WASHINGTON COUNTY SCHOOL SYSTEM, ET AL.
THE CITY OF JOHNSON CITY, TENNESSEE
Session Heard at Nashville October 4, 2018
by Permission from the Court of Appeals Chancery Court for
Washington County No. 42491 E. G. Moody, Chancellor
one of five cases on appeal to this Court regarding the
proper distribution of liquor-by-the-drink tax proceeds
between a county and a municipality within the county. In
each case, the county had not approved the
liquor-by-the-drink sales, but the city had approved such
sales. The Commissioner of the Tennessee Department of
Revenue, who collects taxes on all liquor-by-the-drink sales,
distributed tax proceeds to the defendant cities in
accordance with the liquor-by-the-drink tax distribution
statute, Tennessee Code Annotated section 57-4-306. The
statute required the recipient cities to then distribute half
of their proceeds "in the same manner as the county
property tax for schools is expended and distributed."
Tenn. Code. Ann. § 57-4-306(a)(2)(A) (2013). In each
case, the recipient city distributed half of its tax proceeds
to its own city school system and did not share the proceeds
with the county. The counties sued the cities, claiming that
the statute required the cities to distribute the tax
proceeds as the counties distribute the county property tax
for schools, which is pro rata among all schools in the
county based on average daily attendance. In the instant
case, the trial court held in favor of the county, concluding
that the distribution statute was ambiguous and that public
policy considerations favored the county's
interpretation. Upon interlocutory appeal, the Court of
Appeals reversed. After considering the statutory language,
the statutory framework, and the legislative history, it
adopted the interpretation of the statute advocated by the
city. We agree with the Court of Appeals and hold in favor of
R. App. P. 11 Appeal by Permission; Judgment of the Court of
Appeals Affirmed; Judgment of the Trial Court
Logan, Jr., Cleveland, Tennessee, for the appellants,
Washington County School System, by and through the
Washington County Board of Education, and Washington County.
Erickson Herrin, Johnson City, Tennessee, for the appellee,
City of Johnson City, Tennessee.
Kirby, J., delivered the opinion of the Court, in which
Jeffrey S. Bivins, C.J., and Cornelia A. Clark, Sharon G.
Lee, and Roger A. Page, JJ., joined.
issues in this case are better understood with some knowledge
of the development of the pertinent liquor-by-the-drink
statutes. Consequently, we offer some background on the
history of the statutes before we outline the facts and
analyze the issues.
the years of federal prohibition (1920-1933), Tennessee had
"bone dry" laws, which criminalized the sale,
purchase, receipt, possession, transport, and manufacture of
alcoholic beverages. City of Chattanooga v. Tenn.
Alcoholic Beverage Comm'n, 525 S.W.2d 470, 472
(Tenn. 1975); Tenn. Op. Att'y Gen. 79-215 (May 3, 1979).
After prohibition ended, Tennessee enacted a "local
option" law authorizing counties to hold county-wide
local option elections on whether to allow off-premises
(package) sales of alcoholic beverages within their borders.
City of Chattanooga, 525 S.W.2d at 472; Chadrick
v. State, 137 S.W.2d 284, 285 (Tenn. 1940); see also
Templeton v. Metro. Gov't of Nashville & Davidson
Cnty., 650 S.W.2d 743, 754 (Tenn. Ct. App. 1983).
"The 'bone dry law' continued in effect in
counties not electing to come under the provisions of the
local option law." City of Chattanooga, 525
S.W.2d at 472; see also Renfro v. State, 144 S.W.2d
793, 794 (Tenn. 1940).
1967, the Legislature passed comprehensive legislation
related to liquor sales for on-premises consumption, i.e.,
liquor by the drink (hereinafter "LBD"). We refer
to this as "the LBD Act." The LBD Act
"authorize[s] the sale of intoxicating liquors by the
drink for consumption on the premises, impose[s] taxes upon
such sales[, ] and provide[s] for the collection
thereof." Aetna Cas. & Sur. Co. v. Woods,
565 S.W.2d 861, 865 (Tenn. 1978). Initially, the LBD Act
allowed only the largest counties to hold local option
elections. See Tenn. Code Ann. § 57-164 (1968).
Gradually, in increments, the Act was amended to allow all
counties-as well as all municipalities-to approve LBD sales
by local option election. See 1987 Tenn. Pub. Acts,
ch. 456 § 2; 1992 Tenn. Pub. Acts, ch. 711 § 1.
jurisdiction that approves LBD sales, such sales can lawfully
be made by the establishments enumerated in the statutes,
including restaurants, hotels, and sports facilities.
See Tenn. Code Ann. § 57-4-101 (2013). Private
clubs are among the enumerated establishments, but they are
also permitted to sell LBD even in counties or municipalities
that have not adopted LBD.
Code Annotated section 57-4-301(c) levies a 15% tax on all
LBD sales. Tenn. Code Ann. § 57-4-301(c) (2013).
We refer to this as "the LBD tax." Retailers
collect the LBD tax from consumers and then forward the tax
proceeds to the Commissioner of the Tennessee Department of
Revenue ("Commissioner"). See Tenn. Code
Ann. § 57-4-302 (2013 & 2018). The Commissioner then
distributes the LBD tax proceeds in accordance with the
statute at issue in this case, Tennessee Code Annotated
section 57-4-306. We refer to this as "the distribution
case involves the application of the distribution statute as
it existed prior to the enactment of a July 2014
amendment. The relevant versions of the distribution
statute required the Commissioner to distribute 50% of all
LBD tax proceeds to Tennessee's "general fund to be
earmarked for education purposes." Tenn. Code Ann.
§ 57-4-306(a)(1). The Commissioner was directed to
distribute the remaining 50% of the tax proceeds back
"to the local political subdivision" that generated
the proceeds. Id. § 57-4-306(a)(2).
to this appeal, the remaining provisions of the distribution
statute described what was to be done with the tax proceeds
sent back to the originating local political subdivision. The
distribution statute said that half of those proceeds would
go to the general fund of the county, city, or town in which
the taxes were generated. Id. §
57-4-306(a)(2)(B). The other half, the distribution statute
stated, "shall be expended and distributed in the same
manner as the county property tax for schools is expended and
distributed." Id. § 57-4-306(a)(2)(A).
Interpretation of this provision is the issue presented to us
in this case.
underlying facts in this case are essentially undisputed.
Johnson City ("the City") lies in Washington County
("the County"). The City has at all relevant times had
its own municipal school system ...