If Tennessee swept regulatory board fees into the general fund, would those fees become taxes that require new legislation?

Subject

Opinion No. 14-67, Transfers of Fees to General Fund, July 1, 2014

Plain-English summary

Representative G.A. Hardaway asked whether a future appropriations act sweeping fees collected by Tennessee's regulatory and health-related boards into the general fund would convert those fees into "taxes," whether amending § 4-3-1016 alone would suffice to authorize such transfers, and whether such transfers would be constitutionally defensible. The AG said no on the tax characterization (assuming the sweep is relatively small), and yes the legislature can act through § 4-3-1016 alone.

The fee/tax framework: Saturn Corp. v. Johnson, City of Tullahoma v. Bedford County, and S & P Enterprises v. City of Memphis distinguish fees (regulatory; defray cost of service to fee-payer) from taxes (revenue-raising for general debts). A license fee that produces more income than its administration costs is still a fee, so long as it bears some reasonable relation to expenses (S & P Enterprises citing McMillan v. City of Knoxville; Memphis Retail Liquor Dealers' Ass'n; City of Chattanooga v. Veatch).

Tennessee's regulatory and health-related boards collect substantial fees. The Division of Regulatory Boards (Tenn. Code Ann. § 4-3-1304; §§ 56-1-301, -302) administers fees set by boards like the Auctioneer Commission (§ 62-19-111(a), (j)) and Board for Licensing Contractors (§ 62-6-111(a)). Monies go to separate accounts under § 56-1-310(a) and (b), must be used for the boards' regulatory work, and generally do not revert to the general fund at year-end (§ 56-1-310(d)). The health-related boards have a parallel framework in § 63-1-137. So both fee streams are statutorily earmarked.

§ 4-3-1016 authorizes the Commissioner of Finance and Administration to transfer funds from specified accounts to the general fund "[n]otwithstanding any provision of law to the contrary," subject to specific appropriations-act provisions. Subsection (d) lists eligible accounts; subsection (f) prohibits transfers from regulatory and health-related boards for the 2014 fiscal year (a recurring legislative balance). The question was whether reauthorizing such transfers in a future year would make the underlying fees taxes.

The AG's answer: not necessarily, as long as the transfer is relatively small. The fees retain their regulatory purpose. The underlying activity remains regulated; the fees still defray administrative costs. A small diversion to the general fund undermines but does not destroy the regulatory characterization. Continued large-scale routine sweeps would change the calculus.

Even if the fees were characterized as taxes, the legislature could still appropriate them. § 4-3-1016(a)'s "notwithstanding any provision of law to the contrary" language overrides earlier statutes that earmark the funds for specific regulatory uses. The Tennessee Constitution does not bar the General Assembly from appropriating regulatory fees to general operating expenses. So the legislature would not need to amend the underlying fee statutes to redesignate them as taxes; § 4-3-1016 alone supplies sufficient legal authority.

Currency note

This opinion was issued in 2014. 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.

Common questions

What are regulatory and health-related board fees?

Fees that regulated professions and businesses pay for licensing and oversight. Auctioneers, contractors, real estate brokers, doctors, nurses, dentists, etc. Tennessee's Division of Regulatory Boards and Division of Health-Related Boards collect them. By statute, the fees fund the boards' regulatory work.

Why does it matter whether the fees are taxes?

If they were taxes, additional constitutional and statutory considerations apply (Article XI, § 8 special-legislation concerns, federal-court doctrines on excessive taxes, etc.). Treating them as fees preserves legislative flexibility while keeping them within the regulatory framework.

Can the legislature sweep regulatory fees into the general fund?

Yes, via § 4-3-1016 and its "notwithstanding any provision of law to the contrary" clause. The General Assembly has done this in past fiscal years (the opinion cites 2008-2011 transfers and the recent prohibition on regulatory/health-related boards for fiscal years 2009, 2011, and 2014).

Where is the line between fee and tax?

The AG was careful here: transfers of "a relatively small portion of the total fees collected by each board" do not change the character. "Continued and routine transfer of a large portion of Board Fees into the general fund, on the other hand, could lead to the conclusion that they are in fact taxes and not fees." There is no bright-line percentage in the opinion.

What does Memphis Retail Liquor Dealers' Ass'n teach?

