.

The City of LaGrange provided a statement saying they intend to fight the lawsuit.

“Claiming to file on behalf of each citizen and business of LaGrange, Plaintiffs allege that the City charges for services like electricity, water, sewer and gas are an illegal tax.  First of all, basic hornbook law dispatches with the ‘tax’ argument.  The law is well developed and clear that utility service fees are not a tax, but are instead a fee for service.  Second, numerous state and local laws clearly authorize the City to provide services and charge for those services,” said a statement provided by City Attorney Jeff Todd. “Plaintiff can hardly prove a utility charge is unreasonable when it is extremely competitive and in most instances, lower than the local competition. We regret that the case has been filed and that City resources will be required to defend it but look forward to quickly demonstrating to the Court why it should be dismissed. Ultimately, Plaintiff’s request is that the City institute property taxes, so it is difficult to see how they are acting in the interests of the citizens of LaGrange.”