July 18, 2002
Dear City Manager:
You have the following question communicated to me through David Angerer: Can the
city give prospective new retail stores a sales tax rebate as an incentive to locate in the city? I
assume that the question applies only to the local option sales tax.
The answer is no.
A large number of cases hold that a municipality or county cannot exempt property in the
city from property taxes. Those cases have rejected a number of tax abatement and rebate
schemes under which a class of property owner would receive tax relief of one kind or another.
[Jones. v. Memphis, 101 Tenn. 117 (1898); Bell v. Town of Pulaski, 184 S.W.2d 384 (1945);
Corporation of Sevierville v. King, 184 S.W.2d 381 (1939); American Bemberg Corp. v. City of
Elizabethton, 175 S.W.2d 535 (1943); Graham v. Spivey, 133 S.W.3d 460 (1939); City of
Nashville v. State Board of Equalization, 360 S.W.2d 458 (1962); Metropolitan Government of
Nashville & Davidson County v. Hillsboro Land Co., 436 S.W.2d 850 (1958); Federal Express
Corp. v. Tenn. State Board of Equalization, 717 S.W.2d 873 (Tenn. 1986); Albert v. Williamson
County, 798 S.W.2d 758 (Tenn.1990).] Those cases are broad enough to include property tax
relief in the form of abatement or rebates. They may also be broad enough to apply to any form
of taxation, but the inquiry need not end there.
Surprisingly, there appear to be no Tennessee cases directly on the question of whether a
municipality can give a sales tax rebate. However, the sales tax is collected from the retailer on
the goods and services subject to the sales tax, and the retailer collects the tax from the consumer
“insofar as it can be done.” [Tennessee Code Annotated, ' 67-6-502.] There is no question, then,
that if a municipality gives certain business sales tax rebatesBin the case contemplated by your
question, to new businessesBit is expending municipal revenues, the sales tax already having
been collected by the retailer from the consumer.
The courts have held on numerous occasions that Article II, ' 29, of the Tennessee
Constitution, which requires local government expenditures to be for a “Apublic purpose,”
prohibits counties and cities from directly aiding individual private businesses and industries on
the ground that such aid is not a public purpose. [See, for example, Ferrell v. Doak, 275 S.W.2d
29 (1924); Abzill v. Lexington Mfg. Co., 221 S.W.2d 522 (1949).] The courts have upheld what
amounts to the aid of individual businesses and industries by counties and cities where the aid
flows through various industrial development statutes. [See, for example, McConnell v. City of
Lebanon, 314 S.W.2d 12 (1975); City of Fayetteville v. Wilson, 367 S.W.2d 772 (1963); Small
World, Inc. v. Industrial Development Corporation Board, 332 S.W.2d 596 (1976); West v.
July 18, 2002
Page 2
Industrial Development Board of City of Nashville, 332 S.W.2d 201 (Tenn. 1960); ChattanoogaHamilton County Hospital Authority v. City of Chattanooga, 580 S.W.2d 322 (1979).]
But in Smith v. City of Pigeon Forge, 600 S.W.2d 231 (Tenn. 1980), the Tennessee
Supreme Court also drew a line in the sand with respect to expenditures of taxes for the aid of
economic development where the expenditures were not enacted pursuant to the public policy of
the state, and where there were no standards governing such expenditures. In that case Public
Acts 1976, Chapter 808, authorized the City of Pigeon Forge to levy a 1% gross receipts tax on
business. The City passed an ordinance providing that:
For the purpose of expending revenues derived from this
ordinance, the city recorder shall deposit twenty-five percent of all
revenues in a special reserve fund. The Board of Commissioners
shall by appropriate resolution earmark any portion of said funds
from the special reserve funds for projects, purchases, or expenses
deemed appropriate. The remaining seventy-five percent shall be
expended in a manner so as to be directly or indirectly beneficial to
the business community and tourism in general.
The Court held that the 75% of the gross receipts allocated by the ordinance to business
and tourism was a violation of the public purpose provision of Article II, ' 29, of the Tennessee
Constitution. The Court conceded that the concept of what is a public purpose had been
expanded by McConnell and Wilson, but reasoned that:
This case is clearly distinguishable from McConnell and Wilson,
where expenditures were authorized pursuant to clearly expressed
public policy of the State, responsive to a declared crisis and with
standards and checks to be exercised by public officials upon the
use of the funds....The express language of Pigeon Forge ordinance
143 mandates the use of the seventy-five percent of the tax revenue
for the benefit of the business community and tourism leaving the
public at large with only the remote hope that it may derive some
incidental benefit from the promotion of private business
enterprises wherein neither it nor its representative have any
participation in management or profits. [At 233]
For that reason, concluded the Court, the ordinance “allocates tax revenues beyond the
pale of public purpose in violation of the Tennessee Constitution, Article 2, ' 29 and the
decisions of this Court.” [At 233]
July 18, 2002
Page 3
Read closely, Smith v. City of Pigeon Forge actually imposes three tests with respect to
local government expenditures in aid of private businesses or industries:
1. The expenditures must be for a public purpose;
2. The expenditures must be authorized by law;
3. The law must contain adequate standards and checks.
In reality, using sales tax rebates as an incentive for new retail businesses to locate inside
the city would amount to the city’s expenditures of its sales tax revenues in the aid of private
retail businesses, and would meet none of the above tests.
Sincerely,
Sidney D. Hemsley
Senior Law Consultant
SDH/