How can a Tennessee county capture sales tax from a state park it develops, and what does the county owe if the project loses money?

Subject

Opinion No. 11-56, Allocation of Sales and Use Taxes for Debts Incurred by County for Development at State Park, July 11, 2011

Plain-English summary

Representative Dennis Powers asked five process questions about a 2005 statute, Tenn. Code Ann. § 67-6-103(h), that gives a Tennessee county the ability to capture sales tax revenue from a state park the county helps develop. The statute appears to have been written with Campbell County and Cove Lake State Park (or another similarly situated property) in mind. The mechanism resembles tax increment financing, but it operates on sales taxes rather than property taxes: if the state leases or conveys its development rights at a park to the county, the county can receive an allocation of state and local sales and use taxes equal to the taxes "derived from sales occurring within such property." The county uses that allocation exclusively to retire the bonded indebtedness it incurred to develop the property.

The AG worked through the details:

• The 1992 and 2002 state sales tax rate increases are excluded from the allocation. The county receives the base rate only.
• The statute does not become operative until Campbell County prepays the Department of Revenue for the cost of software changes needed to implement the allocation. The Department refunds any unused portion within 30 days after completing the software work.
• Before issuing bonds, the county must submit its development plan to the executive committee of the State Building Commission for review and a recommendation to the full Commission.
• The statute is silent about timing or notice procedure with the Departments of Finance and Administration or Revenue. Practical sequencing (notify Revenue once the development is approved and bonds are issued) is something the county works out with those departments; it is not a legal question the AG can answer.
• The June 30, 2011 deadline that appears in § 67-6-103(o)(2) is the deadline for a different mechanism (a county-designated commercial development zone for private mixed-use projects). It does not apply to a county pursuing the state-park allocation under § 67-6-103(h).
• Most importantly: the sales tax allocation is not a cap on the county's liability. The county chose to issue the bonds, and the county will be liable for the full amount of those bonds under their terms, plus any operating expenses, regardless of how much sales tax revenue the project actually generates.

That last point is the warning. The allocation is a funding source, not a state guarantee. If the park development underperforms (fewer visitors, less retail activity, less sales tax) the county is still on the hook for the debt it issued.

Currency note

This opinion was issued in 2011. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Tenn. Code Ann. § 67-6-103 has been amended many times since 2011. Anyone evaluating a current state-park or development-zone allocation should pull the current statute, look for any new subsections or repeals, and consult with bond counsel and the Department of Revenue before relying on this opinion's specific mechanical descriptions.

Background and statutory framework

The allocation mechanism. Tenn. Code Ann. § 67-6-103(h)(1) (Supp. 2010) provides that a county that includes a qualifying state park may receive an allocation of sales and use tax revenues "equal to the amount of state and local sales and use taxes derived from sales occurring within such property." The allocation is "exclusively for retirement of the indebtedness incurred by such county for development of such property, to the same extent that such county may pledge any revenues of the county."

The carve-out for rate increases. Tenn. Code Ann. §§ 67-6-103(h)(2)(A), -202(a) and (b) exclude from the allocation the revenue derived from the state sales and use tax rate increases enacted in 1992 and 2002. The county gets the pre-1992 base rate, not the full current rate.

The activation step. Acts 2005, ch. 505, § 2 provides that the act becomes operative only when Campbell County prepays the Department of Revenue the estimated cost of software changes needed to implement § 67-6-103(h). The Department refunds the unused portion within 30 days of completing the changes, and the county pays any shortfall within 30 days of receiving an itemized invoice for actual costs.

State Building Commission review. Tenn. Code Ann. § 67-6-103(h)(3) requires the county to submit its development plan to the executive committee of the State Building Commission for review and recommendation before issuing any bonds.

The unrelated June 30, 2011 deadline. Tenn. Code Ann. § 67-6-103(o) is a separate allocation provision that applies to a county-designated commercial development zone for a privately built mixed-use development. Subsection (o)(2) requires the county legislative body to adopt a designating resolution on or before June 30, 2011. That deadline is specific to subsection (o) and does not migrate to the state-park allocation under subsection (h).

Common questions

Is the sales tax allocation a cap on the county's project liability?

No. This is the most important practical point in the opinion. The allocation is exclusively for retiring the bonded indebtedness, but the county's actual liability comes from the bond documents and any operating contracts it signs. If the project generates less sales tax than projected, the county still owes the bondholders the full amount of the debt and still owes operating-expense obligations under its contracts.

