Can the Tennessee judicial branch pay the annual $400 professional privilege tax for its judges, or would that violate the Tennessee Constitution's ban on increasing judicial compensation mid-term?

Plain-English summary

Tennessee imposes a professional privilege tax on people licensed in certain professions, including attorneys. Tenn. Code Ann. § 67-4-1702(5). Tennessee judges must be "learned in the law" (§ 17-1-106) and so must hold an active law license, even though they are forbidden by statute from actually practicing law (§ 17-1-105). The 2018 tax was $400 per year per attorney.

Director Deborah Taylor Tate of the Administrative Office of the Courts asked AG Slatery whether the judicial branch can pay this $400 tax for the judges it employs.

The opinion's bottom line: yes.

Tenn. Code Ann. § 67-4-1709(a) explicitly says: "Any employer, including any governmental entity, may choose to remit the tax . . . on behalf of persons subject to the tax who are employed by such employer." So the statutory authorization is plain.

The constitutional question is whether paying that tax for judges is a forbidden mid-term "increase" in judicial compensation under Tenn. Const. art. VI, § 7, which says judicial compensation "shall not be increased or diminished during the time for which they are elected" and prohibits "fees or perquisites of office." The opinion gives three reasons why this payment is not a forbidden increase.

First, "compensation . . . ascertained by law" includes the entire statutory scheme, not just base salary. Tenn. Code Ann. § 8-23-103 sets base salaries. Tenn. Code Ann. § 67-4-1709 authorizes employer-paid privilege tax. Both are part of "compensation . . . ascertained by law" because both are objectively computable. The payment is within the statutory framework, not on top of it. Hooker v. Haslam, 437 S.W.3d 409, 426 (Tenn. 2014).

Second, even on the stricter view that employer-paid privilege tax adds to base salary, the rule from Barry v. Wilson County, 610 S.W.2d 441, 444 (Tenn. Ct. App. 1980), is that the constitutional clause prohibits compensation alterations made by statute enacted during a judge's term. The relevant authorization in § 67-4-1709 was last amended in 2002. So for any judge elected after 2002, the payment statute was on the books before that judge's term began. There is no mid-term change, no constitutional violation.

Third, federal tax law treats employer-paid professional license fees as a working-condition fringe benefit excluded from gross income. 26 C.F.R. § 1.132-5(a)(1). The IRS Fringe Benefit Guide § 17 (Jan. 2014) makes this explicit for license fees that an employee could deduct as a business expense. If the IRS does not treat the payment as income to the employee, it is hard to argue that the same payment is a constitutionally significant "increase" to compensation under art. VI, § 7.

The opinion explicitly walks back a 2003 AG opinion (Tenn. Att'y Gen. Op. 03-081) that had reached the opposite conclusion. The 2003 opinion looked only to the "general" presumption that employer payments above salary are compensation; it did not consider working-condition fringe benefits and primary-beneficiary analysis. Because that earlier opinion's analysis was incomplete, the 2018 opinion treats it as not controlling.

The opinion also flags a separate path. Inactive-status attorneys are exempt from the professional privilege tax. Tenn. Code Ann. § 67-4-1708(a). Because Tennessee judges are statutorily forbidden from practicing law (§ 17-1-105), they may qualify for inactive status under Tenn. Sup. Ct. R. 9, sec. 10.7. A judge who applies for and is granted inactive status by the Board of Professional Responsibility would owe no privilege tax in the first place.

Currency note

This opinion was issued in 2018. 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. The professional privilege tax scheme in Tenn. Code Ann. §§ 67-4-1701 et seq. has been amended since 2018, so pull the current statute to confirm which professions remain subject to the tax and at what rate.

Common questions

Q: Why does Tennessee tax attorneys for the privilege of being licensed?
A: It is a privilege tax, not an income tax. Tennessee taxes persons licensed in certain professions, including attorneys, for the privilege of holding the license (Tenn. Code Ann. § 67-4-1702(5)). The opinion notes the rate was $200 when the scheme was enacted in 1992 and rose to $400 in 2002. The list of covered professions and the rate have changed since this 2018 opinion, so check current law.

