Can a Tennessee school board forgive a city that has spent years skipping its share of liquor-by-the-drink taxes owed to the county school fund?

Subject

Opinion No. 14-22, Authority of County School Board to Compromise Liquor-by-the-Drink Tax Revenue, February 26, 2014

Plain-English summary

This opinion answered a question that came up when a Tennessee municipality realized, after years, that it had been holding onto liquor-by-the-drink tax money it was supposed to pass along to the county school fund. Under Tenn. Code Ann. § 57-4-306(a)(2)(A), a city that authorizes liquor by the drink but does not run its own school system must remit half of its share of those receipts to the county school fund. The city had not done so. The question was whether the school board could let the issue drop, compromise the debt, or whether some other defense or offset could clean it up.

The AG said no. A school board cannot waive its statutory right to receive tax revenues. Tennessee courts going back to 1877 (City of Memphis v. Looney) have held that taxes are levied for "public use and upon public trusts," and no local government laches can defeat the public's right to have those taxes collected and properly allocated. Even if a waiver were possible, it would require approval from the county commission, since the commission, not the school board, is the body that appropriates education funds.

On interest: no statute attaches interest to undistributed liquor-by-the-drink tax revenue. (A court could award prejudgment interest under Tenn. Code Ann. § 47-14-123 up to 10% if the matter ends up in litigation, but there is no automatic interest rate.) On statute of limitations: none applies. When the county sues to recover school funds, it is acting as an arm of the state in a sovereign function, and general limitations statutes do not run against it. The county may, however, agree to a payment plan, because spreading out an existing debt is not the same thing as waiving the statutory entitlement.

The AG also rejected two attempted offsets. The city could not credit its liquor-by-the-drink debt against the local-option sales tax revenue it had already paid to the school fund; those are independent obligations under different statutes. And it could not net unpaid water-quality fees owed by the school system against the tax debt, because the school fund is a separate accounting entity from the school system's operating budget. If the city wants its water-quality fees, it must collect them like any other debt.

Currency note

This opinion was issued in 2014. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Common questions

Could a county school board simply forgive years of unpaid liquor-by-the-drink tax owed by a city?

No. The AG concluded that a school board has no authority to waive its statutory right to receive tax revenues. The opinion relied on City of Memphis v. Looney, 68 Tenn. 130, 136 (1877), which held that public taxes are held for public uses and that local government inaction cannot defeat the public's right to have them collected and "rightfully appropriated."

Did a statute of limitations cut off the county's right to chase old unpaid amounts?

No. The AG distinguished suits where limitations periods do bar local-government claims (paving lien enforcement in City of Knoxville v. Gervin; recovery of allegedly illegal salary payments in State ex rel. Lawrence County v. Hobbs) from cases involving sovereign functions. Collecting school funding revenue allocated by state statute is a sovereign function, and "[g]eneral statutes of limitations cannot defeat the public's right to have the taxes allocated to the correct local governmental body."

Did interest accrue on the unremitted tax revenue?

Not automatically. The AG noted that while Tennessee imposes statutory interest on unpaid tax liabilities under Tenn. Code Ann. § 67-1-801 in the ordinary course, there is no parallel provision for state tax revenue that was properly collected but then improperly held by a local government. If the county sued, a court could still award prejudgment interest up to 10% under Tenn. Code Ann. § 47-14-123 based on equitable principles.

Could the county and city work out a payment plan?

Yes. The AG drew a clear line between waiving the statutory right to receive the revenue (not allowed) and structuring repayment of an existing debt (allowed). A payment plan is the second category. The opinion cited the analogous 1997 AG opinion on local-option sales tax, which permitted a special school district to settle a pending lawsuit over disputed amounts because settling a debt is not the same as waiving a statutory right.

Could the city argue it had overpaid through local-option sales taxes?

No. The liquor-by-the-drink remittance under Tenn. Code Ann. § 57-4-306(a)(2)(A) and the local-option sales tax distribution under Tenn. Code Ann. § 67-6-712(a)(1) are separate, statutorily independent obligations. Money paid under one stream does not credit against money owed under the other.

