Which mixed-use retail, restaurant, and commercial facilities near a new city-owned convention-center hotel qualify as 'ancillary facilities' whose sales and hotel taxes the city can have rebated to help pay off the project's bonds?

Plain-English summary

The Texas Comptroller drew a detailed line around which parts of a large downtown mixed-use redevelopment qualify as "facilities ancillary to the hotel" for purposes of a city's right to have state (and potentially local) sales, use, and hotel occupancy taxes generated there rebated back to help pay off the project's construction bonds.

The city is building a "qualified hotel project" under Chapter 351: a 200-room hotel next to its convention center, bundled with a ~385-unit residential building, ~80,000 sq. ft. of retail (including a food hall), 100,000+ sq. ft. of office space, and ~800 parking spaces, financed through a public facility corporation and layered sublease structure. Confirmed: the city qualifies as an "eligible central municipality" and is entitled to rebates of state sales/use taxes and state hotel occupancy taxes generated by the hotel and its ancillary facilities during the hotel's first 10 years of operation, plus certain local taxes a governmental body separately agrees to rebate. The harder question was what counts as an "ancillary facility." Drawing on the dictionary meaning of "ancillary" (providing necessary support to a primary operation) and a 2011 Texas appellate decision (Putnam v. City of Irving) holding that ancillary facilities needn't be physically attached to the hotel or derive most revenue from hotel guests, the Comptroller set concrete rules: restaurants and shops that exclusively sell tangible personal property qualify, wherever located within the project, as long as they're owned by (or on land owned by) the city/its public facility corporation and their closest wall is within 1,000 feet of the hotel or convention center. But medical/dental offices, spas, fitness centers, museums, cultural/civic and educational units, and laundry/dry-cleaning centers do NOT qualify as either "shops" or "convention center entertainment-related facilities" — even sitting in the exact same mixed-use buildings. The ruling also spells out the specific documentation (certificate of formation, capital improvement plan, maps proving the 1,000-foot distance, taxpayer ID numbers, confidentiality waivers) the city must submit to actually initiate the rebate.

What this means for you

Municipalities structuring qualified hotel projects with mixed-use ancillary development

Only food/beverage operations and pure retail "shops" (selling tangible personal property exclusively) reliably qualify as ancillary facilities generating rebatable tax revenue — service-oriented tenants like medical offices, spas, gyms, museums, and dry cleaners do NOT qualify, even in the same building complex, so factor that into how you structure leasing and revenue projections for bond financing.

Developers of hotel-anchored mixed-use projects near convention centers

The 1,000-foot distance is measured wall-to-wall (closest exterior wall to closest exterior wall for single-tenant buildings, or demising wall for multi-tenant buildings) from the hotel or convention center — plan tenant placement with this precise measurement in mind if ancillary-facility tax rebate eligibility matters to your project's financing.

Accountants, bond counsel, and municipal finance professionals

The controlling framework combines Section 351.102(b)-(c) (hotel project and rebate eligibility), the Putnam v. City of Irving appellate precedent on the meaning of "ancillary," and Section 151.429(h) plus Government Code § 2303.5055 for the specific taxes covered. Watch the flagged ALERT above: House Bill 2071 (2023) later created a separate sales-tax exemption for construction materials used to improve public-facility-corporation real property — a development this 2018 ruling doesn't address, since it predates that law by five years.

Common questions

Q: Does a spa or medical office inside a hotel-anchored mixed-use development generate rebatable sales tax for the city?
A: No. Per this ruling, medical/dental offices, spas, fitness/wellness centers, museums, cultural/civic and educational units, and laundry/dry-cleaning centers do not qualify as "facilities ancillary to the hotel," regardless of their location within the project.

Q: Does an ancillary facility need to be physically connected to the hotel to qualify?
A: No. Following Putnam v. City of Irving, ancillary facilities don't need to be physically attached to the hotel, and restaurants don't need to derive most of their revenue from hotel guests — but they DO need to be within 1,000 feet and meet the ownership requirement.

Q: How is the 1,000-foot distance measured?
A: Wall-to-wall: from the closest exterior wall of the hotel to the closest exterior wall of the convention center, and (for ancillary facilities) from the closest exterior wall of a single-tenant building or the closest demising wall of a multi-tenant building's space to the hotel or convention center.

