Picking up the tab: Chattanooga region schools wait on revenue from mixed-drink taxes

Picking up the tab: Chattanooga region schools wait on revenue from mixed-drink taxes

February 4th, 2014 by Ben Benton in Local Regional News

Olive Martini.

Olive Martini.

Illustration by Laura McNutt /Times Free Press.

Across at least five Southeast Tennessee counties, local governments face an almost $2 million liquor-by-the-drink tax tab due to their respective county school districts, according to County Technical Assistance Service officials.

Many cities, particularly the ones that operate their own city school systems, are balking at the tax bill, noting that language about how tax money should be distributed is confusing. County governments also owe smaller shares, CTAS county government consultant Gary Hayes says.

Governments in Bradley, Coffee, Franklin, Marion and McMinn counties owe a combined $1,967,612 to the local county school system. Dayton and Spring City in Rhea County also owe small amounts, CTAS county government consultant Gary Hayes said.

Most cities that owe county schools didn't realize how the law on distribution of revenues from sales tax on mixed drinks worked. The tax works like the local option sales tax; one half goes to education, the other half goes to the point of collection, he said.

If a county has multiple school systems, the tax money is split according to average daily attendance percentages, Hayes said. Average daily attendance refers to the percentage of a county's total student population attending city and county systems.

As CTAS personnel reviewed counties' finances, they found discrepancies everywhere, he said.

The Tennessee Municipal League is among the agencies reviewing the issue for its potential impact on cities and counties across the state.

TML executive director and former Athens, Tenn., Mayor Margaret Mahery said officials are urging schools and governments to work together.

"We are advising our folks to work with their local school systems to work out an agreement that is amicable for everyone," she said.

Agreements already have been worked out across the state.

"I think everyone needs to maintain a reasonable expectation," Mahery said.

Chattanooga, which no longer has a city school system, hasn't paid the schools' share of liquor-by-the-drink taxes for nearly a decade.

The shortfall totals $11.4 million.

Chattanooga Mayor Andy Berke has started to make it up to the Hamilton County Department of Education, the Times Free Press reported in September. Berke's 2014 budget includes $1 million in liquor-by-the-drink taxes, and he's proposing to donate the site of the former Poss Homes public housing complex to the school system and give the system half a million dollars to start an early childhood education center.


In the region's largest rural county, Bradley, the school system is owed more than $800,000 by the county and the city of Cleveland, which has the lion's share of the bill at $725, 547, according to Hayes.

Cleveland City Manager Janice Casteel believes the law exempts cities from sharing mixed-drink tax collections with the county if a municipal school system exists.

"We have shared our mixed-drink tax with the city's school system all along. We feel the law is very clear when it has that sentence in there about city schools. Even the Department of Revenue has said so," Casteel said.

An email sent in December to Casteel from state Department of Revenue Financial Control assistant director Lindsey Wolfenbarger states, "According to state law, cities that do not operate their own school systems separate from the county are required to pay half of the liquor by the drink funds from the state to the county school fund."

There is no further mention of anything owed by cities with school systems.

Casteel said city and county school officials will meet Feb. 10 to discuss the matter further.

"It comes down to an interpretation of the law," she said.


Municipal officials in Coffee County, Tenn., say they want to hear more from the Tennessee Comptroller's Office about more than $527,000 in back mixed-drink taxes said to be owed to county schools.

Hayes shocked Coffee County finance committee officials late last year by reporting that Tullahoma and Manchester owe the county Board of Education $527,595 in mixed-drink taxes dating back to 1980. Tullahoma's part is $387,488 and Manchester's share of the bill is $137,340, according to Hayes' figures.

Tullahoma City Administrator Jody Baltz said he hopes a review by TML and the Comptroller's office will give officials an idea of the potential impact on cities and counties across the state.

Manchester Mayor Lonnie Norman admits he doesn't know much about the details, but hopes "we can work this out so that we don't have to pay anything."

The Manchester mayor said the city didn't pursue a lawsuit in a tax distribution dispute with the school system several years ago and since Manchester was owed money in that matter, maybe the school system will see any mixed-drink tax shortfall as a wash.


Winchester City Manager Beth Rhoton says the town doesn't dispute the $130,126 tax bill that accumulated because city officials were unaware of the distribution law and simply didn't realize the funds were supposed to be routed to county schools.

The Franklin County towns of Cowan and Decherd and the county government also owe money to schools, CTAS contends. None of the towns have their own school systems.

Rhoton hopes that a $ 1 million contribution to schools in the past and the fact that county schools use several of the city's facilities will work as a bargaining chip when repayment is negotiated with county school officials.

"They won't make us pay it all at one time," Rhoton said. "As soon as we were aware that we had an issue we started sending that over. All you can do is go back and try to make it right," she said.


Marion's small town of Monteagle, another town without its own school system, faces a $124,054 chunk of the almost $158,000 owed to the school system there. South Pittsburg, Kimball, Jasper and the county also owe smaller amounts, according to CTAS.

Monteagle Mayor Marilyn Nixon said officials there believe the state should have made the law and its distribution requirements clearer to local governments when it was established and that the amount owed by Monteagle, if any, is far less than $124,000.

Monteagle has begun directing the mixed-drink tax money to Marion County schools, though Nixon contends that it might not be owed. She said officials there felt the state was responsible for distribution and that the city was getting what it was supposed to keep.

"We will do what right, once we know what's right," she said, noting the city wasn't notified of the law until September 2013.


Athens, an operator of municipal schools, has had liquor-by-the-drink since 2000. The county association said it owes McMinn's school system $245,205.

Athens finance director Mike Keith said city officials interpret state law to direct the city's portion of mixed-drink taxes to its own school system, though he admits the law itself is confusing.

"I can see where people can read it different ways, " Keith said. He agreed with Nixon that cities usually don't receive state-shared tax funds that they are supposed to distribute. That responsibility usually goes to counties, he said.

"We've been giving the money to city schools since the liquor referendum passed and we started collecting in 2001," he said. Athens' biggest collection year was last year, at more than $55,000.

Hayes said it's likely the decision will have to be made in some county's Chancery Court, where a ruling can be made in an interpretation of the law.

Contact staff writer Ben Benton at bbenton@timesfreepress.com or 423-757-6569.