February 17, 2005
Dear Mayor:
You have the following question: Is the City entitled to begin receiving its share of the
sales tax due it under Tennessee Code Annotated, section 67-6-712, when the air condition
program for the schools in the County contemplated in the contract between the city and the
county under which the city relinquished its right to its share of the sales tax in favor of the
county for that program, has been paid?
The answer is yes, assuming there were no amendments to the contract that would entitle
the County to continue to receive the city’s share of the sales tax.
Tennessee Code Annotated, section 67-6-712 provides for the distribution of the county
sales tax, as follows:
- One-half of the proceeds goes to the county school system.
- The other one-half is distributed as follows:
- The sales tax collected in the unincorporated portions of the county goes to the
county.
- The sales tax collected in the incorporated cities and towns, goes to those cities
and towns.
However, the same statute authorizes the county and cities by contract to provide for a
different distribution of the second half of the sales tax (the half not allocated to school
purposes). The County and the City entered into such a contract on July 28, 1997.
The first WHEREAS of that contract indicates that the local option sales tax for the
County was increased by 1/2% on “May _______, 1994, in a county-wide referendum” from 21/4% to 2-3/4%. The second WHEREAS of the contract indicates that “the parties have
determined that the air conditioning project for various schools in the County School System is a
needed and worthwhile project.....” The third WHEREAS of the contract declares that:
[T]he City has heretofore agreed that this increase of one-half (2%)
in local option sales tax rate should be used by the County to pay
for the $2,000,000 air conditioning program for schools in the
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County....
Generally, WHEREAS’es in contracts are not substantive, but they can be used to
determine the intention of the parties. The WHEREAS’es in this contract clearly reflect the
intention of the County and the City, that the City allocate to the County its share of the 1/2%
increase in the sales tax adopted by the County sometime in May, 1994.
Paragraph 3 of the contract provided that:
This contract shall terminate upon complete and total payment of
the outstanding debt for the air conditioning program, but in no
event shall this contract term exceed a total of fifteen (15) years
from September 1, 1994. However, if the County or the County
Schools have a need for additional money for other purposes, this
relationship may continue by mutual agreement under the
provisions of a new contract.
It is my understanding that the debt for the air conditioning program has been paid, that
no amendments to the contract have been made, and that no new contracts for the distribution of
the sales tax have been created.
Paragraph 1 of the contract provides that the County Trustee can determine by appropriate
mathematical formula the amount of the 1/2% increase in the county sales tax that would
normally have been paid to the City under Tennessee Code Annotated, section 67-6-712, and pay
that amount into the County Debt Service Fund “for the purpose of debt service on the air
conditioning debt.” No amount of the debt for the air conditioning program is reflected in any of
the paragraphs of the contract, but as pointed out above, the fourth WHEREAS in the contract
clearly states that, “[T]he City has heretofore agreed that this increase of one-half (2%) percent in
local option in local option sales tax rate should be used by the County to pay for the air
conditioning program....” It is also clear from Paragraph 1 of the contract that the City did not
agree to pay any specific amount toward the debt, that all it agreed to pay was the sales tax to
which it was entitled from the 1/2% increase adopted by the county in May, 1994.
Under Paragraph 2 of the contract, the Contract took effect from the date of the execution
of this agreement [July 28, 1997] for all future sales tax revenue or such time as actual collection
shall begin by the County Trustee with the August, 1997 distribution by the state of Tennessee or
at such time as the City first becomes eligible for distribution of the sales tax revenue affected by
this agreement.
That paragraph indicates that the contract applies only to revenues from the city’s share of
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the sales tax beginning with: July 28, 1997, or one of the two points specified in Paragraph 2
after that date.
In all events, under Paragraph 3, the contract terminates when the air conditioning debt is
paid. As I understand it, that event has occurred. If that is the case, it is difficult to envision any
claim of the County to the proceeds from the 1/2% increase in the sales tax controlled by the
contract.
The reported case of City of Gatlinburg v. Sevier County Board of Education, 479
S.W.2d 811 (Tenn. Ct. App. 1981) makes it clear that the courts will hold governments to their
intentions when they make contracts for the distribution of sales tax proceeds under Tennessee
Code Annotated, section 67-6-712. Similarly, so does Lenoir City v. Loudon County, 435
S.W.2d 824 (1968).
The unreported Tennessee Court of Appeals, Middle Section case of Municipalities of
Waynesboro and Clifton v. Wayne County, filed May 5, 1981 supports that conclusion. There
those parties entered into a contract for the distribution of the city’s share of the non-school
portion of the sales tax, but the contract did not specify a termination date. The Court looked to
the intent of the parties to how long the contract was to last. It determined that there were two
outstanding county school bond issues at the time the contract was executed, and that the parties
intended the proceeds of the sales tax covered by the contract help pay those bonds. For that
reason, the Court found that the contract would extend to the pay-off date of those bonds. The
courts would not even need to reach that far to interpret the City-County contract. That contract
has two termination dates, the first of which is the date the debt for the air conditioning
improvements is paid.
In addition, The Tennessee Court of Appeals, Eastern Section, held in the unreported case
of State of Tennessee ex rel. Town of Farragut v. County of Knox, 6 TAM 7-12 (filed March 11,
1981), that Tennessee Code Annotated, section 67-6-712, entitled the Town of Farragut to the
share of sales tax provided for in that statute. That was true, said the Court even though before
the Town of Farragut was created, Knox County and the City of Knoxville had years previously
designated all sales taxes to be used for educational purposes, earlier countywide referenda had
pledged the sales tax revenue for school purposes, and after its creation, the Town of Farragut
operated no school system,. Tennessee Code Annotated, section 66-6-712 must be followed,
reasoned the Court, and that statute allocated one half of the sales tax collected in the
incorporated cities be paid to the incorporated cites.
The facts I have been given indicate that the air conditioning program debt has been paid.
If that is so, the contract is exhausted and terminated, and the city is entitled to the portion of the
non-school one-half of the sales tax under the prescription mandated by Tennessee Code
Annotated, section 67-6-712, from the date the contract was exhausted and terminated.
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Sincerely,
Sidney D. Hemsley
Senior Law Consultant
SDH/