That a fee can be a fee even if it generates 200 times the administrative cost. The case involved liquor regulation, which the AG (per Op. 91-30) has flagged as a unique area; the Court "implied that if the activity regulated had been anything other than the liquor business, the fee might have been characterized as a tax." So the 200x ratio is not generalizable.

Why is the "notwithstanding" clause so powerful?

Tennessee follows general statutory-construction principles. A "notwithstanding any provision of law to the contrary" clause expresses legislative intent to override earlier inconsistent statutes. Op. 09-87 confirmed that § 4-3-1016 can override earmarks in other statutes. So an appropriations act adding regulatory and health-related fees to § 4-3-1016(d)'s transferable list would, by force of that clause, override the use restrictions in §§ 56-1-310 and 63-1-137.

Background and statutory framework

Tennessee's regulatory and health-related boards are structurally separate from general-fund agencies. The fee revenue is treated as a self-funding mechanism: licensees pay for the cost of being licensed and regulated. § 56-1-310 and § 63-1-137 preserve the separation by directing fees to separate accounts and prohibiting general-fund reversion.

§ 4-3-1016 is a budgeting tool that overrides those statutory separations when the General Assembly needs flexibility. The opinion catalogs the recent history: transfers in 2008-2011 fiscal years, prohibitions for 2009, 2011, and 2014. The pattern shows the General Assembly toggling regulatory-board sweeps based on budget conditions.

The fee/tax line is the substantive constraint. The AG's conclusion is moderate: small transfers do not change the character. Large or sustained transfers might. The opinion is also a roadmap for the legislature: amend § 4-3-1016 if you want to authorize transfers, but be careful about the size and frequency to keep the fees from being recharacterized.

Citations

• Tenn. Code Ann. § 4-3-1016 (transfers of funds from reserve accounts to general fund)
• Tenn. Code Ann. § 4-3-1304 (Division of Regulatory Boards)
• Tenn. Code Ann. § 56-1-301, -302 (Department of Commerce and Insurance, Division of Regulatory Boards)
• Tenn. Code Ann. § 56-1-310 (regulatory board fees; separate accounts; use; no general-fund reversion)
• Tenn. Code Ann. § 62-6-111(a) (Board for Licensing Contractors fees)
• Tenn. Code Ann. § 62-19-111(a), (j) (Auctioneer Commission fees)
• Tenn. Code Ann. § 63-1-103 (Commissioner of Health authority to set health-related-board fees)
• Tenn. Code Ann. § 63-1-137 (health-related-board fees; separate accounts; use; no general-fund reversion)
• Tenn. Code Ann. § 68-1-101(a)(8) (listing of health-related boards)
• Saturn Corp. v. Johnson, 236 S.W.3d 156 (Tenn. Ct. App. 2007) (Tennessee Court of Appeals; fee/tax purpose test)
• City of Tullahoma v. Bedford County, 938 S.W.2d 408 (Tenn. 1997) (Tennessee Supreme Court; tax/fee definition)
• S & P Enterprises, Inc. v. City of Memphis, 672 S.W.2d 213 (Tenn. Ct. App. 1983) (Tennessee Court of Appeals; license fee may produce more than administration costs)
• McMillan v. City of Knoxville, 139 Tenn. 319, 202 S.W. 65 (1917) (Tennessee Supreme Court; cost of supervision basis for fee)
• Memphis Retail Liquor Dealers' Ass'n, Inc. v. City of Memphis, 547 S.W.2d 244 (Tenn. 1977) (Tennessee Supreme Court; fee can exceed cost in liquor context)
• City of Chattanooga v. Veatch, 202 Tenn. 338, 304 S.W.2d 326 (1957) (Tennessee Supreme Court; license fee may produce revenue exceeding administration costs)
• Tenn. Att'y Gen. Op. 09-87 (May 19, 2009) (§ 4-3-1016 notwithstanding clause overrides earmarks)
• Tenn. Att'y Gen. Op. 91-30 (Apr. 8, 1991) (Memphis Retail Liquor limited to liquor context)

Source

• Landing page: https://www.tn.gov/attorneygeneral/opinions.html
• Original PDF: https://www.tn.gov/content/dam/tn/attorneygeneral/documents/ops/2014/op14-067.pdf

Original opinion text

STATE OF TENNESSEE
OFFICE OF THE ATTORNEY GENERAL

July 1, 2014

Opinion No. 14-67

Transfers of Fees to General Fund

QUESTIONS

1. If a future appropriations act were to authorize transfers of fees collected by the regulatory and health-related boards to meet the funding requirements of State government operations in that year, would a court characterize those impositions as "taxes" rather than "fees"?

