February 17, 2005
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 2-1/4% 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 theCounty 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 (½%) 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 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 (½%) 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 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.
Sidney D. Hemsley
Senior Law Consultant