Appeals court: Johnson City doesn't have to pay Washington County for past liquor-by-the-drink taxes

Zach Vance • Updated Dec 28, 2017 at 10:55 PM

In a monumental ruling that will save Johnson City millions of dollars, Tennessee’s Court of Appeals at Knoxville reversed a previous court decision that ordered the city to share years of liquor-by-the-drink tax revenue with Washington County.

On Wednesday, Judges Thomas Frierson, Michael Swiney and Richard Dinkins issued the decision, effectively dismissing Washington County’s complaint, first filed in 2014, that sought $3.4 million in liquor-by-the-drink tax collections from Johnson City.

The county’s attorney based the lawsuit on language in the statute requiring the revenues to be distributed in the same manner as property tax revenues, though the city’s attorney argued that section only applies if municipalities do not operate their own school districts.

“Determining the municipality was not required under the applicable version of the statute to share its liquor-by-the-drink tax revenue with the county, we reverse the trial court’s grant of declaratory judgment and grant summary judgment in favor of the municipality, dismissing the county’s complaint,” the order states.

As one of four similar cases, the Court of Appeals issued similar decisions regarding liquor-by-the-tax lawsuits involving Sullivan County and Bristol; Blount County and Maryville and Bradley County and Cleveland. 

Those decisions, however, upheld previous court rulings dismissing the counties’ claims to portions of the revenue. The Johnson City and Washington County lawsuit was the only to be reversed.

In October 2016, Sullivan County Chancellor E.G. Moody surprised many when he sided with Washington County on the matter, labeling the liquor-by-the-drink state statute as “ambiguous.”

Under state law, half of liquor-by-the-drink tax revenue collected is kept by the state for educational purposes, while the other half goes to “the local political subdivision,” with half of the local disbursement earmarked for education.

Because the court determined the statute ambiguous, the appeals court centered its attention on two things: old attorney general opinions commenting on the liquor-by-the-drink statute and the intent of the legislators who passed a liquor-by-the-drink amendment in 1982.

To prove the legislators’ intent, Attorney Erick Herrin, who represented Johnson City on the case, began digging through old state archives of General Assembly hearings and committee meetings.

“The biggest one was the transcript that we got out of the state archives of cassette tapes where the legislators were talking about this statute before they voted on it,” Herrin said. “It was clear from that transcript that the legislators, who were sponsors of the bill back in 1982, their intention was for tax revenue out of liquor-by-the-drink generated within the city limits of the city, the city got to keep it if the county had not passed a (liquor-by-the-drink) referendum.”

Included in the ruling is portion of the transcribed conversation between state Sens. Ray Albright and Ernest Crouch, where Albright assures Crouch that if a municipality is operating its own school system, the liquor-by-the-drink taxes would still go to the city.

In 1980, Johnson City became the first of the Tri-Cities to adopt a liquor-by-the-drink sales tax during a referendum decided by just six votes, a referendum that Herrin recalled being challenged all the way to the state Supreme Court before it was upheld.

Johnson City keeps between $500,000 and $600,000 a year in liquor-by-the-drink sales tax revenue.

Washington County has never passed a referendum allowing liquor-by-the-drink, and thereby, according to the appellate court’s ruling, was not eligible for any of its liquor-by-the-drink revenues.

Herrin said the county could attempt what’s called a “permissive appeal” to the Tennessee Supreme Court on the ruling.

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