2. If the answer to Question 1 is yes, in order to effect future transfers could the General Assembly simply amend Tenn. Code Ann. § 4-3-1016, or would it need to amend the statutes authorizing these fees to reflect their character as general-purpose "taxes" rather than regulatory "fees"?

3. Would such transfers be constitutionally defensible?

OPINIONS

1. No. Authorizing the transfer of fees collected by the regulatory and health-related boards would not warrant their characterization as "taxes" so long as such transfers involved only a relatively small portion of the total fees collected by each board.

2. and 3. Even if the transfer of such fees caused them to be deemed "taxes" instead of "fees," the General Assembly could still appropriate them to balance the State's budget under Tenn. Code Ann. § 4-3-1016.

ANALYSIS

1. Tenn. Code Ann. § 4-3-1016 provides:

(a) Notwithstanding any provision of law to the contrary, subject to the specific provisions of an appropriation act, the commissioner of finance and administration is authorized to deny carry forwards for, and to transfer funds from, the funds, reserve accounts or programs identified in this section to the state general fund for the purpose of meeting the requirements of funding the operations of state government for the fiscal year ending June 30, 2006, and subsequent fiscal years. This authority shall only apply to transfers and carry forwards necessary to fund the expenditures for the state for the fiscal year ending June 30, 2006, and subsequent fiscal years.

(b) No funds shall be transferred unless specifically appropriated in an appropriations act and such funds shall only be expended in accordance with the provisions of such act.

(Emphasis added.) Subsection (d) of the statute authorizes transfers from a long list of funds, reserve accounts, and programs for certain fiscal years, including, by recent amendment, the fiscal year ending June 30, 2014. See 2014 Tenn. Pub. Acts, ch. 917, § 5. While that list includes both the Division of Regulatory Boards Fund in the Department of Commerce and Insurance and the Health-Related Boards Fund in the Department of Health, transfers from those funds are expressly prohibited by subsection (f) of the statute for the fiscal year ending June 30, 2014. See 2014 Tenn. Pub. Acts, ch. 917, §§ 8, 9.

But if such transfers to the general fund were authorized again in the future without the prohibition on transferring funds of the regulatory and health-related boards, would that render the fees imposed and collected by these boards "taxes"? The answer to that question depends upon the purpose of these fees; the distinction between a tax and a fee "lies not in the name given in the relevant statute, but rather in the purpose of the monetary imposition." Saturn Corp. v. Johnson, 236 S.W.3d 156, 160 (Tenn. Ct. App. 2007).

A tax is a revenue raising measure levied for the purpose of paying the government's general debts and liabilities. . . . A fee is imposed for the purpose of regulating a specific activity or defraying the cost of providing a service or benefit to the party paying the fee.

City of Tullahoma v. Bedford County, 938 S.W.2d 408, 412 (Tenn. 1997) (citations omitted). In S & P Enterprises, Inc. v. City of Memphis, 672 S.W.2d 213 (Tenn. Ct. App. 1983), the Court of Appeals noted:

An occupational or a privilege tax embodies as its primary purpose the creation and collection of revenue while a true license fee as distinguished from such a tax should be fixed to cover the expense of issuing it, the service of officers and other expenses directly or indirectly incident to the supervision of the particular business or vocation.

672 S.W.2d at 215 (citing McMillan v. City of Knoxville, 139 Tenn. 319, 202 S.W. 65 (1917)). The court stated that "it is only required that the fees bear some reasonable relation to the expenses involved and it is no objection to a regulatory license that it produces more income than is required for its administration and enforcement." Id. at 216 (citing Memphis Retail Liquor Dealers' Ass'n, Inc. v. City of Memphis, 547 S.W.2d 244 (Tenn. 1977); City of Chattanooga v. Veatch, 202 Tenn. 338, 304 S.W.2d 326 (1957)).