Q: Is the privilege tax different from bar dues?
A: Yes. Bar dues are paid to the Tennessee Board of Professional Responsibility under the Supreme Court's licensing authority. The privilege tax is a separate state tax administered by the Department of Revenue.

Q: Why doesn't this opinion just rely on the inactive-status exemption?
A: Inactive status requires an application to the BPR and a finding that the attorney is not engaged in the practice of law. Some judges may not pursue inactive status for various reasons, including the requirement to reinstate before returning to practice. The opinion provides a backup answer that works whether or not a particular judge holds inactive status.

Q: Does this rule apply to other state employees who are licensed attorneys?
A: § 67-4-1709 authorizes any employer, including any governmental entity, to remit the tax for its covered employees. The rule is not limited to judges. The constitutional analysis (art. VI, § 7) is specific to judges, but § 67-4-1709's statutory authorization is general.

Q: Does this opinion say the state must pay the tax for judges?
A: No. The opinion answers a "may" question, not a "must" question. § 67-4-1709 is permissive ("may choose to remit"). Whether the judicial branch actually exercises that authorization is a budgeting and policy decision.

Q: What about local government judges or municipal judges?
A: The opinion focuses on state-level judges (Tennessee Supreme Court, Court of Appeals, Court of Criminal Appeals, and statutorily designated trial courts). Municipal courts and general sessions judges may have different employer arrangements; the opinion does not address them, but the § 67-4-1709 authorization applies broadly to any employer.

Background and statutory framework

The Tennessee professional privilege tax was enacted in 1992 and amended materially in 2002 (when the rate rose from $200 to $400). The list of covered professions includes attorneys (§ 67-4-1702(5)). The employer-remittance provision (§ 67-4-1709) was in place by the time of the 2002 amendments. The tax does not apply to inactive or retired licensees under the appropriate licensing board's rules (§ 67-4-1708(a)).

Tennessee judges are required by statute to be licensed attorneys (Tenn. Code Ann. § 17-1-106) but are barred from practicing law (§ 17-1-105). Together, those provisions create the awkward situation where a judge must hold a license they cannot use, and pay (or have paid for them) a tax on the privilege of holding that license.

Article VI, § 7 of the Tennessee Constitution protects judicial compensation from mid-term alteration. The compensation clause has historically been interpreted strictly: judges' base salaries cannot be raised or lowered during their terms. The opinion's contribution is to clarify that statutory authorizations to pay specific employee costs (like the privilege tax) that exist before the judge's term begins do not violate the clause, even if the dollar value of the benefit varies during the term.

Federal tax law's working-condition fringe benefit doctrine (26 C.F.R. § 1.132-5) provides additional support. The IRS treats employer-paid professional license fees as excluded from gross income when they are necessary to maintain a license required for the employee's job. That doctrine confirms that the payment is properly understood as a cost of the position, not as additional compensation.

Citations

• Tenn. Const. art. VI, § 7
• Tenn. Code Ann. §§ 8-23-103(1), (2); 17-1-105; 17-1-106
• Tenn. Code Ann. §§ 67-4-1702(5); 67-4-1708(a); 67-4-1709(a)
• Tenn. Sup. Ct. R. 7; R. 9, secs. 1, 4, 10.3(e), 10.7
• 26 C.F.R. § 1.132-5(a)(1), (a)(1)(v); § 1.62-1T(e)
• IRS Fringe Benefit Guide § 17 (Jan. 2014); IRS Publication 15-B (2017); IRS Publication 529
• Hooker v. Haslam, 437 S.W.3d 409 (Tenn. 2014)
• State ex rel. Sonnenburg v. Gaia, 717 S.W.2d 883 (Tenn. 1986)
• Barry v. Wilson County, 610 S.W.2d 441 (Tenn. Ct. App. 1980)
• Tenn. Att'y Gen. Op. 93-30 (Apr. 2, 1993); Op. 03-081 (June 25, 2003)

