Great Wolf Lodge owners sue to keep Thurston County from collecting property tax

Christian Hill
The Olympian

Oct. 26, 2008

Thurston County, WA - The owners of the Chehalis tribe's Great Wolf Lodge have gone to federal court to prevent Thurston County from assessing the resort for property taxes.

The state Department of Revenue ruled in August that the resort, located in south Thurston County, was exempt from property taxes because it is partly owned by the tribe.

But 49 percent of the improvements on the property are owned by a nontribal corporation, and that was the basis Thurston County assessor Patricia Costello used to assess the property.

Last week, a federal judge agreed to hear the case but declined to stop the assessment while the lawsuit proceeds, an early victory for the county in what promises to be lengthy litigation that could have ramifications across the state and, possibly, the nation.

The outcome of the dispute is important for at least two reasons:

• Millions of dollars in tax revenue would flow to the state and county over the next two decades to pay for roads, teachers and social services if the county prevails. The revenue could ease the property tax burden on other taxpayers and bring additional revenue to cash-strapped Thurston County, which will weigh layoffs and program cuts to close a projected $4.3 million budget shortfall. If the resort's owners were forced to pay property taxes, the estimated bill for 2009 would be more than $760,000. "This is a lot of money that is going to be a tax shift to other property owners," Costello said.

• The ruling could have a significant effect on the feasibility of other joint projects between tribes and nontribal companies as they look beyond casinos to generate revenue and jobs. For instance, the Nisqually Indian Tribe, which wants to develop commercial land it owns in Hawks Prairie, is following the case closely.

"If the property tax can be imposed, it's going ... to make agreements of this sort less likely," said Erik Jensen, a professor at Case Western Reserve University in Cleveland who studies and writes about tax issues involving tribes. "If something is going to be taxed that otherwise wouldn't be taxed, people are less likely to do it. That means, in this context, outside investors are going to be less interested in investing in Indian Country, and that's to the good of nobody."

Some tribes have reaped substantial financial rewards from casinos, but those successes are not representative of all tribes in the United States, he said.

Costello has accused the No. 2 official at the state Department of Revenue, the agency's tribal liaison, of using her influence to secure a ruling favorable to the tribe. Hundreds of e-mails and other documents obtained by The Olympian through public-records requests show that the official, Leslie Cushman, took an active role in the tax questions surrounding the resort and was in close contact with the tribe throughout the process that led to the ruling. The agency acknowledged "misunderstandings" during the process, and at one point, a Revenue official issued an opinion that the lodge should not be exempt from property taxes. Cushman has denied Costello's accusations.

Differing views

CTGW LLC is a joint venture between Madison, Wis.-based Great Wolf Resorts Inc. and the Confederated Tribes of the Chehalis Reservation. The eight-story resort opened in March and features one of the nation's largest indoor water parks, 398 guest rooms and a conference center.

The resort employs nearly 500 people, including eight tribal members.

Neither the tribe nor the company would say how much money the resort has generated since opening, although a Great Wolf Resort spokesman said it "couldn't be more pleased with the performance."

The tribe and CTGW argue the county can't levy property taxes on a building owned by a venture controlled by the tribe, and that Costello's action is an attack on the tribe's self-governance. "If you don't owe the tax, you don't pay it," said Jeff Warnke, the tribe's director of government relations.

They also disagree with the county over the extent to which the resort relies on services paid for by property taxes, such as roads and fire and police protection. The county counters that Great Wolf Resorts, a publicly traded company, has a "significant interest" in the venture, and the resort should not be exempt from paying property taxes. "To that extent, it does not appear to be a uniquely tribal enterprise here," Deputy Prosecuting Attorney Jane Futterman said during a recent court hearing.

The joint venture

The county, tribe and Revenue Department have wrangled over the taxation question for more than a year.

The tribe bought 43 acres of property sandwiched between Interstate 5 and Old Highway 99 from a timber company for $1.5 million in 2002, according to the assessor's office. The federal government agreed to take the off-reservation land into trust for use by the tribe. No one disagrees that the land itself is exempt from property taxes.

In 2005, the tribe and Great Wolf Resorts formed CTGW LLC under Delaware law to develop and operate the resort on 39 of the 43 acres.

The tribe owns 51 percent of the joint venture, and Great Wolf Resorts owns 49 percent; the profits generated by the joint venture are divided by the same percentages. Great Wolf is the managing member of the limited-liability company, but the resort is "controlled by the tribe in every aspect," Harry Chesnin, the tribe's longtime attorney, said at a court hearing. The tribe then leased the trust land to CTGW for 25 years. The federal Bureau of Indian Affairs approved the lease in April 2007, almost six months after ground was broken on the project. CTGW LLC can extend the lease for 25 more years; otherwise, the site fully reverts to the tribe.