The Division of Regulatory Boards administers the regulatory boards listed in Tenn. Code Ann. § 4-3-1304. See Tenn. Code Ann. §§ 56-1-301, -302. These boards are generally authorized to set licensing and other regulatory fees. See, e.g., Tenn. Code Ann. § 62-19-111(a), (j) (Auctioneer Commission authorized to set licensing and examination fees); Tenn. Code Ann. § 62-6-111(a) (Board for Licensing Contractors authorized to set licensing and examination fees). Under Tenn. Code Ann. § 56-1-310(a), monies collected by these boards are to be credited to a separate account in the general fund for each board. The monies must be used solely to pay the boards' cost of implementing and enforcing in their areas of regulation. Tenn. Code Ann. § 56-1-310(b). Funds remaining in the boards' accounts at the end of a fiscal year generally do not revert to the general fund but remain available for expenditures in accordance with law. Id. § 56-1-310(d).

The Division of Health Related Boards is responsible for administrative, fiscal, inspectional, clerical, and secretarial functions of the health-related boards listed in Tenn. Code Ann. § 68-1-101(a)(8). The Commissioner of Heath is authorized to set licensing and other regulatory fees. Tenn. Code Ann. § 63-1-103. Under Tenn. Code Ann. § 63-1-137(a), monies collected by these boards are to be credited to a separate account in the general fund for each board. The monies must be used solely to pay the boards' cost of implementing and enforcing in their areas of regulation. Tenn. Code Ann. § 63-1-137(b). Funds remaining in the boards' accounts at the end of a fiscal year generally do not revert to the general fund but remain available for expenditures in accordance with law. Id. § 63-1-137(d).

These statutes support the conclusion that the fees imposed and collected by these boards ("Board Fees") are indeed fees and not taxes. Their purpose is not to pay the government's general debts and liabilities but to regulate a specific activity and to defray the cost of doing so. See City of Tullahoma, 938 S.W.2d at 412. Although authorizing a transfer of Board Fees remaining at the end of a fiscal year into the general fund pursuant to Tenn. Code Ann. § 4-3-1016 would tend to undermine their characterization as fees, it would not alter their fundamental purpose so long as such a transfer involved only a relatively small portion of the total fees collected by each board. Continued and routine transfer of a large portion of Board Fees into the general fund, on the other hand, could lead to the conclusion that they are in fact taxes and not fees.

2. and 3. Tenn. Code Ann. § 4-3-1016(a) authorizes the transfer of funds "[n]otwithstanding any provision of law to the contrary." For this reason, if the statute were amended in the future to authorize such transfers for a new fiscal year, it would control over any inconsistent statute adopted earlier, including the statutes governing how Board Fees are to be used. See Tenn. Att'y Gen. Op. 09-87, at 3-4 (May 19, 2009) (opining that emergency-communications funds may be transferred pursuant to § 4-3-1016 despite the statutory limitation on how such funds may be used). The Tennessee Constitution does not prohibit the General Assembly from appropriating a regulatory fee to cover general operating expenses. Therefore, the legislature would not be constitutionally required to expressly designate Board Fees as taxes before it could appropriate them to balance the State's budget under Tenn. Code Ann. § 4-3-1016.

ROBERT E. COOPER, JR.
Attorney General and Reporter

JOSEPH F. WHALEN
Acting Solicitor General

ANN LOUISE VIX
Senior Counsel

Requested by:
The Honorable G.A. Hardaway
State Representative
37 Legislative Plaza
Nashville, Tennessee 37243

Footnotes:

1 Transfers were also authorized for the fiscal years ending June 30, 2008; June 30, 2009; June 30, 2010; and June 30, 2011. See also 2008 Tenn. Pub. Acts, ch. 1203, § 67; 2009 Tenn. Pub. Acts, ch. 554, § 72; 2010 Tenn. Pub. Acts, ch. 1108, § 70; 2011 Tenn. Pub. Acts ch. 473, § 76; 2014 Tenn. Pub. Acts, ch. 919, § 58 (provisions of the corresponding appropriation acts making transfers from the funds enumerated in § 4-3-1016(d)).

2 Transfers from those funds were also prohibited for the fiscal years ending June 30, 2009; and June 30, 2011. Tenn. Code Ann. § 4-3-1016(f)(4), (5) (2013 Supp.).

3 In Memphis Retail Liquor Dealers' Ass'n, the Court found a charge to be a fee even though it generated 200 times the cost to administer it. But since this case involved regulation of liquor, a unique area, this Office has cautioned against applying it to other regulatory fees. See e.g., Tenn. Att'y Gen. Op. 91-30 (Apr. 8, 1991) ("The Court . . . implied that if the activity regulated had been anything other than the liquor business, . . . the fee might have been characterized as a tax.").