Q: Can another city with a similar qualified hotel project rely on this ruling?
A: No. It's binding on the Comptroller only for the requesting city and facts presented, and cannot be relied on by any other municipality — and note the 2023 statutory development flagged in the alert above that postdates this ruling.

Citations and references

Statutes and rules:

• Tex. Tax Code § 351.102(b), (c) (Pledge for Bonds — qualified hotel project definition and rebate eligibility)
• Tex. Tax Code § 351.001(2), (7)(A) (Definitions — convention center facility; eligible central municipality)
• Tex. Tax Code § 151.429(h) (Tax Refunds for Enterprise Projects)
• Tex. Gov't Code § 2303.5055 (Refund, Rebate, or Payment of Tax Proceeds to Qualified Hotel Project)
• Putnam v. City of Irving, 331 S.W.3d 869, 872 (Tex. App.—Dallas 2011, pet. denied) (meaning of "ancillary" facilities)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/201801044L

Original ruling text

NOTE: This document is also indexed as a Hotel Tax document, STAR 201801009L.

ALERT: House Bill 2071 (88th Leg. Session, 2023) exempts from the sales and use tax purchases of materials by certain persons to improve the real property of a public facility corporation because the materials are for the benefit of the corporation. Effective 06/18/2023.

Jan. 9, 2018

City Attorney

City of CITY

ADDRESS

CITY, Texas 78283-3966

RE: Private Letter Ruling No. 2017010131

City of CITY, Taxpayer No. **

Dear **:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters. [ENDNOTES: 1] We are responding to your request dated March 31, 2017, which supplements the request dated Jan. 10, 2017. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You requested guidance on the qualifications for tax rebates under Section 351.102(b) and (c).

Facts Presented

The following facts are based on information in your original request dated Jan. 10, 2017 (Original Request), the supplemental request dated March 31, 2017 (Supplemental Request), and additional information you provided in our subsequent email correspondence and telephone conversations.

The City of CITY is redeveloping COMPANY A, an area in downtown CITY next to the CITY’s convention center facility. The CITY has adopted a capital improvements plan for the expansion of the CITY’s convention center facility and provided a copy of this plan with its request. The CITY will construct a mixed-use development consisting of four structures (the Project), including a 200 room hotel (the New Hotel), a residential building with around 385 residences (the Residential Building), approximately 80,000 square feet of retail space, including a food hall structure (the Food Hall), more than 100,000 square feet of office space, including an office building (the Office Building), and around 800 parking spaces. These structures will share commercial, retail, and food and beverage spaces at the ground level. Each structure will have a ground level containing multiple units leased to multiple subtenants.

The Project will be located on land (the Project Site) that the CITY conveyed to COMPANY B, a nonprofit public facility corporation authorized to act on the CITY’s behalf.

Pursuant to this authority, COMPANY B leased the Project Site to COMPANY C, which the CITY also created. COMPANY C subleased the Project Site to COMPANY D, an affiliate of COMPANY E. COMPANY E is expected to be the owner of the Project. COMPANY D will then sublease retail space to different subtenants.

The CITY indicates that some of the potential commercial, restaurant, and retail facilities may include a food hall, art gallery, bar/lounge, bicycle shop, cultural/civic unit, dessert shop, educational unit, fitness/wellness center, hobby retail or rental store, laundry/dry cleaning, live-work units, medical/dental offices, spas, specialty stores, sporting goods store, teashop, and toy store.

The CITY states that the cultural/civic and educational units may include a branch of a museum or a space for community groups that conduct performances or classes. The educational units may further include an educational toy store. The CITY describes the live-work units as spaces where designers, artists, or hand crafters display and sell their crafts on one floor and live on another floor. The CITY has not selected the tenants for the retail space or provided more detail because the Project is currently in the planning phase.

In the 2010 federal census, the CITY’s population was 1,327,407 and LOCATION County’s population was 1,714,773. Most of the CITY is located in LOCATION County.

Questions, Rulings, and Analysis

Our restatements of your questions are shown below, followed by our rulings and analysis. The questions are a compilation of questions from the Original Request and the Supplemental Request. As a result, we have revised the questions to respond to the questions you posed in both requests.

Question One: Is the CITY entitled to receive rebates pursuant to Section 351.102(c) (Pledge for Bonds) of state sales and use taxes and state hotel occupancy taxes generated by the New Hotel during the first 10 years after the New Hotel is open for initial occupancy?