A tax question

Leslie Cushman, Revenue's deputy director and tribal liaison, started discussions with the tribe in late 2006 to determine whether the resort was exempt from sales and business and occupation taxes. The agency ruled it was exempt in February 2007, but the ruling did not address property taxes.

The state Department of Revenue is charged with ensuring taxes are administered fairly and consistently. The county assessor under state law determines what property is taxable and at what value, although the state agency provides guidance on tax issues.

That July, Costello tried to find out whether she could assess the resort for property tax purposes. County attorneys since have advised her the resort is not exempt from property taxes.

On Aug. 8, Chief Deputy Assessor Dennis Pulsipher wrote that Futterman was told "the tribe's attorney (Chesnin) will be meeting with DOR before they will provide us any information," according to an e-mail.

The next day, according to another e-mail, Cushman wrote to her subordinates and the tribe's lawyer that her department "will make every effort to make sure this doesn't get tangled up. I suggest that DOR and the tribe sit down, figure out what we think the situation is, and then meet with the assessor," she wrote.

All of the parties met Sept. 11. Although no conclusions were reached, the tribe agreed to provide the county with documents. What the tribe produced was a written explanation for why the resort wasn't subject to property tax, but without any corresponding documents.

Costello submitted a public-disclosure request to Revenue for all documents related to the development of the Grand Mound project. The request was denied in early November on the basis that documents were either confidential tax information or didn't exist because "the majority of the information provided to the department was through meetings and telephone calls rather than by written communications," according to the Nov. 9, 2007, letter. Withheld were more than 80 e-mails, primarily between Cushman, the author of the February 2007 ruling, and the tribe.

Assessor presses on

Four days later, Costello notified the tribe and CTGW of her intent to assess the improvements for the 2008 tax year. Her assessment was based on 30 percent of the value of Great Wolf Resort's 49 percent ownership of the building, which still was under construction. CTGW has not paid the resulting tax and, with penalties, the assessor's office said, the company owes more than $100,000.

It's unknown whether the county could place a tax lien on the improvements to secure payment because they are on Indian trust land.

The tribe appealed Costello's decision to the county Board of Equalization on Dec. 13, 2007. The day before, Cushman had written a letter to the board, the purpose of which is central to the dispute.

Cushman said in an interview she wanted the board to know the agency could share its expertise on this issue and that the February 2007 ruling on other taxes could offer some guidance on the property-tax question. She did not say specifically that the ruling applied to property taxes.

The fact the letter even addressed property taxes surprised the agency's property-tax division. In an e-mail, Brad Flaherty, who heads the division, wrote Cushman that her letter had put the division in a difficult situation. Assessors are responsible for administering tax exemptions, but the boards of equalization, trained and overseen by the state Department of Revenue, hear challenges to the assessors' decisions.

"As a result, we have some very upset assessors," he wrote.

Cushman replied that she was "remiss in not keeping you in the loop on this issue" and that the letter was meant to be an explanation of the ruling. "But in the big picture isn't there a need to use consistent principles with the same taxpayer?" she asked.

Her letter was the final straw for Costello. She met with department director Cindi Holstrom on Jan. 18 and accused the department of hiding information and claimed Cushman had changed her job from tribal liaison "to advocate which specifically advances policy and analysis to ensure tax avoidance," according to Costello's memorandum outlining her talking points obtained by The Olympian. Costello also raised a concern that Cushman had exerted her authority to influence the county Board of Equalization before it had a chance to hear the appeal.

Holstrom said she was surprised by Costello's accusations and added, "I'm completely confident that all our activities have been appropriate in this matter and appropriate in working with the county."

Cushman denied Costello's accusations.

Other e-mails appear to support Cushman's stance that she wasn't working on the tribe's behalf.

On Aug. 13, when Mike Gowrylow, the agency's communications director, inquired in an e-mail about the agency's position on the property-tax issue, Cushman wrote, "We don't have a position yet!" In February, critiquing a draft of a letter on the property-tax issue, Cushman wrote it wasn't ready to give to the tribe. "They would be very upset at the analysis because it is incomplete. I worry less about the outcome than the reasoning."

Asked whether the tribe pressured the agency for a favorable ruling, Warnke, the tribe's director of government relations, laughed before saying, "We don't tell them how to do their business any more than we'd want them to tell us how to do our business."

However, Costello said those concerns remain with her today.

"I'm glad it's gone to the courts," she said. "I don't have a lot of confidence on any kind of ruling that the Department of Revenue would issue at this time."

Drafting a ruling

The meeting led Holstrom to ask the agency's property-tax division for a formal ruling on whether such a tax can be imposed on the resort.