Could the city offset unpaid school-system water-quality fees against the liquor-tax debt?

No. The AG treated the two debts as running between different entities. The liquor-by-the-drink revenue is owed to the county school fund (administered by the county trustee and appropriated by the county commission). The water-quality fees would be owed by the school system out of its operating budget. Different funds, different debtors, no clean offset. The city has to collect the water-quality fees the same way it would collect any other debt.

Could the city take future water-quality fees out of future liquor-tax remittances?

No, for the same reason. The AG was careful to note that, separately, a 2006 AG opinion already concluded that stormwater user fees under Tenn. Code Ann. § 68-221-1107(a) can be charged to governmental and tax-exempt entities, so the school system is on the hook for water-quality fees, but the collection has to happen on its own track rather than through a deduction from the school fund.

Background and statutory framework

Tennessee's liquor-by-the-drink tax, Tenn. Code Ann. § 57-4-301(c), is a 15% tax on the sales price of alcoholic beverages consumed on the premises. The tax is collected by the Department of Revenue and then redistributed by formula. Under Tenn. Code Ann. § 57-4-306(a)(2)(A), municipalities that authorize liquor by the drink but do not run their own school systems must turn over half of their share of the proceeds to the county school fund.

The constitutional/structural background: under State ex rel. Weaver v. Ayers, 756 S.W.2d 217, 222 (Tenn. 1988), it is the county commission, not the school board, that "has the authority to appropriate the funds necessary to carry out the county education program." That is why even a hypothetical school-board waiver would not bind the county.

The sovereign-function doctrine on limitations comes from City of Knoxville v. Gervin, 169 Tenn. 532, 89 S.W.2d 348 (1935), which acknowledged that limitations can bar municipal claims (10-year limit barred a city's paving-assessment suit) but carved out an exception when the local government is exercising a sovereign function. The Court of Appeals applied that exception to school-funding claims in City of Maryville v. Blount County, 1993 WL 1887, at *6, declaring that "[p]ublic education in Tennessee is primarily a state function" and that a county pursuing those funds "acts as an arm of the state and is exempt from the statute of limitations."

The 1997 AG opinion (Op. 97-104) cited in this analysis worked out the related rule for local-option sales taxes: a school district cannot waive future statutory entitlement, but it can settle pending litigation over how much was actually owed.

Citations

• Tenn. Code Ann. § 57-4-301(c) (liquor-by-the-drink tax, 15% on consumption on premises)
• Tenn. Code Ann. § 57-4-306(a)(2)(A) (distribution formula; half of municipal share to county school fund)
• Tenn. Code Ann. § 67-1-801 (interest on unpaid tax liabilities, general)
• Tenn. Code Ann. § 67-1-1501 (six-year limitations period for tax collection)
• Tenn. Code Ann. § 67-6-712(a)(1) (local-option sales tax distribution to school fund)
• Tenn. Code Ann. § 47-14-123 (prejudgment interest, cap of 10%)
• Tenn. Code Ann. § 68-221-1107(a) (municipal stormwater user fees)
• City of Memphis v. Looney, 68 Tenn. 130 (1877) (Tennessee Supreme Court; public taxes held in public trust)
• City of Maryville v. Blount County, 1993 WL 1887 (Tenn. Ct. App. Jan. 6, 1993)
• State ex rel. Weaver v. Ayers, 756 S.W.2d 217 (Tenn. 1988) (Tennessee Supreme Court; county commission appropriates school funds)
• City of Knoxville v. Gervin, 169 Tenn. 532, 89 S.W.2d 348 (1935) (Tennessee Supreme Court)
• State ex rel. Lawrence County v. Hobbs, 194 Tenn. 323, 250 S.W.2d 549 (1952) (Tennessee Supreme Court)
• State ex rel. Paduch v. Washington Cnty., 1994 WL 421083 (Tenn. Ct. App. Aug. 12, 1994)
• Tenn. Att'y Gen. Op. 97-104 (July 28, 1997)
• Tenn. Att'y Gen. Op. 06-177 (Dec. 19, 2006); 94-039 (Mar. 21, 1994); 93-57 (Sept. 3, 1993)