What does "derived from sales occurring within such property" actually mean?

The statute does not define the phrase in granular operational terms. As a practical matter, the Department of Revenue would have to identify taxable transactions sourced to the park property (likely tied to seller location reporting, point-of-sale identification, or special reporting). That sourcing-and-allocation problem is part of why the statute conditions its operation on the county prepaying the Department's software costs.

Why is Campbell County named in the activation provision?

The AG observes that Campbell County "appears to be the only county to which it would apply." The 2005 legislation was effectively a special-purpose mechanism for one county.

What does the State Building Commission review actually involve?

Tenn. Code Ann. § 67-6-103(h)(3) requires submission of a development plan to the executive committee. The committee reviews and then makes a recommendation to the full Commission. The opinion does not detail the standards the committee uses; in practice, this is a project-fit and feasibility check. The statute requires this step "[p]rior to the issuance of any bonds for development of the property," but does not impose a fixed timeline.

Could the county simply opt out and use general revenue instead?

The county can develop the park using any lawful funding source. Tenn. Code Ann. § 67-6-103(h) is an opt-in mechanism that provides a funding source (a sales tax allocation) tied to a specific use (retiring bonded indebtedness). A county that does not want the allocation doesn't have to use it. But the county wanting the allocation has to follow the activation step (the software cost prepayment) and the Building Commission review.

Citations

• Tenn. Code Ann. §§ 67-6-103(h), -103(h)(1), -103(h)(2)(A), -103(h)(3), -103(o), -103(o)(2)
• Tenn. Code Ann. §§ 67-6-202(a), -202(b)
• Acts 2005, ch. 505, § 2

Source

• Landing page: https://www.tn.gov/attorneygeneral/opinions.html
• Original PDF: https://www.tn.gov/content/dam/tn/attorneygeneral/documents/ops/2011/op11-056.pdf

Original opinion text

July 11, 2011
Opinion No. 11-56
Allocation of Sales and Use Taxes for Debts Incurred by County for Development at State Park

QUESTIONS

1. Does Tenn. Code Ann. § 67-6-103(h) provide for Campbell County to receive an allocation of sales and use taxes derived from sales occurring within a specified state park as to which the state has leased or conveyed to the county its rights to the property for development? If so, how is the allocation calculated and for what purpose may the county use the allocation?

2. How or when should the county contact the State Building Commission to obtain approval to authorize the issuance of bonds for the development of the state park?

3. How or when should the county contact the Department of Finance and Administration to issue a directive to the Department of Revenue to implement the allocation of sales and use taxes?

4. What specific actions should the Campbell County Commission take prior to June 30, 2011, in order to proceed with the development of the state park? Is Tenn. Code Ann. § 67-6-103(o)(2) applicable to a county seeking the allocation under Tenn. Code Ann. § 67-6-103(h)?

5. Would Campbell County be liable for repayment of either the bonded indebtedness or operating expenses applicable to the development of the state park beyond the sales tax generated from the development itself?

OPINIONS

1. Yes, Campbell County may receive the allocation to the extent authorized by Tenn. Code Ann. § 67-6-103(h)(1). The allocation does not include revenues from the state sales and use tax rate increases pursuant to the 1992 and 2002 public acts. The allocation may be used only for the purpose of retiring debts incurred by the county for developing the park. Also, it must be noted that the legislation providing for this allocation does not become operative until Campbell County has paid to the Department of Revenue the estimated cost of software changes necessary to implement Tenn. Code Ann. § 67-6-103(h).

2. The county must submit its development plan to the executive committee of the State Building Commission for the committee's review and recommendation to the Commission prior to the issuance of any bonds.

3. The statute does not specify whether, how, or when the county should contact the Department of Finance and Administration and the Department of Revenue to implement the sales tax allocation. This is not a legal question that this Office can answer.

4. The statute does not provide a deadline that Campbell County must meet to implement these allocation provisions. A county seeking the allocation provided under Tenn. Code Ann. § 67-6-103(h) does not need to comply with Tenn. Code Ann. § 67-6-103(o).