Source

• Landing page: https://www.tn.gov/attorneygeneral/opinions.html
• Original PDF: https://www.tn.gov/content/dam/tn/attorneygeneral/documents/ops/2018/op18-27.pdf

Original opinion text

STATE OF TENNESSEE
OFFICE OF THE ATTORNEY GENERAL
June 29, 2018
Opinion No. 18-27

Payment of Professional Privilege Tax for State Judges

Question 1
May the judicial branch of the state government, as employer, remit the professional privilege tax, as permitted under Tenn. Code Ann. § 67-4-1709, on behalf of judges employed by the State?

Opinion 1
Yes.

ANALYSIS

The Tennessee Legislature has required that, in addition to meeting the qualifications specified in article VI, sections 3 and 4 of the Tennessee Constitution, judges of the Tennessee Supreme Court, Court of Appeals, Court of Criminal Appeals, chancery courts, circuit courts, and criminal courts be "learned in the law, which must be evidenced by the judge being authorized to practice law in the courts of this State." Tenn. Code Ann. § 17-1-106. This statutory requirement amounts to a requirement that all of the specified judges be licensed to practice law in Tennessee, since no one is permitted to "engage in the 'practice of law' or the 'law business'" without a license issued by the Supreme Court. Tenn. S. Ct. Rule 7, Sec. 1.01.

But, while the Legislature requires these judges to hold a license to practice law, the Legislature at the same time prohibits them from actually practicing law. Tenn. Code Ann. § 17-1-105 ("No judge or chancellor shall practice law, or perform any of the functions of attorney or counsel, in any of the courts of this state."). In other words, although judges must be licensed as attorneys as a condition of employment as a judge, they may not actively practice law.

Tennessee levies a tax "on the privilege of engaging in" certain professions and occupations, and that professional privilege tax applies to "persons licensed as attorneys by the supreme court of Tennessee." Tenn. Code Ann. § 67-4-1702(5). The "tax levied on 'the privilege of engaging in certain occupations requiring registration or a license' do[es] not apply to a person so registered or licensed, if the person is inactive or retired pursuant to the regulations of the appropriate licensing board." Tenn. Code Ann. § 67-4-1708(a).

The Supreme Court has created the Board of Law Examiners for the State of Tennessee to determine initial eligibility for licensure for attorneys. Tenn. S. Ct. Rule 7. The Supreme Court has also created the Board of Professional Responsibility (the BPR) to oversee and administer a licensed attorney's continued fitness to be licensed to practice law. Tenn. S. Ct. Rule 9, sec. 1 and sec. 4. A licensed attorney who is not "engaged in the practice of law in Tennessee" as that term is defined in Rule 9, sec. 10.3(e), may apply to the BPR to assume inactive status. Tenn. S. Ct. Rule 9, sec. 10.7. A person who is granted inactive status remains licensed but may not actively engage in the practice of law in Tennessee. Reinstatement following inactive status is available provided certain conditions are met. Id.

Thus, to the extent that judges may qualify for inactive status pursuant to S. Ct. Rule 9 because they are prohibited by statute from practicing law in Tennessee while serving on the bench, the professional privilege tax would not apply to any judge who applies for and is granted inactive status by the BPR, the appropriate licensing authority. See Tenn. Code Ann. § 67-4-1708(a).

When the tax does apply to a person licensed to engage in one of the listed professions, that person is liable for payment of the professional privilege tax, but "[a]ny employer, including any governmental entity, may choose to remit the tax . . . on behalf of persons subject to the tax who are employed by such employer." Tenn. Code Ann. § 67-4-1709(a). Accordingly, the judicial branch, as employer of state court judges, is clearly authorized by the Legislature to remit the privilege tax on behalf of judges who are subject to the tax.