Ruling One: The CITY is entitled to rebates pursuant to Section 351.102(c) of state sales and use taxes and state hotel occupancy taxes that an owner of a qualified hotel project receives during the first 10 years the hotel is open for initial occupancy, provided the New Hotel meets the requirements described in Section 351.102(b).

Question Two: What criteria does the Comptroller’s office use to determine whether a commercial business is a facility ancillary to a hotel within the meaning of Section 351.102(b)?

Ruling Two: The Comptroller’s office uses the following criteria to determine if a business is a facility ancillary to a hotel: whether the business provides necessary support for the operation and function of the hotel; whether the business is a convention center entertainment-related facility, restaurant, shop, or parking facility; and whether the business meets the distance and ownership requirements under Section 351.102(b).

Question Three: Are the commercial, restaurant, and retail facilities that the CITY describes as being located inside or outside the New Hotel building considered to be “facilities ancillary to the hotel” under Section 351.102(b), so that the CITY would be entitled to receive rebates of state sales and use taxes generated at these facilities during the first 10 years after the hotel is open for initial occupancy?

Ruling Three: For purposes of Section 351.102(b), “facilities ancillary to the hotel” that generate sales tax revenues may include the following, whether located inside or outside of the New Hotel building: food and beverage operations and retail stores that exclusively sell tangible personal property. These facilities must be owned by or located on land owned by the CITY or COMPANY B and must be located within 1,000 feet of the convention center facility or New Hotel. During the first 10 years after the New Hotel is open for initial occupancy, the CITY may be entitled to receive rebates of the state sales and use taxes generated at the facilities that qualify as “facilities ancillary to a hotel.” Medical or dental offices, spas, fitness/wellness centers, cultural/civic and educational units, museums, and laundry/dry cleaning centers do not qualify as “facilities ancillary to the hotel.”

Question Four: Assuming that the Comptroller’s office agrees that the CITY is entitled to receive the rebates under Section 351.102(c), what procedures will the CITY need to follow to obtain those rebates?

Ruling Four: Below are the current agency requirements to initiate a request for rebate, refund, or payment of taxes. The CITY should submit a written request to the Comptroller’s Audit Division along with the following required information:

Copy of the Certificate of Formation for COMPANY B;

Copy of the CITY’s Capital Improvement Plan;

Copy of the ordinance from the CITY approving the tax rebate agreement between the CITY or COMPANY B and the owner of the Project;

Copy of the architect’s plan for the Project;

A map that shows the New Hotel project is within 1,000 feet of the convention center facility and that the facilities ancillary to the hotel are within 1,000 feet of the convention center facility or the hotel;

Name and address of the New Hotel along with the Comptroller-issued taxpayer identification and location number for sales and use tax and hotel occupancy taxes;

Records from the New Hotel, convention center, and CITY, such as guest folios and press releases, which show the date when the project was or will open for initial occupancy;

Name and Comptroller-issued taxpayer identification, and location numbers that the New Hotel is using, or will use, for each ancillary facility under agreement with the hotel project;

Waiver of confidentiality releases signed by the authorized officer or director of the New Hotel and from each ancillary facility under agreement with the hotel project. These forms allow the Comptroller’s office to release the facility’s sales and use tax information to the CITY and/or COMPANY B. Releases must be renewed annually, unless the release specifically states it is in effect for three years;

Name and phone numbers of the contact person with the CITY and COMPANY B; and

Completed direct deposit authorization form from the owner of the hotel project, the CITY, or COMPANY B.

After review, the Comptroller’s office will give the CITY written notice as to the results of that review and will initiate the rebate process as appropriate.

Question Five: Assuming that the Comptroller’s office agrees that the CITY is entitled to receive the rebates under Section 351.102(c), what taxes would the rebates encompass and what would be the general timeline for payment of the rebates after the taxes are received by the Comptroller’s office?

Ruling Five: The rebates the CITY may receive based on Section 351.102(c) are the state sales and use taxes and state hotel occupancy taxes generated by the hotel project pursuant to Section 151.429(h) (Tax Refunds for Enterprise Projects). The CITY may also receive the ad valorem taxes, local sales and use taxes, local hotel occupancy taxes, and local mixed beverage taxes that a governmental body agrees to rebate to the CITY under Government Code Section 2303.5055 (Refund, Rebate, or Payment of Tax Proceeds to Qualified Hotel Project) during the first 10 years after the New Hotel is open for initial occupancy. The Comptroller’s office makes monthly payments of eligible taxes that are collected by or forwarded to the Comptroller’s office.

