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Original Author: Shechter, Leslie
Date of Material: 12/17/1992


Allocation of the First One-Half of the Local Option Sales Tax by the County to the City

Reviewed Date: 06/21/2021
MTAS was asked whether the first half of the sales tax must be apportioned among the school system and whether the county could allocate these funds to school debt retirement.

December 17, 1992

I have looked into the situation regarding allocation of the first one-half of the local option sales tax by the County to the City. It is my opinion that the City is entitled to receive the weighted average daily attendance portion of the first one-half of the one cent sales tax and, that the County has no authority to take those monies and deposit them in the County Debt Service Fund without the approval of the City.

The facts, as I understand them are as follows:

Up until 1987, the County was properly apportioning the first one-half of the sales tax to the city schools on the basis of weighted average daily attendance as required by Tennessee Code Annotated, § 67-6-712(a)(1) and § 49-3-315(a).

T.C.A. § 49-3-315(a)(1) requires that:

...all school funds for current operation and maintenance purposes collected by any county...shall be apportioned by the county trustee among the LEAs therein on the basis of the WFTEADA maintained by each, during the current school year.

T.C.A. § 67-6-712(a)(1) requires one-half of the proceeds from the local option sales tax to be "expended and distributedin the same manner as the property tax for school purposes is expended and distributed."

In 1987, the County stopped apportioning to the city its share of the first one-half of the sales tax and put the monies directly into the School Debt Service Fund. County Audit questioned this during their 1987 audit and sought the advice of the Attorney General. Pending a ruling by the Attorney General, no formal audit findings regarding this allocation were made for the years 1987-1989. By informal opinion letter, dated March 15, 1991, the Attorney General confirmed County Audit's findings, ruling that
the statutes mandated that the first half of the sales tax must be apportioned among the school system and the county could not, without permission of the local governing body of the city school, allocate these funds to school debt retirement. It was up to the city and special school systems to determine whether to pass back these funds to the County for debt retirement pursuant to Tennessee Code Annotated, § 67-6-712(a)(3) which provides:

any county, city, town, incorporated area, or special school district entitled to receive the proceeds described in subdivisions (a)(1)...shall have the power and authority, by resolution of the governing body thereof, to pledge such proceeds to the punctual payment of principal of and interest on bonds, notes or other evidence of indebtedness issued for the purpose for which such proceeds are permitted to be spent pursuant to such subdivisions (a)(1).... (Emphasis mine)

This informal attorney general opinion relied on the Supreme Court decision of City of Harriman v. Roane County, 553 S.W.2d 904 (Tenn. 1977) wherein the court found:

Under T.C.A. § 67-3052(1) [now § 67-6-712] the county is directed to expend one-half of its sales tax proceeds for school purposes, and under T.C.A. § 49-605 [now § 49-3-315] these are to be divided with the city school system on an average daily attendance basis. [Id., at 908.]

The Attorney General added:

This office has previously opined that under the statutes and City of Harriman, the one-half of the local option sales tax designated for school purposes may be spent to retire school debt but must first be apportioned between the county and the city pursuant to T.C.A. § 49-3-315(a). Op. Tenn. Atty. Gen. 81-271 (August 27, 1981). This is also the implication of T.C.A. §67-6-712(a)(3).

Thus County may apply its portion of the local sales tax proceeds under T.C.A. §67-6-712(a)(1) to the county's debt service fund to retire school debt. However, the county must first apportion the local sales tax proceeds received ...between the city and the county.

Acting on the advice of CTAS; and contrary to the recommendation by County Audit, the County unilaterally continues to appropriate the city's share of the first one-half of the sales tax directly to the School Debt Service Fund.

Coincidentally, the Attorney General was asked for a formal opinion by Representative L. Don Ridgeway on this very same subject which was given on January 24, 1992. The Attorney General was asked whether the county commission could appropriate to county debt service all of the first half of the local option sales tax without obtaining approval of such appropriation from the Special School District. The Attorney General gave the same answer in the formal opinion as they had on March 15, 1991.

The Attorney General argued because property taxes levied for education are apportioned and, because the statute requires that the local option sales tax be "distributed in the same manner as the county property tax for school purposes," then the local option sales tax must be apportioned between the county and city/special schools.

CTAS's premise is based on the notion that there is no specific requirement that sales tax revenue be placed in the general purpose school fund. Thus, like the property tax, when it is levied specifically to retire school bonded indebtedness, these monies may go directly to the debt service fund and need not be apportioned. In other words, it is only the property tax levied for general purpose operation and maintenance of schools that need be apportioned; property tax designated to retire bond debt need not be apportioned. Because, CTAS argues, sales tax is "distributed in the same manner as the county property tax for school purposes," then sales tax "designated" to pay school bond debt (which is also a "school purpose") need not be apportioned either.

In my opinion, this argument confuses distribution of the sales tax with expenditure of the sales tax and conflicts with the plain language of the statute; a statute which governs the distribution of the sales tax. The statute does not provide for exceptions to the requirement of apportionment and nowhere states that the County may unilaterally appropriate or "designate" that all of the first one-half of the local sales tax will go to the school debt service or any school purpose without the explicit permission of the city or special school district. If this was the meaning of the language in 67-6-712(a)(1), as CTAS argues, what would be the reason for paragraph (a)(3) which provides that the city/special schools may approve, by resolution, their share going to debt service. The County simply may not avoid this part of the statute or make the determination of how these monies are to be spent on behalf of the city/special schools.

The Attorney General has ruled consistently on this same question for many years. County Audit has reported that the County is mis-allocating the first one-half of the sales tax by failing to apportion the city's share of the revenue to the city schools. The County apparently seeks yet another determination by the Attorney General. I do not believe the opinion of the Attorney General will change.

I think your case is a meritorious one and if the County continues to neglect to give your school the ADA share of this tax you should take the matter to the courts. However, it is likely that the County will argue that they will simply reduce the amount of school property tax revenue that is apportioned to the city schools so the fiscal gain may be negligible. Nevertheless, the County should be made to properly apportion the tax revenue as required by law and pay your schools what has been owed since 1987.

I am providing you copies of all of the Attorney General opinions and a copy of the 1992 annual audit report for the County discussing the improper allocation. If you need further assistance, please do not hesitate to call.


Leslie Shechter
Legal Consultant