Even though the judicial branch is authorized to remit the professional privilege tax on behalf of the state court judges it employs, there is a question whether payment of the professional privilege tax by the employer on behalf of a judge would run afoul of the constitutional prohibition on increasing the "compensation" that the Legislature sets for elected judges during the time for which the judge is elected. The Tennessee Constitution provides that judges of the Tennessee Supreme Court and inferior courts

shall, at stated times, receive a compensation for their services, to be ascertained by law, which shall not be increased or diminished during the time for which they are elected.

Tenn. Const. art. VI, § 7. Nor may these judges "be allowed any fees or perquisites of office." Id. The question is premised on the theory that "compensation" as used in article VI, section 7, is synonymous with "base salary," that payment by the employer of the privilege tax is a benefit paid in addition to the base salaries the Legislature establishes for judges, and payment of the benefit in addition to the base salary is an "increase" in "compensation."

But "compensation" is not necessarily limited to "base salary." The words and terms in the Constitution should be given their plain, ordinary, and inherent meaning. Hooker v. Haslam, 437 S.W.3d 409, 426 (Tenn. 2014); State ex rel. Sonnenburg v. Gaia, 717 S.W.2d 883, 885 (Tenn. 1986). The "compensation" delimited by the Constitution is "compensation" to judges "for their services" as "ascertained by law." Tenn. Const. art. VI, § 7. First, "compensation for services" is commonly understood to include more than base salary. For example, "compensation," according to Black's Law Dictionary 301 (8th ed. 1999), "consists of wages and benefits in return for services." (Citation omitted.) Thus, even if payment of the professional privilege tax on behalf of the judges is viewed as a benefit, it falls within the scope of "compensation" as that word is commonly understood.

Second, "compensation ascertained by law" means "that the compensation is either expressly set by statute or is capable of being computed pursuant to an objective statutory scheme." Tenn. Att'y Gen. Op. 93-30, at 2 (Apr. 2, 1993). Since the Legislature has expressly authorized payment of the tax by any government employer on behalf of its employee, that payment, which is capable of being computed pursuant to an objective statutory scheme, i.e., the professional privilege tax scheme, is within the scope of compensation as "ascertained by law." It follows, then, that the payment would not increase compensation for the judges, since it is included within the scope not only of the ordinary meaning of "compensation for services," but also within the scope of the meaning of "compensation ascertained by law."

Third, even if payment of the tax were deemed an "increase," that increase would not be unconstitutional as applied to any judge whose term began after 2002. The constitutional prohibition on the increase or diminution of the compensation of judges during the time for which they are elected has been held to mean that the compensation may not be altered by statute enacted during that time. Barry v. Wilson County, 610 S.W.2d 441, 444 (Tenn. Ct. App. 1980). The professional privilege tax statutory scheme was first enacted in 1992 and any amendments to the portions of that statutory scheme relevant here were last made in 2002, when the tax rate was increased from $200 to $400. In short, any alteration in compensation made by the provision in the professional privilege tax law that permits an employer to pay the tax for the employee was enacted before, not during, the time for which judges whose terms began after 2002 were elected. Payment of the tax by the judicial branch for those judges would, therefore, not be an increase to compensation within the meaning of article VI, section 7.

When previously asked for an opinion on this issue, this Office began with the proposition that "compensation" was not defined in the Constitution, and it looked to cases defining "compensation" for federal income tax purposes. Based on those cases, this Office previously opined that, because "generally" there is a strong presumption that payments from an employer in addition to an employee's agreed-upon salary are additional compensation for services rendered, payment of the professional privilege tax by the judicial branch on behalf of judges would constitute additional, i.e., increased, compensation to judges and would, therefore, be prohibited by article VI, section 7 of the Tennessee Constitution. Tenn. Att'y Gen. Op. 03-081 (June 25, 2003).

However, the previous opinion did not look beyond the "general" treatment of payments made in cash or in kind by employers on behalf of employees. It, therefore, did not consider other applicable principles used in determining whether and when such payments are "compensation." For example, it did not consider that the payment of a professional membership fee will not be considered taxable income if the employer is the primary beneficiary of the payment, and that the employer is deemed the primary beneficiary whenever membership in the association is a requirement of employment. 26 CFR 1.132-5.

