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City and Co. dispute sales tax distribution

Posted on Tuesday, October 10, 2023 at 9:00 am


The City of Shelbyville is asking the Bedford County government to redistribute nearly $2 million in revenue from the local option sales tax by terminating a 1974 contract.

In letter sent by the City of Shelbyville to the Bedford County Commission and County Mayor Chad Graham last May, the city calls for the termination of the contract, in which the city “relinquished its statutory share of the local option sales tax increase (one-half of 0.75%).”

But the county government isn’t fully on board. As a result, the county might have to increase their property tax rate again to make up for the loss in school funding, according to Mayor Graham.

“The only way for us to compensate for that $2 million would be either to cut $2 million out of everything else the county does—which that’s a lot of money—or, the only resource the county has to generate new revenue that is absolute is property tax,” Graham told the Post. “City tax payers pay county tax, so the very citizens of Shelbyville would then turn around and instead of it being captured through sales tax they would be taxed in their property tax for it.”

At their September meeting, the county commission voted to retain the Nashville law firm Holland and Knight LLP in order to consult legal counsel.

“This is a complicated issue,” said Mayor Graham in a written statement, “and I think all of us on both sides of the issue understand how vital a sustainable educational funding plan is to the future of our community. The County Commission believes it is critical to have representation using solid legal advice as we move forward. I share their concerns. It is critical we represent the interests of all taxpayers, students, and parents within the county.”

Sales tax history

The “tax at issue,” according to the city’s letter, is the local sales tax governed by the 1963 Local Option Revenue Act, which gives local governments the authority to levy an additional sales tax percentage on top of the State’s sales tax amount (the maximum amount allowed is 2.75%).

Bedford County originally passed a 1% local option sales tax around 1966. One-half of that 1% automatically went to fund education in the county, while the other half went to the general fund of whichever jurisdiction that sales transaction occurred (municipal or county).

But in 1974, a referendum was held by the county to increase the local option sales tax from 1% to 1.75% as part of a “comprehensive new school building program as proposed by the Bedford County School Board,” according to the letter.

In 1968, the city and county had agreed to for the county to take over operation of all schools, with the two governing bodies entering into Lease and Lease-Purchase Agreements for city school buildings.

As a part of this plan, the city agreed to relinquish its statutory share of the 0.75% increase and entered into the contract.

Therefore, the city would still receive from the one-half of the 1% but not from the 0.75%.

The response from the county mayor’s office notes that in 1974, the city — which no longer wished to operate and manage their city schools — would voluntarily provide their portion of a sales tax increase to the county. This had been authorized by public referendum.

“Which is unusual for the public to vote themselves a tax but this is the 70s,” Graham told the Post.

The city’s share of sales tax proceeds were to be dedicated for public education and school construction debt. The county accepted their request and assumed responsibility for operating and maintaining the entire city school system and merged it with the county schools.

In 1996, the city increased the sales tax by 1%, creating a 2.75% local option sales tax. The letter states that as it currently stands, the city receives its share of the 2%, but again, not on the 0.75%.

Terminating the contract

In the letter, the city cites two cases that establish precedence for terminating a contract that has no definite termination date — which the 1974 does not have.

But the two cases are not government-related. Instead, the letter cites First Flight Assocs v Prof’l Gold Co. (1975) and McReynolds v Cherokee Insurance Company (1994).

This statutory share of one-half of the 1974 tax increase of 0.75% generate about $2 million in revenue, according to the city’s letter.

The city requests it should receive one-quarter of its statutory share of the 0.75% beginning in July of 2024. This would then be increased to half of the 0.75% in July 2025 and then three-quarters of its statutory share by July 2026.

The letter reads, “Council also believes that a two-year notice would be sufficient to allow Bedford County to find funds for replacement of the City’s statutory share.”

Based on these estimates, the city, in the letter, said it expects $500,000 by June 2025 and eventually $1.5 million by June of 2027 to be returned to the city in its statutory share over the life of their proposal.

County response

In the county mayor’s response, it says, “The City of Shelbyville now believes their financial contribution to dedicated educational funding could be better used in other ways and are now requesting the funding that was dedicated to education be returned to the city’s general budget.”

In addition to hiring on the Nashville law firm, the county commission sent out a letter to the city declining their request.

Graham said why he and the commission cannot agree to the terms of this letter is because, “A hundred percent of this money goes to education purposes. Period.

“This is really a better model to help support education because they tied it to sales tax. Anybody who comes through Bedford County and buys a piece of bubble gum is contributing to our education system…If the city was to in fact undue this agreement we’ve had all these years…that would put us in a situation to need two more million dollars a year every year just to equalize what we would lose there. There’s no wiggle room there at all,” said Graham.

This would especially be difficult as Bedford County’s population continues to grow rapidly, requiring new schools and expansion of existing schools.

“We look forward to constructive discussion with the city over this important issue and the need to make sure every student, inside and outside city limits, can get an excellent education in a proper and secure environment,” Graham said in the statement.

If legal matters are to be pressed, the city would have to take action against the county. The Post will continue to monitor any developments.