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Agreement nears on back liquor-by-the-drink taxes

By Sara McManamy-Johnson sjohnson@lebanondemocrat.com • Updated May 21, 2014 at 11:18 PM

Lebanon will likely soon begin repaying years’ worth of back liquor-by-the-drink taxes to local school systems.

City council on Tuesday passed the first of two readings authorizing a payment agreement and is due to consider the agreement for a second reading at Thursday’s special called meeting.

State law requires cities and counties to provide 50 percent of the revenue they receive from liquor-by-the-drink taxes to schools, but many have failed to do so — around 40 by some estimates — over a period of years.

“[State law] provided for a tax on the sale of liquor by the drink, and the state was to retain half of it and then half of it goes to the city where it was collected,” said Robert Springer, Lebanon’s commissioner of finance and revenues.

In Lebanon’s case, the city was to then distribute half of the portion it retained to the county trustee, who would then divide the schools’ portion between the Lebanon Special School District and the Wilson County Board of Education.

The city, however, was unaware of that part until just last year.

“There was some discussion about it last fall, maybe even late summer,” said Springer. “The city realized that it did owe these taxes in October, so we started making payments in October once they knew for certain.”

He said the city has paid more than $37,000 in combined payments since that time, but that amount does not include amounts due before Oct. 2013.

According to Springer, the city owes $811,215.25 from taxes collected between July 1, 1999, and Sept. 2013. 

The law requiring liquor-by-the-drink tax revenue to be shared with schools actually was enacted in 1981 and Lebanon first began collecting liquor-by-the-drink taxes around 1992, according to Springer, but the relevant state records only date back to 1999. 

According to the terms of the agreement, the city would pay the schools 10 equal annual installments of $81,121.52 each July until the full amount is paid.

Springer said the payments would not likely create a significant burden on the city’s budget, particularly compared to amounts owed by other cities in the state.

“Lebanon’s fortunate in that it’s not one of those with an unbelievably high figure,” said Springer.

In Hamilton County, the school system contends that the city of Chattanooga owes $11.7 million.

With the issue cropping up in cities and counties throughout the state, Cordova state Rep. Steve McManus sponsored a House bill last session to outline rules and procedures by which cities and counties could negotiate payment of the back taxes.

The bill, which Gov. Bill Haslam signed into law last month, grants authority for cities to negotiate a payment plan that can run up to 10 years. The law also provides that cities that don’t negotiate a payment arrangement could lose state funding from other taxes.

A February legal opinion from state Attorney General Bob Cooper stated nothing is in state law allowing governments to delay — with or without negotiations — the money they owe.

“This now gives municipalities, counties and schools an opportunity to negotiate in good faith how much they owe and how it will be paid,” said McManus. “The attorney general says now that, if you owe it, you owe it ... and in some cases this is millions of dollars.”

If the cities and counties owing money fail to enter into negotiations by Aug. 31, the state Department of Revenue can withhold state-shared taxes going to the municipality or county and instead send it to the schools as a payment on the debt.

Under state law, local governments get a portion of some taxes levied and collected by the state, including the Hall tax on investment income and, for cities, the state sales tax.

The law also leaves the door open for lawsuits to be filed by school systems. According to the law, any agreements must be reached and approved by Aug. 31, otherwise school systems may file lawsuits seeking the money owed. 

The law also, however, sets a Dec. 31 deadline for any legal actions on the amounts owed from before July 2014.

Tom Humphrey of the Knoxville News Sentinel contributed to this report via MCT.

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