If a Texas city annexes land inside a county assistance district, does the district lose that territory?

Plain-English summary

Senator Charles Perry, chair of the Senate Committee on Water and Rural Affairs, asked five questions about whether Ector County followed chapter 387 of the Local Government Code when it created a county assistance district. County assistance districts are political subdivisions that can levy a sales and use tax and spend the money on things like economic development, law enforcement, and road projects. The dispute grew out of two moves that happened at almost the same time: the County called a November 2018 election to create the district, while the City of Odessa was annexing land that sat inside both Odessa's extraterritorial jurisdiction (ETJ) and the proposed district. The result was overlapping territory where the district's 1.25 percent tax and Odessa's 2 percent tax together would have exceeded the 2 percent cap.

On the first question, the AG read subsection 387.003(b), which says the commissioners court must define the district to include "any portion" of the county where the combined tax rate would not exceed the statutory maximum. Reading "any" to mean "every," the AG advised that a court would likely conclude the County was required to include Odessa's ETJ in the district, because Odessa imposed no sales tax in its ETJ and that area was therefore below the cap when the election was called.

On the second question, notice, the AG reached the opposite-seeming but consistent result. Subsection 387.003(b-1) requires notice to a city only if the proposed district "includes any territory of a municipality." For sales-tax purposes a "municipality" is an incorporated city, and a city's incorporated limits do not include its ETJ. Because the ballot expressly excluded Odessa's municipal limits, no "territory of a municipality" was inside the proposed district, so the AG advised a court would likely conclude the County owed Odessa no notice.

The third and fourth questions asked whether the district shrinks when Odessa later annexes overlapping land, and whether the ballot was an enforceable "contract with the voters" that blocked the Comptroller from applying the tax rules. The AG advised no on both. Nothing in chapter 387 or Tax Code chapter 321 makes a district's boundary recede because of a city's annexation; a county assistance district changes its boundaries only when the commissioners court orders an election, acts on a landowner petition, or excludes territory by order. Real property boundaries are presumed static, the election order said nothing about an ever-changing boundary, and a court would likely read the boundary as fixed as of election day. With a static boundary, the Comptroller's tax handling did not impair any contract with the voters.

On the fifth question, the AG explained what the Comptroller did and why. Under Tax Code subsections 321.102(e) and (f), when a city's annexation pushes the combined rate in overlapping territory above 2 percent, the other entity's rate is automatically cut to keep the total at 2 percent, and the Comptroller then withholds an equal dollar amount from the city and pays it to the other entity. So the district's rate was reduced on paper in the overlap, but its tax revenue was made whole out of the city's share. Because the district existed before Odessa's annexation, the AG advised the Comptroller acted as the statute directs.

What this means for you

This describes what the 2021 opinion holds. It is the AG's reading of chapter 387 and the related Tax Code provisions as they stood in 2021, not a ruling on any later dispute, and tax and local-government statutes change, so confirm current law before relying on it.

Commissioners courts and county officials

The opinion holds that subsection 387.003(b)'s "any portion" language likely requires a county to include every part of the county not already at the maximum combined rate, including a city's ETJ, when it draws a county assistance district. It also holds that excluding a city's incorporated limits in the ballot can mean no notice is owed to that city under subsection 387.003(b-1), because ETJ is not the city's "territory" for this purpose.

Cities and annexation planners

The opinion holds that a city's later annexation does not pull territory out of an existing county assistance district. The district's boundary stays as drawn at the creation election unless the commissioners court changes it.

The Comptroller and tax practitioners

The opinion describes Tax Code section 321.102(e)–(f) as the mechanism for overlapping rates: the later entity's rate is automatically reduced to hold the combined rate at 2 percent, and the Comptroller reallocates dollars from the city to keep the other entity's revenue unchanged. The opinion treats the Comptroller's handling of the Ector County overlap as consistent with that statute.

Property owners and businesses in the overlap

For a buyer or business in the overlapping area, the opinion explains why the combined sales tax was capped at 2 percent rather than 3.25 percent, and why the district did not simply disappear from the annexed land.

Common questions

Q: What is a county assistance district?
A: It is a political subdivision a county can create to raise revenue, typically through a sales and use tax, for purposes like economic development, law enforcement, and road and highway projects.

