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Tennessee Supreme Court sides with Johnson City, Bristol in liquor-by-the-drink suit

Zach Vance • May 10, 2019 at 7:56 PM

The Tennessee Supreme Court sided with Johnson City, Bristol and three other cities this week, ruling that liquor-by-the-drink tax proceeds do not have to be shared with counties.

The definitive ruling, written by Justice Holly Kirby, settled five lawsuits that centered on the disbursement of taxes collected from the sale of liquor for on-premise consumption, otherwise known as liquor-by-the-drink, which is allowed only in cities or counties that have approved it by referendum.

Under current law, the state keeps half of those taxes and sends the other half back to the city or county in which it was collected.

For more than 30 years, cities with school systems had used its entire portion for education without sharing with the respective counties they were located in. Kirby based her ruling on the state legislature, in all those years, not choosing to change the law, an indication that lawmakers agreed with how the statues were being applied.

“In its opinion, the Court noted that, for over thirty years, cities and counties across Tennessee had been handling liquor-by-the-drink tax proceeds in the same way: cities kept their portion of the tax proceeds for their own schools and did not share the proceeds with the counties,” a press release from the Tennessee Supreme Court stated.

“The Tennessee General Assembly was aware of this longstanding practice. During that 30-year period, the General Assembly amended the liquor tax laws several times, but it chose not to amend the laws on the cities’ responsibilities as to distributing the liquor tax proceeds. This indicated that the legislature agreed with how the cities and counties were applying the liquor tax statutes.”

In 2014, five counties that had not approved a liquor-by-the-drink referendum — Blount, Bradley, Coffee, Sullivan and Washington counties -— challenged that precedent by filing lawsuits against their respective cities, claiming state statute required the city share a portion of those taxes with county schools.

The counties based the lawsuits on language in state statute that requires liquor-by-the-drink revenues be disbursed in the same manner as property tax revenues, though the cities argued that section only applies if municipalities do not operate their own school districts.

In its specific case, Washington County sought $3.4 million in liquor-by-the-drink revenue from Johnson City. Listed in its budget as “State Mixed Drink Tax” revenue, Johnson City was remitted from the state $627,708 during the 2016 fiscal year and $717,976 during the 2017 fiscal year.

In the five cases, different verdicts were reached, as Sullivan County Chancellor E.G. Moody ruling in favor of Washington County, while Chancellor John Rambo ruled against Sullivan County.  Each of the five cases, including those two, were appealed.

In four of the cases, a panel of judges on the Court of Appeals held in favor of the cities, but a separate panel of appeal judges sided with the county in one case.

The Tennessee Supreme Court eventually agreed to hear all five lawsuits and held in favor of the cities.

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