Who in Tennessee should hold the hotel liquor license when a hotel owner has hired a management company to run the food and beverage operation: the hotel owner or the management company?

Plain-English summary

The Commissioner of Revenue asked the AG's office a bundle of questions about who carries the licensing and tax burden when a hotel owner contracts with a management company to run the food and beverage side of the hotel, including the on-premises bar. The AG worked through six questions in sequence:

1. Who holds the license? Either the hotel owner or the management company can hold the license required by Tenn. Code Ann. § 57-4-201(b)(1). The statute's definition of "hotel" expressly includes a franchisee that operates the restaurant on the hotel's premises, so the management company qualifies as a "hotel" too and may apply for its own license. Which party actually holds it is up to the franchise/management agreement.

2. Is the hotel owner liable for unpaid taxes when the management company is the licensee? No. The license carries the tax obligations with it; the licensee, not the underlying owner, is on the hook.

3. Does a management company "quit the business" when it stops managing the hotel? Yes. Section 57-4-303 obligates a licensee that quits the business to file a final return and pay all outstanding taxes, interest, and penalty.

4. Is the next operator a "successor or assign"? It depends. The successor-liability framework in section 57-4-303 attaches when the next operator pays purchase money for the license or stock of goods. Any consideration paid for those items is "purchase money" for the statute's purpose.

5. Is the management company jointly liable with the hotel owner for sales/use tax on alcohol? No. The statute makes the licensee, not the underlying owner, responsible. There is no joint-and-several liability between licensee and non-licensee.

6. How is the management company classified for Tennessee business tax? It depends on its "dominant business activity" under section 67-4-708. If food and drink sales are the major and principal source of taxable gross sales, Classification 2 (retailer of prepared food and drinks) applies; if management-services fees are the dominant source, Classification 3 (services) applies.

The opinion also gave significant weight to the Tennessee Alcoholic Beverage Commission's longstanding administrative practice of issuing licenses to management companies, citing the Tennessee Supreme Court's deference to long-accepted agency construction in State v. Nashville Baseball Club and New England Mut. Life Ins. Co. v. Reece.

Currency note

This opinion was issued in 2016. 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.

Background and statutory framework

Tennessee's hotel liquor framework is built on a definition: a "hotel," for purposes of on-premises consumption licensing, is a building "kept, used, maintained, advertised and held out to the public to be a place where food is actually served and consumed and sleeping accommodations are offered for adequate pay." Tenn. Code Ann. § 57-4-102(20)(A). Crucially, the definition continues that "the operation of a restaurant on the premises of a hotel may be granted by franchise to another person or entity, and the holder of such franchise shall be included in the definition of 'hotel.'" That language is what lets the franchisee step into the licensee role.

Section 57-4-201(b)(1) requires a hotel that "desir[es] to sell wine or other alcoholic beverages for consumption on its premises" to obtain a license from the Tennessee Alcoholic Beverage Commission. The licensing application disclosures in subsection (d) anticipate that the license applicant and the underlying owner may be different persons.

The tax piece sits in Title 57, Chapter 4, Part 3:

• § 57-4-301(a): every person engaged in the business of on-premises retail alcohol sales exercises a taxable privilege.
• § 57-4-301(b)(1) and (T): the licensee pays a one-time application fee and ongoing privilege taxes.
• § 57-4-302: the licensee collects the tax from consumers and remits to the Commissioner of Revenue, backed by an indemnity bond.
• § 57-4-303: when a licensee sells the business or "quit[s] the business," it must file a final return; a successor that pays purchase money for the license or stock of goods becomes subject to successor liability up to the amount of purchase money.

Business-tax classification under section 67-4-708 turns on the "major and principal" source of taxable gross sales (the "dominant business activity" test in § 67-4-702(5)). A management company that takes the food-and-drink revenue directly looks like a Classification 2 retailer; one that takes a management fee instead looks like a Classification 3 services provider.

The opinion's reliance on the ABC's longstanding interpretation was important. The Commission had for years been issuing § 57-4-201(b)(1) licenses to management companies, particularly in cases involving municipal-corporation-owned hotels where the municipality itself could not hold a license. The legislature had amended Title 57, Chapter 4 multiple times over the years without disturbing that practice, and the opinion treated that legislative quiescence as endorsement under State v. Nashville Baseball Club, 154 S.W. 1151 (Tenn. 1913) (statutory construction "adopted by the legislative or executive departments of the State, and long accepted by the various agencies of government and the people, will usually be accepted as correct by the courts").

Common questions

Q: At the time of this opinion, could either the hotel owner or the management company hold the liquor license?
A: Yes. The "hotel" statutory definition explicitly covers the franchisee of the food-and-beverage operation, so either party could apply for and hold the license. The terms of the franchise or management agreement would govern who actually applies.