Analysis:

The CITY is an eligible central municipality as described in Section 351.001(7)(A) (Definitions) and therefore, is eligible for a hotel project.

Section 351.102(b) provides that a hotel project for the CITY is:

a hotel that is owned by, or located on land owned by, the CITY or by a nonprofit corporation acting on the CITY’s behalf, and located within 1,000 feet of an operational convention center facility owned by the CITY; and

any facilities ancillary to the hotel that are owned by, or located on land owned by, the CITY or by a nonprofit corporation acting on the CITY’s behalf, including convention center entertainment-related facilities, meeting spaces, restaurants, shops, street and water and sewer infrastructure necessary for the operation of the hotel or ancillary facilities, and parking facilities located within 1,000 feet of the hotel or convention center facility.

Section 351.102(b) provides, in part, that ancillary facilities include “convention center entertainment-related facilities,” “meeting spaces,” “restaurants,” and “shops.” However, the terms “facilities ancillary to the hotel,” “convention center entertainment-related facilities,” and “shops” are not defined by statute.

The use of the term “ancillary” throughout the Tax Code provides context to the meaning of the term. The term appears as follows:

“…group of manufacturing and processing machines and ancillary equipment that together are necessary to create or produce….” See Section 151.0047(b)(2) (Real Property Repair and Remodeling).

“…piping through which the product…is recycled or circulated in a loop between the single item of manufacturing equipment and the ancillary equipment that supports only that single item of manufacturing equipment….” See Section 151.318(c)(1)(B) (Property Used in Manufacturing).

“‘[q]ualified property’ means…tangible personal property…that is first placed in service in the new building…if the personal property is ancillary and necessary to the business conducted….” See Section 313.021(2)(C)(iii) (Definitions).

These uses of the term “ancillary” in the Tax Code recognize that the tool or personal property are necessary to support another purpose or thing.

The common meaning of the term also provides that “ancillary” means providing necessary support for operation and function. For example, Oxford Living Dictionaries defines the term as “providing necessary support to the primary activities or operation of an organization, system, etc.” “Ancillary.” Oxford Living Dictionaries, 2018, https://en.oxforddictionaries.com/definition/ancillary (Jan. 9, 2018).

In Putnam v. CITY of Irving, 331 S.W.3d 869, 872 (Tex. App.–Dallas 2011, pet. denied), the CITY of Irving constructed a hotel project. It proposed to pledge certain revenue, such as state and CITY sales and use taxes, state and CITY mixed beverage taxes, and state and CITY hotel occupancy taxes from the hotel and ancillary facilities to repay its bond debt. Id. at 872. Joe Putnam, a citizen, filed suit against the CITY of Irving claiming that the CITY could not pledge the state’s portion of state taxes generated at the project to repay its bond obligations because the project did not qualify as a “hotel project.” Id. He argued, in part, that the non-hotel facilities were not ancillary to the hotel. Id. at 876.

The court, in making its determination on whether the non-hotel facilities are ancillary facilities, looked to the language in Section 351.102(b). Id. The court used the common meaning of the term “ancillary” and relied on the examples provided in the statute. Id. The court held that the facilities did not have to be physically connected to the hotel and that the restaurants did not have to derive the majority of their revenue from hotel guests in order to qualify as “ancillary.” Id. The court further stated that “restaurants, performance hall[s], outdoor stages, outdoor plaza[s], and parking facilities” are “the types of facilities expressly included in the statute as examples of facilities ‘ancillary to [a] hotel.’” Id.

Based on these definitions, the case law, and the use of the term “ancillary” in the Tax Code, “facilities ancillary to the hotel” means facilities that provide necessary support for the operation and function of the hotel.

Additionally, Section 351.102(b) provides that facilities ancillary to the hotel include “convention center entertainment-related facilities,” “meeting spaces,” “restaurants,” “shops,” “street and water and sewer facilities,” and “parking facilities” within 1,000 feet of the hotel or convention center. Section 351.001(2) defines “convention center facilities,” but does not define “entertainment.” The common meaning of the term “entertainment” means “[a]n event, performance, or activity designed to entertain others.” “Entertainment.” Oxford Living Dictionaries, 2018. https://en.oxforddictionaries.com/definition/entertainment (Jan. 9, 2018). The court in Putnam did not distinguish between facilities ancillary to the hotel and convention center entertainment-related facilities when providing a list of ancillary facilities. See Putnam, 331 S.W.3d at 876. The Putnam decision went beyond the statutory examples and included performance hall, outdoor stages, and outdoor plaza. Id.

