Tennessee Court Strikes Down Excise Tax on Whitewater Rafting

November 13, 2008

Polk County TN Photo credit Dan Lehr

Earlier this week, the Tennessee Court of Appeals ruled that Polk County, Tennessee‘s tax on whitewater rafting (a key activity in the county) is unconstitutional. See High Country Adventures, Inc. v. Polk County, Tenn., No. E2007-02678-COA-R3-CV (Tenn. Ct. App. Nov. 10, 2008).

Under state law, whitewater rafting services are exempt from the combined state and local 9.25% sales tax imposed in Polk County. See Tenn. Code Ann. § 67-6-330(a)(8). Such an exclusion is generally indefensible as yet another example of using the tax code to pick winners and losers, but in this case it exists because the rivers used by the services are federal waterways that cannot be taxed by the state.

However, in 1981, the state permitted Polk County to charge a privilege tax on consumers purchasing “amusements” at $2.50 per ticket, and keep the money for itself. Seen as a way to shift tax burdens to tourists (whitewater rafting is popular in the area), Polk County imposed such a tax on whitewater rafting.

From April to October 2001, High Country Adventures, Inc. paid $30,598.84 in privilege tax under protest and sought a refund. The lower court correctly rejected High Country’s argument that exclusion of whitewater rafting from the state sales tax prohibited local governments from taxing the activity, since that permission came from an explicit grant of power from the state. However, the tax fell afoul of the federal law prohibiting taxes and tolls on watercraft or their passengers using the navigable waters of the United States, 33 U.S.C. § 5(b).

Consequently, the tax was held to be pre-empted by federal law and Polk County has been instructed to refund the tax revenue collected. The tax had raised some $700,000 per year, and the county is considering appealing to the state supreme court.

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