Q: Did the AG say Ector County broke the law?
A: No. The AG advised that a court would likely find the County was required to include Odessa's ETJ in the district, but also that the County owed no notice to Odessa and that the Comptroller's tax handling was proper. The opinion frames each point as how a court would "likely" rule, not a final adjudication.

Q: If a city annexes land inside the district, does the district lose it?
A: Under this opinion, no. The district's boundary is treated as fixed as of the creation election. A county assistance district changes its boundaries only by action of the county commissioners court.

Q: Why was the combined sales tax capped at 2 percent in the overlap?
A: Tax Code subsection 321.102(e) automatically reduces the later-overlapping entity's rate so the combined local rate does not exceed 2 percent, and subsection (f) directs the Comptroller to reallocate dollars from the city to the other entity so its revenue is not lost.

Q: Did the ballot lock in that Odessa would always be excluded, even from future annexations?
A: The AG advised no. A court would likely read the ballot as creating a static district boundary as of election day, not a boundary that shifts every time Odessa annexes more land.

Background and statutory framework

Chapter 387 of the Local Government Code (sections 387.001–.013) authorizes county assistance districts and lets them impose a sales and use tax under section 387.007. Subsection 387.003(b) requires the commissioners court to draw the district to include any portion of the county where the combined local sales and use tax, including the proposed district tax, would not exceed the maximum set by Tax Code sections 321.101 and 323.101. Subsection 387.003(b-1) requires notice to a municipality whose territory is included in a proposed district, and subsections 387.003(f), (i), and (j) describe how a district's territory is later added or excluded. The notice analysis turns on the Tax Code's definition of "municipality" as an incorporated city, town, or village (section 321.002(2)) and on the administrative definitions distinguishing a city from its ETJ (34 Tex. Admin. Code § 3.334(a)(2), (8)). The overlapping-rate analysis rests on Tax Code subsections 321.102(e) and (f). The "contract with the voters" discussion draws on article I, section 16 of the Texas Constitution and on San Saba Cnty. v. McCraw, Black v. Strength, City of San Antonio v. Headwaters Coal., Inc., and the static-boundary principle in Severance v. Patterson.

Citations and references

Statutes:

• Tex. Loc. Gov't Code ch. 387 (county assistance districts), §§ 387.003, 387.007
• Tex. Tax Code § 321.102 (overlapping rate reduction and reallocation), §§ 321.002, 321.101; Tex. Tax Code § 323.101
• 34 Tex. Admin. Code § 3.334 (Comptroller's local sales and use tax rules); Tex. Const. art. I, § 16

Key cases:

• Beck v. Craven, 360 S.W.2d 827 (Tex. App.—Houston [1st Dist.] 1962, no writ) and Hime v. City of Galveston, 268 S.W.2d 543 (Tex. Civ. App.—Waco 1954, writ ref'd n.r.e.) ("any" means "every")
• San Saba Cnty. v. McCraw, 108 S.W.2d 200 (Tex. 1937) and Black v. Strength, 246 S.W. 79 (Tex. 1922) (contract with the voters)
• Severance v. Patterson, 370 S.W.3d 705 (Tex. 2012) (real property boundaries are static)

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/ken-paxton/kp-0365
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/2021/kp-0365.pdf

Original opinion text

KEN PAXTON
ATTORNEY GENERAL OF TEXAS

April 5, 2021

The Honorable Charles Perry
Chair, Committee on Water and Rural Affairs
Texas State Senate
Post Office Box 12068
Austin, Texas 78711-2068

Opinion No. KP-0365

Re: Ector County's compliance with chapter 387 of the Local Government Code, regarding creation of a county assistance district (RQ-0382-KP)

Dear Senator Perry:

You ask five questions about Ector County's compliance with chapter 387 of the Local Government Code in its creation of a county assistance district.¹

Background

County assistance districts are political subdivisions created to generate revenue for specified uses including economic development, law enforcement, road and highway projects, and other services that benefit the public health or welfare. See TEX. LOC. GOV'T CODE §§ 387.001–.013. A county assistance district may impose a sales and use tax and use the tax revenue for the general purposes specified by chapter 387. See id. § 387.007.

