Knowledgebase-Legality of City-County Sales Tax Allocation Agreement


Information Product

Title:Legality of City-County Sales Tax Allocation Agreement
Summary:MTAS was asked to determine whether there is any way for the city to get out of the contract under which the city waived its share of the sales tax to the county for a term
ending upon the payment of a 2.4 million bond issue.
Original Author:Hemsley, Sid
Co-Author:
Product Create Date:04/13/92
Last Reviewed on::06/27/2017
Subject:Contracts; Intergovernmental agreements; Tax collection; Taxes--Sales
Type:Legal Opinion
Legal Opinion:

Reference Documents:

Text of Document: You asked me to determine whether there is any way for the city to get out of the contract under which the city waived its share of the sales tax to the county for a term ending upon the payment of a 2.4 million bond issue. In my opinion, the answer is no.

The contract in question calls for the city to waive its right to revenues generated by an additional sales tax, apparently approved by referendum on November 2, 1976. The term of the contract is from September 15, 1976 until a bond issue of 2.4 million dollars to finance to construction of a new high school for the county is paid. It is clear from the terms of the contract that both the city and the county understood that the purpose of the tax was to finance construction of the new high school.

In support of my opinion, I am sending you a copy of a letter on the same question I wrote to the another city a month or so ago (the letter says April 10, but that is because the computer dates letters stored in it as of the date they are called to the screen). I draw your attention particularly to the discussion of Hamblen County et al. v. City of Morristown et al, 584 S.W.2d 673 (1979), at the bottom of page 2. That case by itself indicates that the city is not in a good legal or equitable position to escape the contract.

In addition, I am enclosing a copy of The Municipalities of Waynesboro and Clifton, Tennessee v. Wayne County, Ct. App., Middle Section, May, 1981. In that case, the two contracts entered into between the parties in 1965 and 1974 did not have a term, but the court set one ending in the year 2000 when several bond issues to finance the Wayne County schools would be paid off. The Court made it clear that what is now Tennessee Code Annotated, section 67-7-712(a)(2)(C), authorized municipal contracts for the distribution of the sales tax lasting beyond the existing board. Important in that case is the Court's declaration that:

Where the county maintains the school system and on the strength of the agreement issued bonds for the construction and improvement of schools in the county, including some schools in the municipality involved, the court should give effect to the intent of the parties.

In Wayne County, said the Court, the intent of the parties was for the sales tax to be used to improve, and to pay the indebtedness of, the Wayne County school system.
The intent of the parties seems to be clear on the face of the agreement between the City and the County: to provide the funds for the construction of a new high school for the County. It was undoubtedly on the strength of that agreement that theCounty issued the bonds to finance the construction of the school. Both the law and the equity favor the County.

On the basis of the Hamblen County and the Wayne County cases cited above (and the cases cited therein), I do not believe the courts will permit the City to escape the contract in question until the bond issue is paid.

If I can help you further in this or any other matter, please let me know.

Sincerely,

Sidney D. Hemsley
Senior Law Consultant
SDH/

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