5. The provisions of Tenn. Code Ann. § 67-6-103(h) merely create a means by which a qualifying county can obtain additional funding to develop the park. The county would be liable for the bonded indebtedness and operating expenses that it chooses to incur in developing and operating the park, in accordance with bond instruments and contracts into which it enters. The county's liability is not limited by Tenn. Code Ann. § 67-6-103(h) to the sales tax revenues generated from the project site itself, which revenues can be used only to retire the county's bonded debt, but would be determined by the county's own contracts and undertakings.

ANALYSIS

1. Pursuant to Tenn. Code Ann. § 67-6-103(h), a county that includes a state park as described therein may receive an allocation of sales and use tax revenues "equal to the amount of state and local sales and use taxes derived from sales occurring within such property." Tenn. Code Ann. § 67-6-103(h)(1) (Supp. 2010). The allocation does not include revenue derived from the state sales and use tax rate increases in 1992 and 2002. Tenn. Code Ann. §§ 67-6-103(h)(2)(A) and -202(a) and (b) (Supp. 2010). The allocation is "exclusively for retirement of the indebtedness incurred by such county for development of such property, to the same extent that such county may pledge any revenues of the county." Tenn. Code Ann. § 67-6-103(h)(1) (Supp. 2010).

It must be noted that the legislation providing for this allocation does not become operative until Campbell County, which appears to be the only county to which it would apply, has paid to the Department of Revenue the estimated cost of software changes necessary to implement Tenn. Code Ann. § 67-6-103(h). The General Assembly provided that the act shall become operative only if the estimated cost of software changes necessary to implement the provisions of this act are paid to the department of revenue by Campbell County. Such payment shall be made prior to any expenditure of funds by the state. The department shall return any unused portion of the estimated cost to Campbell County within thirty (30) days of completion of the software changes necessary to implement the provisions of this act. If the actual cost exceeds the estimated cost, an amount equal to the difference in such costs shall be remitted to the department by Campbell County within thirty (30) days of receiving an itemized invoice of the actual cost from the department. Acts 2005, ch. 505, § 2.

2. The county commission must submit a plan for development of the state park to the executive committee of the State Building Commission, which the committee will review and then use in making its recommendation to the Commission. Tenn. Code Ann. § 67-6-103(h)(3). The statute does not provide a deadline for the county to contact the Commission; instead, it only requires that the plan be submitted "[p]rior to the issuance of any bonds for development of the property."

3. The statute contains no reference to the Department of Finance and Administration or the Department of Revenue. The allocation should occur once the development has been approved by the State Building Commission and a bonded indebtedness for the project has been incurred by the county. The county may wish to inform the Department of Revenue as to when these things have occurred so the Department can make the correct allocation of revenues when sales taxes begin to be collected at the development.

4. The statute does not provide a deadline for developing the state park, whether it be June 30, 2011, or any other date. See Tenn. Code Ann. § 67-6-103(h) (Supp. 2010). Pursuant to Tenn. Code Ann. § 67-6-103(o), a county may receive an allocation of sales and use tax revenues collected within a county-designated commercial development zone in which a private entity plans to build a mixed-use development. Tenn. Code Ann. § 67-6-103(o)(2) (Supp. 2010). Of the many requirements specified in that statute, the county legislative body must have adopted a resolution designating such a commercial development zone on or before June 30, 2011. Id. While both Tenn. Code Ann. §§ 67-6-103(h) and (o) are procedures by which a county may receive an allocation of state and local sales and use taxes for the development of certain property, they are entirely separate and distinct. A county seeking an allocation under one statute need not comply with the other. Thus, the June 30, 2011, deadline does not apply to a county developing a state park pursuant to Tenn. Code Ann. § 67-6-103(h).

5. The statute expressly provides that the revenue distributed to the county under its provisions "shall be exclusively for retirement of the indebtedness incurred by such county for development of such property, to the same extent that such county may pledge any revenues of the county." Tenn. Code Ann. § 67-6-103(h)(1). Thus, a prerequisite to the use of these funds is that the county has pledged its own revenue for retirement of the bonded indebtedness associated with the development. But this does not in any way limit the county's liability to the amount contributed by the state. The county would be liable for the bonded debt, as well as any operating expenses in accordance with the contracts, documents, and undertakings it has entered in developing and running the facilities.

ROBERT E. COOPER, JR.
Attorney General and Reporter

GORDON W. SMITH
Associate Solicitor General

NICHOLAS G. BARCA
Assistant Attorney General

Requested by:
The Honorable Dennis Powers
State Representative
202 War Memorial Building
Nashville, Tennessee 37243-0136