On April 24, 2008, Jim Winterstein, the division's senior policy counsel, concluded that the tribal involvement was not enough to exempt the resort from paying property taxes. His letter, addressed to the tribe and later obtained by Costello, led her to move to assess the entire resort. But it was clear from the letter that Winterstein wanted more information from the tribe to reach a firm conclusion on the tax status of the resort.

It took months for the tribe to provide the information. The agency received a copy of the financial documents deemed most sensitive by the tribe Aug. 15, around the time the county attempted to obtain them by calling Great Wolf Resorts directly. The tribe required that neither the agency nor the county make copies of the documents and they had to remain at the state agency's office.

Gowrylow voiced concerns in an Aug. 13 e-mail that the department "doesn't hold the tribe accountable for failing to provide documents for months."

To which Cushman replied: "We aren't going to point our fingers at the tribe. They have many reasons to be acting the way they are, not for us to judge at this time."

Warkne said the tribe doesn't lightly release proprietary financial information.

"In the end, we did what the state asked us to do," he said.

In late August, the agency released its final ruling that the resort was exempt from property taxes. Flaherty reached that conclusion while noting "the relevant facts are still not as clear as we would like" and that "a legitimate argument" could be made either way. Flaherty said in an interview that the amount of control the tribe had over the joint venture and its operation "tipped the scales in favor of preemption."

Asked why it took so long to release its ruling, he said, "What we are doing is trying to apply our knowledge of state and federal law as the information is presented to us."

The ruling infuriated Costello. When she continued to press ahead, the tribe asked the Revenue Department to order the county to stop the assessor, but the agency, after consulting the Attorney General's Office, declined. The tribe and CTGW sued Costello, Thurston County, the county Board of Equalization and its three members in federal court Sept. 18.

Turning to the court

The suit seeks a court order that the resort is exempt from paying property taxes.

It also asked for a preliminary injunction to prevent Costello from assessing the property and stop the pending case before the county Board of Equalization. The oft-delayed hearing, scheduled for Thursday, has been postponed to Jan. 30 at the earliest.

Chesnin said the judge should give "great weight" to the state ruling, but the county argued it is not nearly as conclusive as the resort's owner would have him believe.

In his written ruling released Tuesday, U.S. District Judge Benjamin Settle declined to issue a preliminary injunction because the tribe hadn't proved it would suffer irreparable injury.

"Plaintiffs admit that they entered into a 'unique structure' and until the Court decides the merits of the (tax) immunity issue, there is no reason to consider CTGW as anything but a limited liability company," he wrote. "As such, it should be subject to an assessment of taxes as are the majority of other businesses in this state."

Notably silent in the dispute has been Great Wolf Resorts, but a company spokesman said last week it would participate in the lawsuit.

"Quite frankly, we believe that the county's position is baseless both because of the federal law and because the county provides no uncompensated services to the resort," said Steve Shattuck, the spokesman.

The Grand Mound resort was the first project in which the company has joined with an Indian tribe. The company since has signed a preliminary agreement with the Mashantucket Pequot Tribal Nation to build a resort on tribal land near a casino in Connecticut.

The company looks to pursue more joint ventures or licensing and management deals because it's a way to split the cost of resort projects, which can exceed $120 million, Shattuck said.

These partnerships also benefit tribes who want to generate jobs and revenue to pay for government services and realize casinos aren't "the end-all and be-all forever," said Thor Hoyte, the attorney representing the Nisqually Indian Tribe. The Nisqually tribe started a commercial diving business toward that end.

The tribe bought and owns outright nearly 40 acres of commercial property in Hawks Prairie near Interstate 5 and plans to develop it through a joint venture with an investment partner. The tribe has been tight-lipped about its plans other than to say the project won't be another casino. The tribe owns the Red Wind Casino on reservation land outside of Yelm.

Hoyte said the Chehalis tribe took a "huge step" with the Great Wolf Lodge to diversify its economy. The court case will raise questions about whether tax questions will put the brakes on potential economic expansion or whether "tribes have enough momentum to overcome an adverse ruling if there is one," he said.

"We're watching the case very closely," Hoyte said.

Taxing districts wait

As the battle wages in the courts, Costello has notified taxing districts not to expect the additional revenue from the resort as they develop their budgets for next year.

The Rochester School District would receive nearly $240,000 in property taxes from the resort, according to the county assessor's office. Superintendent James Anderson said he had to cut about $400,000 from the budget this year. He didn't lay off employees, but left positions open indefinitely.

"It would definitely allow us to help the taxpayers (by reducing their overall tax burden), but if we could raise more money then we could fund more programs and more teachers. That's significant — $250,000."

Christian Hill covers Lacey and Thurston County for The Olympian. He can be reached at 360-754-5427 or chill@theolympian.com.