You tell us that in June of 2018 the Ector County Commissioners Court ("County") called for a November election to approve the creation of a county assistance district ("District"). See Request Letter at 1. You also tell us that chapter 387 required the County to include in the area of the proposed district all of the "unincorporated area of the County, which includes the area of extraterritorial jurisdiction ("ETJ") of the City, located in Ector County, an area in which the combined local sales tax would not exceed the maximum local sales tax rate at the time of the adoption of the [o]rder." Id. at 2. You state that the ballot's language described the territory of the District as "all portions of the territory situated in Ector County, Texas, excluding all territory within the municipal limits of . . . Odessa and Goldsmith." Id. at 1. You assert that the County did not notify the City of Odessa ("City" or "Odessa") as required by chapter 387.² See id. at 2 (citing subsection 387.003(b-1) of the Local Government Code). You inform us the County claims it did not have to "because the District excluded the City from . . . the proposed district." Id.

The City initiated annexation proceedings on August 18, 2018, after the County's order calling for the November election concerning the District's creation. See id. The City adopted its annexation ordinance on November 27, 2018, with the annexation to be effective on January 1, 2019. See id. Thus, you state that "[w]hile the annexation was moving forward, on November 6, 2018, the creation of the [District] was approved by voters." Id.

Lastly, with respect to the actions of the Comptroller of Public Accounts ("Comptroller"), you tell us that the City submitted its annexation ordinance to the Comptroller on December 20, 2018, and the Comptroller postponed the collection of the tax in the annexed area until April 1, 2019. Id. You also tell us that the County submitted its November 7, 2018 canvass order regarding the District election to the Comptroller such that the proposed new tax would take effect on April 1, 2019. See id.

Your questions implicate the overlapping territory caused by the parallel moves of Odessa and the County described above. The District includes territory formerly located within Odessa's ETJ. But Odessa annexed portions of this same territory on November 27, 2018, bringing that territory into the incorporated limits of Odessa (the "Overlapping Territory"). In the Overlapping Territory, the District imposes a 1.25 percent tax rate and Odessa imposes a 2 percent tax rate.³ Thus, the parallel moves resulted in a combined tax rate of 3.25 percent in the Overlapping Territory. See Comptroller Brief at 3. In administering the tax in this Overlapping Territory, the Comptroller states that it did each of the following: (i) identified it as a "combined area," (ii) reduced the tax rate to the maximum allowed rate of 2 percent, and (iii) provided 1.25 percent to the District and the remainder to Odessa. See id. You characterize the Comptroller's action as "an express administrative determination that the District boundaries and the authorizing election exceeded the County's limited power to create the District." Request Letter at 3. You ask about the legality of the various actions of the District, the City, and the Comptroller. See id. at 4–5.

Ector County's Compliance with Chapter 387 of the Local Government Code

Your first two questions inquire whether the County complied with chapter 387 with respect to territory and notice. See id. at 4. Subsection 387.003(b) requires the commissioners court seeking to create a county assistance district to:

define the boundaries of the district to include any portion of the county in which the combined tax rate of all local sales and use taxes imposed, including the rate to be imposed by the district if approved at the election, would not exceed the maximum combined rate of sales and use taxes imposed by political subdivisions of this state that is prescribed by Sections 321.101 and 323.101, Tax Code.

TEX. LOC. GOV'T CODE § 387.003(b). We find no judicial opinion construing the meaning of "any" for purposes of subsection 387.003(b). But judicial opinions have construed the term "any" consistently in other contexts to mean "[s]ome; one out of many; . . . and is given the full force of 'every.'"⁴ Thus, the "any portion" language cited above requires that a proposed district encompass every portion of the county territory not otherwise at the combined maximum rate. From a plain reading of the above statute, if Odessa did not impose a sales and use tax in its ETJ when the County called the election for the creation of the District, then that ETJ is territory of the County in which the maximum tax rate would not have at the time the election was called exceeded the statutory maximum. As such, a court would likely conclude that subsection 387.003(b) required the County to include Odessa's ETJ in the District's proposed boundaries.