Importantly, the previous opinion did not factor into the analysis the "working conditions benefits" exclusion from income. If an employer provides an employee with a benefit, the cost of which would have been allowable as a business or depreciation deduction had the employee paid for it himself, that cost is not treated as income to the employee. This is known as the "working condition benefits" exclusion. See IRS Publication 15-B (2017), Employer's Tax Guide to Fringe Benefits.

In other words, "[g]ross income does not include the value of a working condition fringe [benefit]," and a "'working condition fringe [benefit]' is any property or service provided to an employee of an employer to the extent that, if the employee paid for the property or service, the amount paid would be allowable as a deduction under section 162 or 167." 26 CFR § 1.132-5(a)(1). And a cash payment made by an employer to an employee will qualify as a working condition fringe benefit as long as it is used for the payment of expenses in connection with a specific undertaking for which a section 162 or 167 deduction is allowed. 26 CFR § 1.132-5(a)(1)(v).

The IRS Fringe Benefit Guide Jan. 2014, section 17, provides additional guidance specifically on the payment by the employer for an employee's professional license and for expenses necessary to maintain a license required for employment.

Employer reimbursements to employees for the cost of their professional licenses and professional organization dues may be excludable [from gross income] if they are directly related to the employee's job. Once an employee has completed the education or experience required for a professional license, the expenses necessary to maintain a license or status are considered ordinary and necessary business expenses. If paid or reimbursed by an employer for an employee, the fees are a working condition fringe benefit. . . . If paid by an individual, with no employer reimbursement, the fees are deductible as a business expense on the individual's Federal income tax return. IRC §162 Reg. §1.62-1T(e).

Because the analysis in Tenn. Att'y Gen. Op. 03-081 (June 25, 2003), is incomplete, the conclusion reached is not controlling. The payment by the employer of amounts necessary for an employee to maintain his professional license is not considered compensation to the employee for federal income tax purposes. It is, to the contrary, specifically excluded from gross income. Thus, even under the very broad IRS definition of gross income, payment by the judicial branch of the professional privilege tax for its employee judges would not be deemed compensation to the judges and, accordingly, would not "increase" their compensation in violation of the Tennessee Constitution.

In sum, the judicial branch of the state government, as employer, may remit the professional privilege tax, as permitted under Tenn. Code Ann. § 67-4-1709, on behalf of judges employed by the State. That payment by the employer is not an "increase" in a judge's compensation within the meaning of article VI, section 7 of the Tennessee Constitution. First, since the Legislature has expressly authorized payment of the tax by a government employer on behalf of its employees, that payment is within the scope of, i.e., not in addition to, compensation for services as "ascertained by law." Second, even if payment of the tax were deemed an "increase," it would not be an increase for any judge whose term began after 2002 because the payment statute was enacted before their terms began. Third, payment of the professional privilege tax by the employer would not be treated as income to the employee, and therefore not an "increase" to the employee's salary, even under the very broad IRS definition of "gross income," because it would be excluded from income as a "working conditions [fringe] benefit."

[Footnote: The "base salaries" of judges, justices, and chancellors as of 1990 are fixed by statute. Tenn. Code Ann. § 8-23-103(1). Those base salaries must be adjusted each year in accordance with a statutory scheme centered on changes in the average consumer price index. Tenn. Code Ann. § 8-23-103(2).]

[Footnote: It is possible, of course, that the payment in a particular case may not qualify as a working conditions benefits exclusion, in which case this part of the analysis would not necessarily support the constitutionality of the payment. For example, it may be that an individual employee is not allowed to deduct the expense on his income tax return due to his particular circumstances, in which case the working conditions benefits exclusion would not apply.]

HERBERT H. SLATERY III
Attorney General and Reporter

ANDRÉE SOPHIA BLUMSTEIN
Solicitor General

Requested by:
The Honorable Deborah Taylor Tate
Director, Administrative Office of the Courts
Nashville City Center, Suite 600
511 Union Street
Nashville Tennessee 37219