Based on the reading of the statute, case law, and the dictionary definition, “convention center entertainment-related facility” means a facility used for convention center events, activities, and performances.

Merriam-Webster Dictionary defines the term “shop” as “a building or room stocked with merchandise for sale: store.” “Shop.” Merriam-Webster Dictionary, 2018, https://www.merriam-webster.com/dictionary/shop (Jan. 9, 2018). Based on this definition, a “shop” means a retail store that exclusively sells tangible personal property.

The statute also requires facilities ancillary to the hotel to be owned by or located on land owned by the CITY or, as an eligible central municipality, a nonprofit corporation acting on behalf of the CITY. Finally, the statute requires facilities ancillary to the hotel to be located within the hotel or to be within 1,000 feet of the hotel or convention center facility. Section 351.102 is silent about how to measure the 1,000-foot distance between the ancillary facilities and the hotel or convention center facility. The Comptroller’s office determines that the 1,000-foot distance is measured as follows:

the closest exterior wall of the hotel must be within 1,000 feet of the closest exterior wall of the convention center facility; and

if the facility ancillary to the hotel is located in a single-tenant building, the closest exterior wall of the ancillary facility must be within 1,000 feet of the closest exterior wall of the convention center facility or hotel; or

if the facility ancillary to the hotel is located in a multi-tenant building, the closest demising wall of the ancillary facility must be within 1,000 feet of the closest exterior wall of the convention center facility or the hotel.

The closest demising wall of each restaurant and shop on the first floor level of the Residential Building, Food Hall, and Office Building must be within 1,000 feet of the closest exterior wall of the CITY’s convention center facility or the New Hotel to qualify for rebates. Food and beverage operations and retail stores that exclusively sell tangible personal property qualify as restaurants and shops, and therefore, qualify as facilities ancillary to a hotel pursuant to Section 351.102(b). The CITY may be entitled to receive rebates of the state sales and use taxes generated at these facilities if these facilities are owned by or located on land owned by the CITY or COMPANY B, and are located within 1,000 feet of the convention center facility or the New Hotel.

Medical or dental offices, spas, cultural/civic and educational units, fitness/wellness centers, museums, and laundry/dry cleaning centers do not qualify as shops. Further, these facilities do not meet the definition of convention center entertainment-related facilities. Examples of convention center entertainment-related facilities include a performance hall, permanent or temporary stage, amphitheater, and pavilion.

Under Section 351.102(c), the CITY is entitled to receive from its hotel project the funds that an owner of a qualified hotel project may receive under Section 151.429(h), or under Government Code Section 2303.5055. Therefore, the rebates may encompass state sales and use taxes and state hotel occupancy taxes generated at the New Hotel and facilities ancillary to the New Hotel under Section 151.429(h). Under Government Code Section 2303.5055, the rebates may also encompass “eligible taxable proceeds,” which are ad valorem taxes, local sales and use taxes, local hotel occupancy taxes, and local mixed beverage taxes that a governmental body agrees to rebate to the CITY.

These rebates will be for the first 10 years after the New Hotel is open for initial occupancy. The Comptroller’s office makes monthly payments of eligible taxes. For a sales tax allocation payment distribution schedule, see https://comptroller.texas.gov/transparency/local/allocations/sales-tax/distribution- schedule.php

We base this response on the facts presented, which are subject to verification by the Comptroller’s Audit Division. Different facts may yield different conclusions.

The Texas Tax Code and Texas Administrative Code are accessible at www.comptroller.texas.gov/taxes/.

If you have questions about this private letter ruling, please email us through our website at https://comptroller.texas.gov/web-forms/tax-help/ and reference Private Letter Ruling No. 2017010131.

Sincerely,

Tax Policy Division – Indirect Taxes

Texas Comptroller of Public Accounts

ENDNOTE:

1. Unless otherwise indicated, all references to “Government Code” are to the Texas Government Code, all references to “Section” are to the Texas Tax Code, and all references to “Rule” are to Title 34 of the Texas Administrative Code.