Subsection 387.003(b-1) provides that "[i]f the proposed district includes any territory of a municipality, the commissioners court shall send notice . . . to the governing body of the municipality of the commissioners court's intent to create the district."⁵ TEX. LOC. GOV'T CODE § 387.003(b-1). To determine the applicability of subsection 387.003(b-1) we must ascertain the meaning of the phrase "territory of the municipality." Chapter 387 does not provide a definition, but for purposes of sales and use taxes, the term "municipality" means "any incorporated city, town, or village." TEX. TAX CODE § 321.002(2) (emphasis added). The incorporated limits of a municipality exclude its ETJ. See generally 34 TEX. ADMIN. CODE § 3.334(a)(2), (8) (defining for purposes of the Comptroller's administration of local sales and use taxes the term "city" to mean "[a]n incorporated city, municipality, town, or village" and defining "extraterritorial jurisdiction" to mean "[a]n unincorporated area that is contiguous to the corporate boundaries of a city"). By its own terms, extraterritorial jurisdiction is outside the territory of the jurisdiction. See NEW OXFORD AM. DICTIONARY 614 (defining "extraterritorial" as "(of a law or decree) valid outside a county's territory" or "situated outside a country's territory"). Construing subsection 387.003(b-1) to require notice to a city only when a proposed district includes the incorporated territory of the city, the County's express exclusion of Odessa's municipal limits in its ballot language means that no territory of a municipality was included in the proposed district. Accordingly, a court would likely conclude that subsection 387.003(b-1) required no notice to the City of Odessa.

Impact of Future Annexations on the District's Boundaries

Your third question asks whether the District's ballot proposition excluding the territory of Odessa also excludes "future land annexed" by Odessa. See Request Letter at 5. This question presumes that future annexations by Odessa of territory within both its ETJ and the District's territory will cause the District's boundaries to recede. Nothing in either chapter 387 of the Local Government Code or chapter 321 of the Tax Code provides for a such a result. The District's boundary does not change because of Odessa's annexation: A county assistance district changes its boundaries only pursuant to action of the county commissioners court to either order an election or respond to a landowner's petition to add territory to the district, or to exclude territory from the district by order. See generally TEX. LOC. GOV'T CODE § 387.003(f) (authorizing commissioners court to call election to determine whether additional county territory should be included in a district); id. § 387.003(i) (providing for inclusion of additional territory in district upon receipt of landowner petition); id. § 387.003(j) (authoring the commissioners court to exclude territory in certain circumstances).

If Odessa was to annex territory in its ETJ that is also within the boundaries of the District resulting in a tax rate in excess of the 2 percent maximum, subsections 321.102(e) and (f) of the Tax Code direct certain actions to keep the tax rate from exceeding the maximum tax rate. See TEX. TAX CODE § 321.102(e), (f). They provide as follows:

(e) If as a result of the imposition or increase in a sales and use tax by a municipality in which there is located all or part of a local governmental entity that has adopted a sales and use tax or as a result of the annexation by a municipality of all or part of the territory in a local governmental entity that has adopted a sales and use tax the overlapping local sales and use taxes in the area will exceed two percent, the entity's sales and use tax is automatically reduced in that area to a rate that when added to the combined rate of local sales and use taxes will equal two percent.

(f) If an entity's rate is reduced in accordance with Subsection (e), the comptroller shall withhold from the municipality's monthly sales and use tax allocation an amount equal to the amount that would have been collected by the entity had the municipality not imposed or increased its sales and use tax or annexed the area in the entity less amounts that the entity collects following the municipality's levy of or increase in its sales and use tax or annexation of the area in the entity. The comptroller shall withhold and pay the amount withheld to the entity under policies or procedures that the comptroller considers reasonable.

Id. § 321.102(e)–(f). These subsections provide that if a municipality expands into territory of another political subdivision and causes the combined tax rate to exceed the maximum, the other political subdivision's tax rate is reduced by an amount sufficient to bring the combined rate back in line with the maximum. But these subsections direct the Comptroller to take the dollar amount equal to the other political subdivision's rate reduction from the city and give it to the other political subdivision, thereby leaving the other political subdivision's tax revenue unchanged. As stated above, nothing in Local Government Code chapter 387 provides for a change in the District's boundaries based on the future actions of Odessa. And Tax Code subsections 321.102(e) and (f) expressly provide for the allocation of taxes imposed by two political subdivisions in overlapping territory such as happened here. Accordingly, a court would likely not have a basis from these provisions to conclude that the District's boundary recedes to exclude future annexations by Odessa.