Q: If the management company held the license, was the hotel owner on the hook for taxes the management company didn't pay?
A: No. The licensee carried the tax obligations. The non-licensee owner was not liable.

Q: What did "quitting the business" trigger?
A: A final-return obligation under § 57-4-303 and payment of all outstanding taxes, interest, and penalty. If a management company stopped managing a hotel (for any reason), that counted as quitting the business.

Q: What is "purchase money" for successor-liability purposes?
A: Any consideration paid to the former management company for the license itself or for its stock of goods (typically including the alcohol inventory). A new operator was liable up to the purchase-money amount for the former licensee's unpaid taxes.

Q: How would the management company be taxed under Tennessee's business tax?
A: Based on its dominant business activity. If food-and-drink sales were the major and principal source of taxable gross sales, Classification 2 (retailer); if management fees were the dominant source, Classification 3 (services).

Q: Why did the AG defer to the Alcoholic Beverage Commission's practice?
A: Under State v. Nashville Baseball Club and similar Tennessee Supreme Court precedent, courts give "substantial weight" to longstanding administrative interpretations that the legislature has had ample opportunity to override and has not. The ABC's longstanding practice of licensing management companies, combined with multiple Title 57 amendments that left the practice untouched, met that standard.

Citations and references

Statutes:
- Tenn. Code Ann. § 57-4-101 (Authorization to sell on hotel premises)
- Tenn. Code Ann. § 57-4-102(20)(A) (Definition of "hotel")
- Tenn. Code Ann. § 57-4-201(b)(1) (Hotel on-premises consumption license)
- Tenn. Code Ann. § 57-4-201(d) (Application disclosures)
- Tenn. Code Ann. § 57-4-301 (Privilege taxes)
- Tenn. Code Ann. § 57-4-302 (Collection and bond)
- Tenn. Code Ann. § 57-4-303 (Quitting the business; successor liability)
- Tenn. Code Ann. § 67-4-702(5) (Dominant business activity)
- Tenn. Code Ann. § 67-4-708 (Business tax classifications)

Cases:
- State v. Nashville Baseball Club, 127 Tenn. 292, 154 S.W. 1151 (Tenn. 1913) (Tennessee Supreme Court, deference to longstanding administrative construction)
- New England Mut. Life Ins. Co. v. Reece, 83 S.W.2d 238 (Tenn. 1935) (Tennessee Supreme Court)

Prior AG opinions:
- Tenn. Att'y Gen. Op. No. 14-03 (Jan. 9, 2014) (Municipal-corporation hotel licensing)

Source

• Landing page: https://www.tn.gov/attorneygeneral/opinions.html
• Original PDF: https://www.tn.gov/content/dam/tn/attorneygeneral/documents/ops/2016/op16-005.pdf

Original opinion text

STATE OF TENNESSEE
OFFICE OF THE ATTORNEY GENERAL
February 9, 2016
Opinion No. 16-05
Licensing and taxation of hotels selling alcohol for consumption on the premises

Question 1
For purposes of the license required under Tenn. Code Ann. § 57-4-301(b)(1)(T) for the sale by a hotel of alcoholic beverages sold for consumption on the premises, is the hotel owner or the hotel management company hired by the hotel owner the appropriate licensee?

Opinion 1
When the owner of a hotel has granted a franchise to a management company to operate the food and beverage services in the hotel, the management company may be the licensee for purposes of Tenn. Code Ann. § 57-4-201(b)(1).

Question 2
Although not the licensee, is the hotel owner liable for any delinquent taxes imposed under Tenn. Code Ann. § 57-4-301(c) that the management company fails to collect and remit with respect to sales of alcoholic beverages at the hotel owner's establishment?

Opinion 2
No.

Question 3
If the hotel management company is the licensee and ceases managing the hotel for whatever reason, has the management company "quit the business" within the meaning of Tenn. Code Ann. § 57-4-303 (2013) so that it must file a final return and remit all taxes due pursuant to that statute?

Opinion 3
Yes.

Question 4
If the hotel management company ceases managing the hotel for whatever reason, is the hotel owner (in the event the owner commences direct operation of the hotel) or the new hotel management company (in the event the hotel owner contracts with a new management company) considered the "successor or assign" of the business, so that the hotel owner or new management company may be held liable for any unpaid tax, interest, or penalty under Tenn. Code Ann. § 57-4-303? If so, what constitutes "purchase money" for purposes of determining whether the hotel owner or new management company withheld sufficient amounts to cover all unpaid taxes, interest, and penalty that are due?

Opinion 4
Whether the hotel owner or a new management company would be liable for taxes, interest, or penalty that had not been paid by the former management company depends on the circumstances in which a new licensee assumes operation of the hotel. Any money paid to the former management company for its license or its stock of goods would be considered "purchase money" for purposes of Tenn. Code Ann. § 57-4-303.

