Implementing Statutory Allocations of Tax Revenue after Annexation
As discussed in the interim report on Public Chapter 441, the Growth Policy Act (Public Chapter 1101, Acts of 1998) requires local option sales tax and beer wholesale tax revenue collected in newly annexed areas to continue to go to the county for 15 years except for any increase in revenue, which goes to the annexing city. The law requires that counties continue to collect revenue from the local option sales tax and beer wholesale tax—“taxes distributed on the basis of situs of collection”—in the annexed areas until July 1 following the annexation. Then, for the next 15 years, the county is supposed to receive an annual amount equal to what these taxes produced in the annexed area in the twelve months preceding that July 1. Increases above this hold harmless amount are distributed to the annexing city.55
Partly because of a lack of data on retail beer sales in annexed areas, all of the beer wholesale tax has gone to the annexing cities since the hold harmless provision went into effect, not just the increases. Recent changes in reporting requirements may make it possible for the Tennessee Department of Revenue to identify beer retailers among the lists of annexed businesses and request beer wholesalers selling to these businesses to provide the tax payment information necessary to calculate the hold harmless amounts.
The revenue department, cities, and counties all have roles in the reporting and distribution of the hold harmless amounts. Cities are responsible for reporting annexations to the Department of Revenue, but counties are responsible for providing the names and addresses of businesses in the annexed territory.56 Using the reported information, the department is responsible for calculating the “annexation date revenue,” which represents the local share of revenue from the local option sales and beer wholesale taxes collected from annexed businesses during the previous year. Annexing cities are responsible for distributing the beer wholesale tax amounts.57
While it is not clear that it would be possible to calculate the amount improperly paid to cities in the past, this error can and should be avoided going forward using information that is now available to local governments and the Department of Revenue. First, when the impacted city and county governments notify the Department of Revenue of the name and location of businesses in the annexed area, which they report so that the department can correctly track local sales tax collections, they could also report if any of these businesses hold a retail beer license. Retailers in county areas that sell beer are required to have a county beer tax license, and when they are annexed into a city, they must obtain a new license from the city.
Next, the department also can identify likely or possible beer retailers from the list of businesses that were furnished to it by local governments. Every sales tax account has a four-digit business activity code. The department can use the code to determine if any of the businesses identified as involved in annexations were likely or possible beer retailers, for example, grocery stores, eating places, drinking places, drug stores, and gas stations. The department could then check with local governments to determine if any of these businesses hold a retail beer license. Once identified, the department, with authority given to it under Tennessee Code Annotated Section 57-5-206, could request beer wholesalers to provide the appropriate data needed to calculate the hold harmless amount for wholesale beer tax collections.
Finally, since the passage of Public Chapter 657, Acts of 2012, the department now receives detailed data from beer wholesalers that identifies all retailers to whom they sell beer. This information includes the sales tax account number of each retailer. Crosschecking this information with the information they already have on businesses they are tracking for purposes of the hold harmless requirements on local sales taxes would identify those that sell beer and paid wholesale beer taxes. The Department could then request wholesalers to provide the necessary data with which to calculate the annexation date revenue wholesale beer tax hold-harmless amount.
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55 Tennessee Code Annotated, Section 6-51-115.
56 Ibid.
57 Ibid.