Meaning of the District's Election Proposition

Your fourth question is whether the District's ballot "represents an enforceable contract with the voters that cannot be disregarded or impaired by the administrative application of Section 321.10[2] of the Tax Code[.]"⁶ Request Letter at 5. You assert that the putative contract with the voters was that the District would exclude all the territory of Odessa (now and in the future) and that this condition attaches to all future expansions of Odessa, essentially precluding the Comptroller from applying section 321.102 of the Tax Code. See id. at 3–4.

The "contract with the voters" doctrine stems from article I, section 16 of the Texas Constitution, which prohibits laws that impair the obligation of contracts. TEX. CONST. art. I, § 16, Interpretive Commentary; see San Saba Cnty. v. McCraw, 108 S.W.2d 200, 202–04 (Tex. 1937) (orig. proceeding). Generally, the express terms of an order submitting a proposition for a tax or bond election that identify the purposes for which the proceeds are to be used becomes a contract with the voters. Id. (concerning a tax election); Black v. Strength, 246 S.W. 79, 80–81 (Tex. 1922) (concerning a bond election). Thus, tax revenues approved by voters "may only be expended for the purpose for which they were approved." Tex. Att'y Gen. LO-98-060, at 2.

Courts considering the question look to the relevant documents comprising the "contract with the voters" to ascertain the governmental body's intent regarding the proceeds. City of San Antonio v. Headwaters Coal., Inc., 381 S.W.3d 543, 551 (Tex. App.—San Antonio 2012, pet. denied). The County's order calling for the election identified the measure as follows:

Shall the Ector County Assistance District (with boundaries being all portions of the territory situated in Ector County, Texas excluding all territory within the municipal limits of the Cities of Odessa and Goldsmith) be created and a sales and use tax at the rate of 1.25 percent be imposed for the purpose of financing the operations of the District?

Election Order § 1.⁷ The County's election order also identified the boundaries of the proposed district to be "all portions of the territory of Ector County, Texas excluding all territory within the municipal limits of the cities of Odessa and Goldsmith." Id. § 2. The ballot language is as follows:

Authorizing the creation of the Ector County Assistance District and the imposition of a sales and use tax at the rate of 1.25 percent for the purpose of financing the operations of the District.

Id. § 5. These election materials carve out of the proposed district the territory of the two municipalities, but the dispositive issue is whether the voters viewed this exclusion as operating to create either a static district boundary as of the date of the election or instead a fluid district boundary that changes as the excluded municipalities annex territory in the future.

General property law principles in Texas recognize that real property boundaries are static and attach to a specific portion of the property. See generally Severance v. Patterson, 370 S.W.3d 705, 722 (Tex. 2012).⁸ Furthermore, the election order contains no express recitation that the proposed district's boundaries would be everchanging based on potential future activity by one of the listed municipalities. See Election Order §§ 1–9. The recitations in the election order about the combined tax rate not exceeding the maximum rate more likely refer to the existing statutory requirement in chapter 387 and not as an unstated, perpetual condition imposed on the proposed district's boundaries. To construe the election order to designate a boundary that is fluid and changing with every municipal annexation would require us to add language to the election order, which a court would likely decline to do. Cf., Williams v. Tex. State Bd. of Orthotics & Prosthetics, 150 S.W.3d 563, 573 (Tex. App.—Austin 2004, no pet.) (recognizing that courts will not read into an act a provision that is not there). Accordingly, a court would likely conclude that the voters in Ector County voted on the creation of a proposed district with a static boundary defined as of the date of the election. With a static district boundary, the Comptroller's actions pursuant to Tax Code section 321.102 do not disregard or impair the contract with the voters.