Source

• Landing page: https://www.tn.gov/attorneygeneral/opinions.html
• Original PDF: https://www.tn.gov/content/dam/tn/attorneygeneral/documents/ops/2014/op14-022.pdf

Original opinion text

STATE OF TENNESSEE
OFFICE OF THE ATTORNEY GENERAL
February 26, 2014
Opinion No. 14-22
Authority of County School Board to Compromise Liquor-by-the-Drink Tax Revenue

QUESTIONS

1. Where a municipality receives tax revenue from the liquor-by-the-drink tax imposed by Tenn. Code Ann. § 57-4-301(c) but fails for a period of years to remit a portion of the proceeds to the county school fund, does the county school board have the authority to forgive or compromise any such unremitted tax revenue?

2. Assuming that the county school board lacks the authority to forgive or compromise the municipality's obligation to remit already-collected liquor-by-the-drink tax revenue:

(a) Is the municipality liable for interest on any past-due payments, and, if so, at what rate?

(b) Would a claim by the county school board to recover any past-due payments be subject to any statute of limitations?

(c) May the county school board agree to a payment plan with the municipality for payment of any past-due amounts?

3. Is the municipality entitled to offset its liability for already-collected but unremitted liquor-by-the-drink tax revenue by relying upon local-option sales tax revenue previously remitted for a period of years to the county school system?

4. Is the municipality entitled to offset its liability for already-collected but unremitted liquor-by-the-drink tax revenue by relying upon unpaid water-quality fees previously assessed for a period of years against the county school system, or is the municipality estopped by its previous failure to demand such payment from the county or its supported agencies except the school system?

5. May the municipality reduce future liquor-by-the-drink tax payments to the county school fund by the amount of the county school system's annual water-quality fee established by local ordinance?

OPINIONS

1. The county school board does not have authority to waive its statutory right to receive liquor-by-the-drink taxes under Tenn. Code Ann. § 57-4-306(a)(2)(A).

2(a). No statutory provision exists for the accrual of interest on undistributed liquor-by-the-drink tax revenues.

(b). A county school board's claim for recovery of unremitted liquor-by-the-drink tax revenues is not subject to any statute of limitations. In seeking to recover tax revenues that should have been allocated to the school fund pursuant to state statutes governing education funding, the county would be exercising a sovereign function, and statutes of limitations do not apply to the exercise of such a function.

(c). The county may agree to a payment plan by which the municipality pays the undistributed liquor-by-the-drink tax revenues over a period of time.

3. The municipality is not entitled to offset its liability for collected but undistributed liquor-by-the-drink tax revenues by relying upon the local sales tax revenues that are separately distributed to the county school fund.

4. The municipality may not offset its liability for unremitted liquor-by-the-drink tax revenues by any amounts owed by the county school system for unpaid water-quality fees.

5. The municipality may not reduce future liquor-by-the-drink tax payments to the county school fund by any amounts that the county school system owes in water-quality fees.

ANALYSIS

Tenn. Code Ann. § 57-4-301(c) provides for the levying of a 15% tax on the sales prices of all alcoholic beverages sold for consumption on the premises. This tax, known as the "liquor-by-the-drink tax," is computed on the gross sales receipts and includes each and every retail sale. Id. The tax is collected by the Tennessee Department of Revenue and distributed pursuant to a formula that calls for a portion of the tax proceeds to be distributed to municipalities that have authorized the sale of liquor by the drink. Tenn. Code Ann. § 57-4-306(a)(2)(A). "[A]ny proceeds expended and distributed to municipalities which do not operate their own school systems separate from the county are required to remit one half (1/2) of their proceeds of the gross receipts liquor-by-the-drink tax to the county school fund." Id.

