Wash. Cnty. Sch. Sys. v. City of Johnson City, E2016-02583-SC-R11-CV

• Decision Date: 08 May 2019
• Docket Number: No. E2016-02583-SC-R11-CV,E2016-02583-SC-R11-CV
• Citation: 575 S.W.3d 324
• Parties: WASHINGTON COUNTY SCHOOL SYSTEM, et al. v. The CITY OF JOHNSON CITY, Tennessee
• Court: Tennessee Supreme Court

575 S.W.3d 324

WASHINGTON COUNTY SCHOOL SYSTEM, et al.

v.The CITY OF JOHNSON CITY, Tennessee

No. E2016-02583-SC-R11-CV

Supreme Court of Tennessee, AT KNOXVILLE.

October 4, 2018 Session Heard at Nashville

FILED May 8, 2019

James Logan, Jr., Cleveland, Tennessee, for the appellants, Washington County School System, by and through the Washington County Board of Education, and Washington County.

K. Erickson Herrin, Johnson City, Tennessee, for the appellee, City of Johnson City, Tennessee.

Holly 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.

OPINION¹

Holly Kirby, J.

This is 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 the city.

The 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 Liquor-By-The-Drink Act

During 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 , 175 Tenn. 680, 137 S.W.2d 284, 285 (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 , 176 Tenn. 638, 144 S.W.2d 793, 794 (1940).

In 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.

In any 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.²

Tennessee Code Annotated section 57-4-301(c) levies a 15% tax on all LBD sales.³ 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 statute."

This case involves the application of the distribution statute as it existed prior to the enactment of a July 2014 amendment.⁴ 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).

Important 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.

Washington County

The underlying facts in this case are essentially undisputed. Johnson City ("the City") lies in Washington County ("the County").⁵ The City has at all relevant times had its own municipal school system separate from the Washington County school system.

In 1980, citizens of the City passed a referendum authorizing LBD sales within City limits. After that, the City received LBD tax proceeds from those sales. The City has never shared those tax proceeds with the County or with any school system in the County.

The County has not passed a referendum on LBD sales. It has, however, received LBD tax proceeds from lawful LBD sales in private clubs located in unincorporated areas of the County. Unlike the City, the County distributed half of its private club LBD tax proceeds among all of the school systems in the County—just as it distributes County property taxes for schools—pro rata in accordance with average daily attendance maintained by each. See Tenn. Code Ann. § 49-3-315(a) (2018).

On May 2, 2014, the Washington County School System, by and through the Washington County Board of Education ("the County Board"), filed a lawsuit against the City seeking a declaratory judgment as to the rights and obligations of the parties concerning LBD tax proceeds. The County Board alleged that the City was required to share its LBD tax proceeds with the County just "as the county property tax for schools is expended and distributed" by the County. The County Board sought a declaratory judgment and damages in the "full amount of unremitted tax revenues together with prejudgment interest."

In June 2014, the City filed a motion to dismiss or for summary judgment, arguing that the County Board lacked capacity to sue. It also claimed that the LBD tax distribution provisions did not apply to the County because the County had never authorized LBD sales by referendum and that the language of the distribution statute did not require the City to share its LBD tax proceeds.

Subsequently, the County filed a motion to intervene, which was granted. As a result, we hereinafter refer to the County Board and Washington County collectively as "the County."

The parties filed cross-motions for summary judgment. In October 2016, the trial court entered an order granting summary judgment in favor of the County and denying the City’s motion for summary judgment. In doing so, the trial court found that the distribution statute and the legislative history surrounding the July 2014 amendment were both ambiguous. Because of these ambiguities, the trial court considered "public policy and the principles of equity and fairness," which led it to conclude that students in City and County schools should receive equal treatment under the LBD Act. On this basis, the trial court held that half of the City’s LBD tax proceeds must be equitably distributed between the City and County school systems; it directed the City to pay the County accordingly.⁶ The City filed an application for interlocutory appeal,⁷ which was granted by both the trial court and the Court of Appeals.

Around the same time, three other cases involving the same issue regarding the distribution statute were appealed to the Court of Appeals for the Eastern Section. See Blount Cnty. Bd. of Educ. v. City of Maryville , No. E2017-00047-COA-R3-CV, 2017 WL 6606855 (Tenn. Ct. App. May 26, 2017) (" Blount Cnty. "); Bradley Cnty. Sch. Sys. ex rel. Bradley Cnty. Bd. of Educ. v. City of Cleveland , No. E2016-01030-COA-R3-CV, ...