Comptroller's Tax Rate Reduction

Your last question is "whether the effect of the Comptroller's stated administrative interpretation to include the City's 2018 annexed area resulted in the Comptroller effectively imposing for the first time sales taxes in a District's boundaries where the maximum combined sales tax rate was greater than two percent in violation of subsection 387.003(b-1)."⁹ Request Letter at 5. Tax Code subsection 321.102(e) reduces the tax rate to 2 percent, and subsection 321.102(f) reallocates the amount collected as between the annexing municipality and the existing local entity. TEX. TAX CODE § 321.102(e), (f). The Comptroller informs us he acted as directed by these provisions because the creation of the District and the imposition of its taxes preceded Odessa's annexation. Comptroller Brief at 1. The Comptroller's view of the order of actions by the District and Odessa comports with the conclusion that the District's boundary is a static one, which excludes Odessa's municipal territory only as such municipal territory existed on the date of the election. Thus, the tax rates are reduced by operation of law such that the rate in the overlapping territory does not exceed the maximum.

¹ See Letter from the Honorable Charles Perry, Chair, Senate Comm. on Water & Rural Affairs, to the Honorable Ken Paxton, Tex. Att'y Gen. at 1, 4–5 (Oct. 7, 2020), https://www2.texasattorneygeneral.gov/opinions/opinions/51paxton/rq/2021/pdf/RQ0382KP.pdf ("Request Letter").

² You do not ask about the County's compliance with subsection 387.003(b-1), which requires notice to the board of directors of a development corporation that has been created by the municipality, and we do not address it.

³ See Memorandum from Glenn Hegar, Tex. Comptroller of Pub. Accts., to the Op. Comm. at 3 (Oct. 30, 2020) (hereinafter "Comptroller Brief") (on file with the Op. Comm.).

⁴ Beck v. Craven, 360 S.W.2d 827, 830 (Tex. App.—Houston [1st Dist.] 1962, no writ) (citations omitted); Hime v. City of Galveston, 268 S.W.2d 543, 545 (Tex. Civ. App.—Waco 1954, writ ref'd n.r.e.) (recognizing that the "word 'any' has been judicially construed to mean: 'each' or 'every' or 'all'; and particularly in construing statutes, the word 'any' is equivalent to and has the force of 'every' and 'all'" (citations omitted)).

⁵ You do not ask about, and we offer no opinion on, the impact of the election on the territory of the City of Goldsmith, which is also located in Ector County. See Request Letter at 1–5.

⁶ Though your literal question is about section 321.101, section 321.102 provides for the Comptroller's action in the circumstances you describe. See TEX. TAX CODE § 321.102; see also Request Letter at 5.

⁷ See Request Letter attachments (on file with the Op. Comm.).

⁸ While specific instances allow for fluid real property boundaries, such instances typically involve boundaries established by bodies of water that change due to natural forces that affect shorelines or river banks. Severance, 370 S.W.3d at 722; see also Coastal Indus. Water Auth. v. York, 532 S.W.2d 949, 952 (Tex. 1976) (discussing erosion, accretion, and avulsion doctrines affecting property boundaries). Absent such a body of water in Ector County that would regularly impact property boundaries, Ector County voters likely would not imbue that fluid nature to the boundary of the proposed district.

⁹ Though your literal question is about subsection 387.003(b-1), section 387.007 is the provision prohibiting a district from imposing a tax that would result in a combined rate that exceeds the statutory maximum. TEX. LOC. GOV'T CODE § 387.007; see also Request Letter at 5.

S U M M A R Y

Chapter 387 of the Local Government Code provides for county assistance districts, and subsection 387.003(b) establishes the boundaries for those districts. A court would likely conclude that subsection 387.003(b) required Ector County to include the City of Odessa's extraterritorial jurisdiction in the Ector County's county assistance district's proposed boundaries.

Construing subsection 387.003(b-1) to require notice to a city only when a proposed district includes the incorporated territory of the city, the County's express exclusion of Odessa's municipal limits in its ballot language means that no territory of a municipality was included in the proposed district. Accordingly, a court would likely conclude that subsection 387.003(b-1) required no notice.

Neither statute nor equitable principles of law such as the contract with the voters or administrative action by the Texas Comptroller provide a basis to conclude that the District's boundaries should exclude future land annexations by Odessa.

Very truly yours,

KEN PAXTON
Attorney General of Texas

BRENT E. WEBSTER
First Assistant Attorney General

LESLEY FRENCH
Chief of Staff

MURTAZA F. SUTARWALLA
Deputy Attorney General for Legal Counsel

VIRGINIA K. HOELSCHER
Chair, Opinion Committee

CHARLOTTE M. HARPER
Assistant Attorney General, Opinion Committee