Question 5
If the hotel management company is considered to be engaged in the business of selling alcoholic beverages at retail, such that it must obtain the license, is the hotel management company jointly and severally liable along with the hotel owner for Tennessee sales and use taxes due with respect to retail sales of alcoholic beverages sold for consumption on the hotel premises?

Opinion 5
No.

Question 6
If the hotel management company is considered to be engaged in the business of selling alcoholic beverages at retail, such that it must obtain the license, will the hotel management company be classified for Tennessee business tax purposes under Classification 2 as a retailer of prepared food and drinks, including alcoholic beverages (see Tenn. Code Ann. § 67-4-708(2)(G) (2013)) or under Classification 3 as a provider of management services (see Tenn. Code Ann. § 67-4-708(3)(C) (2013))?

Opinion 6
As provided in Tenn. Code Ann. § 67-4-708, the management company would be classified "according to the dominant business activity," which would depend in this case on whether sales of prepared food and drinks or fees received for management of the hotel constituted the "major and principal source of taxable gross sales of the business." Tenn. Code Ann. § 67-4-702(5).

ANALYSIS

1. "It is lawful to sell wine and other alcoholic beverages as defined in § 57-4-102, and beer as defined in § 57-6-102, to be consumed on the premises of, or within the boundaries of, any . . . hotel." Tenn. Code Ann. § 57-4-101. But a "person, firm or corporation owning any hotel . . . desiring to sell wine or other alcoholic beverages for consumption on its premises where food may be served" is required to obtain a license or permit from the Tennessee Alcoholic Beverage Commission to do so. Tenn. Code Ann. § 57-4-201(b)(1).

A "hotel" is, with certain limiting qualifications, a building or structure that is "kept, used, maintained, advertised and held out to the public to be a place where food is actually served and consumed and sleeping accommodations are offered for adequate pay" to guests. Tenn. Code Ann. § 57-4-102(20)(A). Thus, a hotel is by statutory definition a particular kind of commercial enterprise that offers various services and products and that is conducted within a building or a structure and its premises, all of which "are a part of the hotel operation." Id. For purposes of construing § 57-4-201(b)(1) and the taxing provisions of Part 3 of Title 57, Chapter 2, therefore, the "person, firm or corporation owning" a "hotel" is the owner of that commercial enterprise or business.

The operation of a restaurant on the premises of a hotel may be granted by franchise to another person or entity, "and the holder of such franchise shall be included in the definition of 'hotel'" under the statute. Tenn. Code Ann. § 57-4-102(20)(A). A "franchise" is commonly understood to mean an authorization to carry out special commercial activities, like selling goods or providing services. New Oxford American Dictionary. Thus, the hotel enterprise can authorize some other person or entity to operate the hotel's dining facilities where liquor is sold or provide management services for those facilities on behalf of the hotel and, if that authority is granted, then the franchisee is also a "hotel" within the meaning of the statute. It follows, then, that the owner of the franchisee is also the owner of a hotel within the meaning of Tenn. Code Ann. § 57-4-201(b)(1) and can apply for and obtain the required license to sell alcoholic beverages for consumption in the hotel.

The licensing requirements of Tenn. Code Ann. § 57-4-201(d) in fact contemplate that such a franchisee may apply for and hold the required permit to sell alcoholic beverages for consumption in the hotel. When an applicant applies for a license, that applicant has to disclose its name, "the location of the hotel," "the true owner thereof," and has to swear that "the manager and/or operator of the hotel . . . seeking such permit is of good moral character." Tenn. Code Ann. § 57-4-201(d). This only makes sense if the applicant for the license may be different from the owner of the hotel and only if the applicant/licensee in fact may be the manager/operator of the hotel.

In practice, owners of hotels that qualify for licensing under Tenn. Code Ann. § 57-4-102 do sometimes contract with management companies to manage or operate the business, including the sale of alcoholic beverages, and the Tennessee Alcoholic Beverage Commission has a longstanding practice of granting the licenses required by Tenn. Code Ann. § 57-4-201(b)(1) to such management companies. This practice is particularly necessary in the case of establishments owned by municipal corporations since they themselves are not allowed to obtain licenses for the on-premises sale of alcoholic beverages and must obtain licenses through third parties. See Tenn. Att'y Gen. Op. No. 14-03 (Jan. 9, 2014). Tennessee Code Ann. § 57-4-201 and other Code provisions pertaining to intoxicating liquors have been amended numerous times over the years without any attempt or intent to alter the Commission's longstanding interpretation and application of the licensing requirements with respect to hotel management companies. This administrative interpretation is accorded substantial weight, because, as the Tennessee Supreme Court has stated, the "construction of a statute . . . adopted by the legislative or executive departments of the State, and long accepted by the various agencies of government and the people, will usually be accepted as correct by the courts." State v. Nashville Baseball Club, 127 Tenn. 292, 154 S.W. 1151, 1154 (Tenn. 1913), quoted in New England Mut. Life Ins. Co. v. Reece, 83 S.W.2d 238, 241 (Tenn. 1935).

