Mark McGrady liquor by the drink

Attorney Mark McGrady, who represents the City of Tullahoma in an ongoing liquor-by-the-drink tax lawsuit filed by the Coffee County Board of Education, gives an update on the case to the board of mayor and aldermen Monday night. McGrady said the county school system proposed a settlement offer, which was unanimously rejected by the city board.

– Staff Photo by Erin McCullough

An ongoing lawsuit between the City of Tullahoma and the Coffee County Board of Education (CCBOE) over distribution of liquor-by-the-drink taxes will head to the Tennessee Supreme Court, according to the city’s lead counsel and a vote by the Tullahoma Board of Mayor and Alderman.

According to City Attorney Steve Worsham, “this matter has proceeded from the Coffee County Chancery Court, where we prevailed, to the Tennessee Courts of Appeal, where the Chancery Court’s decision was overruled, to now the Tennessee Supreme Court.”

Worsham added that the case is scheduled to be heard by the Tennessee Supreme Court on Oct. 4.

During the city board’s Monday night meeting, attorney Mark McGrady, who is representing the city on the liquor-by-the-drink-tax lawsuit against the county school system, gave an update on the matter, which involved a proposal to settle the case.

McGrady said during the preparations for oral arguments to be heard by the Tennessee Supreme Court, he received an email from CCBOE Attorney Eric Burch with an offer to settle the matter.

The offer, however, was denied by the board of mayor and aldermen, so the case will be heard by the Supreme Court at 1:30 p.m. on Thursday, Oct. 4.



According to McGrady, the original complaint was filed by CCBOE in late May 2014.

The school system claims that since 1980, the city has collected liquor-by-the-drink tax revenues that belong to the county – revenues that total $387,488.

McGrady said the issue stems from the county’s interpretation of two different state statutes.

“There is a statute in Tennessee that says when liquor by the drink is sold in Tennessee, that a 15-percent tax is collected,” McGrady told the board. “It’s like a sales tax, but it’s in addition to a sales tax,” he said.

“And then there is a statute that indicates how that money is to be distributed. Half of it is retained by the state for education, and the other half of it is distributed to the local government, where the tax is collected,” he said.

The county board of education claims half of the collected liquor-by-the-drink tax money should have been distributed among all three school systems in Coffee County, according to each systems “average daily attendance.”

This would mean Coffee County Schools would get half of that figure, as the system currently has around 50-percent of the county’s total student population. Tullahoma has the next largest piece of the pie, followed by Manchester City Schools, as it is only a K-through-8 school district.

With those figures in mind, McGrady said CCBOE has calculated it is owed $387,488 from 1980 to 2014.

McGrady said the city won the case in the Coffee County Chancery Court but lost when CCBOE appealed to the Nashville appellate court.

“The school system appealed to the court of appeals in Nashville and they [the court] reversed the decision of the trial court and held that the city was required to share the money with the school system,” McGrady said.


Supreme Court case

At the same time the city’s case was being heard, there were four similar cases being argued in East Tennessee, according to McGrady.

There were cases out of Bradley, Blount, Sullivan and Washington counties which also involved a liquor-by-the-drink tax dispute, he said, most of which favored the cities involved.

“In those cases, in trial court, the cities won three of them; the county won one,” he said.

But then all four of those cases headed to the Knoxville appellate court, where the court sided with the cities.

Those cases were all decided in December of last year, with the Tullahoma case decision following a month later, in January 2018, siding with the county.

“So we had a split between what the court ruled in Knoxville versus what the court ruled in Nashville,” McGrady said, which is when the state Supreme Court is likely to hear a case.

“That is a time when the Tennessee Supreme Court is likely to hear a case, when you basically have two different court(s) of appeals deciding different things about the same issue,” he said.

The Tennessee Supreme Court will hear all five cases in October to determine final judgement on the issues.


Settlement offer

While both parties were preparing for oral arguments to be heard in October, Eric Burch, who represents CCBOE in this case, contacted McGrady with a settlement proposal.

“The proposal is to settle the matter before it’s argued before the Supreme Court,” McGrady said.

Burch told McGrady the county school system would be willing to accept the argued amount as a settlement in order to close the case – a figure totaling $193,744.

This would avoid a Supreme Court battle, according to McGrady, but if the city board rejected it and the case continued to trial, not only would the school system want the full $387,488, it would also request interest.

The interest from 2014 to the present would alone total $80,000 to $90,000, McGrady said, though the county may also request interest on the total amount from 1980. Estimations on that figure were unavailable by press time.

Despite the possibility of the Tennessee Supreme Court siding with the Coffee County School District, Alderman Ray Knowis made a motion to reject the settlement offer and allow the case to be heard by the Supreme Court.

The board unanimously voted to reject the offer.

Erin McCullough may be reached at