1. A school district does not have the authority to waive its statutory rights to receive tax revenues. See Tenn. Att'y Gen. Op. 97-104 (July 28, 1997) (involving undistributed local-option sales tax). "[T]axes are levied and collected for the public use and upon public trusts," and "[i]t is not in the power of the [municipal or county government] to relieve one and impose upon another a public burden, and no laches on its part or that of its officers can defeat the right of the public to have collected and rightfully appropriated, the public taxes." City of Memphis v. Looney, 68 Tenn. 130, 136 (1877); accord City of Maryville v. Blount County, No. 03A01-9209-CH-00320, 1993 WL 1887, at *5 (Tenn. Ct. App. Jan. 6, 1993) (no perm. app. filed). Accordingly, a county school board lacks the authority to waive its right to liquor-by-the-drink tax revenue. Moreover, even if a school board's entitlement to such tax revenue could be waived, it would require the approval of the county commission, since it is the county commission that "has the authority to appropriate the funds necessary to carry out the county education program." State ex rel. Weaver v. Ayers, 756 S.W.2d 217, 222 (Tenn. 1988).

2. In contrast to this State's general revenue laws, which impose interest at specific rates on unpaid tax liabilities, see, e.g., Tenn. Code Ann. § 67-1-801, there exists no specific statutory authority for interest to accrue on state tax revenues that have been distributed to a local governmental authority but have not been properly distributed by that authority.

Under some circumstances not applicable here, general statutes of limitations may apply to actions brought by counties and municipalities. See, e.g., City of Knoxville v. Gervin, 169 Tenn. 532, 89 S.W.2d 348 (1935) (holding that 10-year statute of limitations barred city's suit to enforce paving assessment lien); State ex rel. Lawrence County v. Hobbs, 194 Tenn. 323, 250 S.W.2d 549 (1952) (holding that 10-year statute of limitations barred county's suit against clerk and master for return of allegedly illegal salary payments). General statutes of limitations do not apply, however, when the matter at issue involves the local government's exercise of a sovereign function. Gervin, 169 Tenn. at 536, 250 S.W.2d at 351. "Public education in Tennessee is primarily a state function." City of Maryville, 1993 WL 1887, at *6. In seeking to recover tax revenues that should have been allocated to it pursuant to state statutes governing education funding, the county "acts as an arm of the state and is exempt from the statute of limitations." Id. A general statute of limitations cannot defeat the public's right to have the taxes allocated to the correct local governmental body. See id. (citing Looney, 68 Tenn. at 136).

Although the county school board may not waive its statutory right to receive liquor-by-the-drink tax revenues designated for the county school fund, the county may agree to allow the municipality to pay the undistributed tax revenues over time. Such an agreement would not constitute an unauthorized waiver of the school board's statutory right to receive those revenues.

3. The municipality is not entitled to offset its liability for collected but undistributed liquor-by-the-drink tax revenues by relying upon the local-option sales tax approved by the voters. The municipality's obligation to distribute liquor-by-the-drink tax revenues to the county school fund is independent of and separate from its obligation to distribute a portion of local option sales taxes to the school fund. See Tenn. Code Ann. § 57-4-306(a)(2)(A) (distributing portion of liquor-by-the-drink taxes to county school fund); Tenn. Code Ann. § 67-6-712(a)(1) (distributing portion of local-option sales taxes to school fund).

4. The municipality may not offset its liability for unremitted liquor-by-the-drink taxes by any amounts owed by the county school system for unpaid water-quality fees. The liquor-by-the-drink taxes are not owed directly to the county school board, but to the county school fund, which is administered by the county trustee and appropriated by the county commission. In contrast, any amounts paid by the county school board to cover the school system's continuing operations, such as water-quality fees, should be paid out of school-system funds that have already been budgeted and appropriated to the school board by the county commission. Inasmuch as the municipality is dealing with two distinct entities and accounts, it cannot achieve a direct setoff of the amounts due. Instead, the municipality should collect the debt for water-quality fees from the school board just as the municipality would collect any other debt owed to it.

5. For the same reason, the municipality may not offset future liquor-by-the-drink tax payments to the county school fund by the amounts the county school system owes in water-quality fees.

ROBERT E. COOPER, JR.
Attorney General and Reporter

JOSEPH F. WHALEN
Acting Solicitor General

MARY ELLEN KNACK
Senior Counsel

Requested by:
The Honorable Gerald McCormick
Majority Leader
18A Legislative Plaza
Nashville, Tennessee 37243