In sum, the owner of a hotel enterprise may apply for and hold the license required under Tenn. Code Ann. § 57-4-301(b)(1)(T) for the sale by a hotel of alcoholic beverages sold for consumption on the premises. If the hotel enterprise grants a franchise to a management company for the operation of the food and beverage portion of the hotel business, the franchisee becomes a "hotel" and, therefore, the owner of the franchisee may, but does not have to, become the applicant for and holder of the license. In that situation, the terms of the franchise grant or management agreement may speak to and govern who applies for a license.

2. Title 57, Chapter 4, Part 3 provides for the taxation of sales of alcohol for on-premises consumption at establishments licensed under the authority granted in Parts 1 and 2. "[E]very person is exercising a taxable privilege who engages in the business of selling at retail in this state alcoholic beverages for consumption on the premises." Tennessee Code Ann. § 57-4-301(a). The applicant for an on-premises consumption license is required to pay the ABC a "one-time, non-refundable fee . . . when the application is submitted for review." Tenn. Code Ann. § 57-4-301(b)(1). The licensee must then pay taxes, as required by Tenn. Code Ann. § 57-4-301(b) and (c).

These taxes are collected by the Commissioner of Revenue and "shall be collected by the retailer from the consumer insofar as it can be done." Tenn. Code Ann. § 57-4-302. Each licensee is required to post and maintain an indemnity bond with the Commissioner of Revenue for the greater of $1000 or quadruple its average monthly tax liability as determined by the Commissioner. Id.

In sum, it is the licensee that is liable for the payment of these fees and taxes. Thus, if a management company obtains a license under Tenn. Code Ann. § 57-4-201(b)(1), the one-time fee is imposed on that company when it applies for a license. The management company is then also the retailer and is charged with collecting the tax from consumers and remitting it to the Commissioner of Revenue. The owner of the hotel enterprise is not the licensee and, therefore, is not charged with collecting the tax.

3. If "any licensee liable for any tax, interest or penalty" under Title 57, Chapter 4, Part 3 sells the business or stock of goods, or "quit[s] the business, the licensee shall make a final return and payment" of any taxes, interest, and penalty due. Tenn. Code Ann. § 57-4-303 (emphasis added). Thus, if a hotel management company is the licensee and if its franchise is terminated or it ceases its management operations for any reason, it must timely make a final return and payment of all taxes, interest, and penalties due under the statute.

4. Whether the owner of a hotel enterprise or a management company assuming operation of a hotel would be liable for unpaid taxes owed by a management company that quits the business would depend on the circumstances in which the new licensee assumes operation of the hotel. See Tenn. Code Ann. § 57-4-303. Any consideration paid to the former management company for its license or its stock of goods would be deemed "purchase money" for purposes of Tenn. Code Ann. § 57-4-303.

5. A management company holding a license for the sale of alcoholic beverages for on-premises consumption would be liable for collecting and remitting the taxes on those sales as both the licensee under Tenn. Code Ann. § 57-4-201(b)(1) and the seller under Tenn. Code Ann. §§ 57-4-301(c) and 57-4-302. Although the hotel owner would be entitled to obtain a license and make sales without the services of a management company, there is no provision in the law for a licensee to be liable for taxes jointly with another person who is not a licensee.

6. As provided in Tenn. Code Ann. § 67-4-708, the management company would be classified "according to the dominant business activity," which would depend on whether sales of prepared food and drinks or fees received for management of the hotel constituted the "major and principal source of taxable gross sales of the business." Tenn. Code Ann. § 67-4-702(5). This determination would depend, in turn, on whether the management company receives the food and drink revenues directly or instead receives a fee for its management services. If the "major and principal" portion of its gross sales comes directly from the sale of prepared food and drinks, the management company would fall under Classification 2 and be taxed accordingly. Tenn. Code Ann. § 67-4-708(2)(G) ("sales of . . . [p]repared food and drinks, including alcoholic beverages, for consumption on and/or off the premises"). If the "major and principal" portion of its gross sales comes from fees for managing the hotel, however, the management company would be subject to the business tax under § 67-4-708(3)(C), which imposes the business tax on persons "making sales of services or engaging in the business of furnishing or rendering services."

HERBERT H. SLATERY III
Attorney General and Reporter

ANDRÉE SOPHIA BLUMSTEIN
Solicitor General

JONATHAN N. WIKE
Senior Counsel

Requested by:
The Honorable Richard H. Roberts
Commissioner of Revenue
Andrew Jackson State Office Building
Nashville, Tennessee 37242