Can a qualifying Texas city use state mixed beverage tax from a qualified hotel project, along with other project-tax rebates, to pay hotel-project bonds?

Plain-English summary

The Texas Comptroller ruled that a qualifying city could use several taxes generated by a qualified hotel project to support its bonds, but not the state's share of mixed beverage tax.

Section 351.102(c) let the city receive the funds that a qualified-hotel-project owner could receive under two other provisions. Section 151.429(h) covered the project's state sales and use tax and state hotel occupancy tax. Government Code § 2303.5055 covered local hotel occupancy, property, sales and use, and mixed beverage taxes when the relevant governmental body agreed in writing to rebate them.

Neither provision granted the state's mixed beverage tax. The Comptroller also explained that one governmental body cannot make a rebate agreement for another: a city cannot agree on the State's behalf to rebate state tax. The city's cited court case, Putnam v. City of Irving, did not decide that issue, while Ex Parte City of Irving expressly rejected access to the state's mixed beverage-tax share without the required written agreement.

What this means for you

Cities financing hotel and convention-center projects

Identify the legal source for each revenue stream separately. Eligibility for qualified-hotel-project incentives does not make every tax generated at the project available for bond repayment. Under this ruling, the city could use the two specified state-tax rebates and locally agreed taxes, but not state mixed beverage tax.

Hotel developers and project owners

Local proceeds under Government Code § 2303.5055 depend on a written agreement with the governmental body that owns the revenue. The ruling says the local rebates may run for no more than ten years and describes the relevant period as the first ten years after the hotel opens for initial occupancy.

Accountants and tax professionals

Do not treat the words "eligible taxable proceeds" as including every state and local tax. The Comptroller read that phrase in this statutory setting as local tax revenue and treated § 151.429(h) as the separate authority for state sales and hotel occupancy tax rebates.

Common questions

Q: Which state taxes could the city receive?
A: State sales and use tax and state hotel occupancy tax generated by the qualified hotel project under § 151.429(h).

Q: Could the city receive any mixed beverage tax?
A: It could receive local mixed beverage tax if the relevant governmental body agreed in writing to rebate it. It could not receive the state's mixed beverage tax under § 351.102(c).

Q: Did Putnam v. City of Irving establish that state mixed beverage tax was available?
A: No. The Comptroller said Putnam did not decide that question and therefore did not support the city's requested result.

Q: Does this ruling automatically apply to another city or project?
A: No. This private letter ruling applies only to the identified taxpayer and facts, and the Comptroller said its conclusions were subject to factual verification.

Citations and references

• Tex. Tax Code § 351.102(c), (e)(8)
• Tex. Tax Code § 151.429(h)
• Tex. Gov't Code § 2303.5055
• Tex. Tax Code § 351.1015(e)
• Putnam v. City of Irving, 331 S.W.3d 869 (Tex. App.—Dallas 2011, pet. denied)
• Ex Parte City of Irving, 343 S.W.3d 850 (Tex. App.—Dallas 2011, pet. granted, judgment vacated)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=HOT
• Opinion: https://star.comptroller.texas.gov/view/201803042L

Original ruling text

March 16, 2018

RE: Private Letter Ruling #20171101120345

*, Texas Taxpayer #*

Dear ***:

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

You requested guidance on the rebates an owner of a hotel project may receive in order to pledge bonds pursuant to Section 351.102(c) (Pledge For Bonds).

Facts Presented

The following facts are based on information contained in your request and additional information you provided in our subsequent email correspondence and telephone conversations.

*** (City) is a home-rule municipality with a 2010 census population greater than 83,000, that borders CITY A, and which is primarily located in CITY B County, which has a 2010 census population of less than 300,000. The City is a city described under Section 351.102(e)(8) that may apply for certain tax rebates and pledge those funds for the payment of bonds under Section 351.102(c).

The City plans to develop hotel projects, including ancillary facilities, upon land owned by the City, which will be within a 1,000 feet of a City-owned convention center facility.

Under Section 351.102(c), a qualified municipality is entitled to receive all the funds that an owner of a qualified hotel project could receive under Section 151.429(h) (Tax Refunds for Enterprise Projects) and Government Code Section 2303.5055 (Refund, Rebate, or Payment of Tax Proceeds to Qualified Hotel Project).

Question, Ruling, and Analysis

Our restatement of your question is shown below, followed by our response and analysis.

Question:

Is the City entitled to receive state and local mixed beverage taxes under Section 351.102(c)?

Ruling:

The City is entitled to receive the rebates that an owner of a qualified hotel project may receive under Section 151.429(h), which are state hotel occupancy and state sales and use taxes, and under Government Code Section 2303.5055, which are local hotel occupancy, ad valorem, local sales and use, and local mixed beverage taxes that a governmental body agrees in writing to rebate. The City is not eligible to receive rebates of the state mixed beverage taxes.

Analysis:

The City is eligible to create hotel projects under Section 351.102(e)(8).

Section 351.102(c) entitles the City to receive the rebates that an owner of a qualified hotel project receives under Section 151.429(h) and Government Code Section 2303.5055. Neither Section 151.429(h) nor Government Code Section 2303.5055 provides that an owner of a qualified hotel project receive the state mixed beverage taxes.

The relevant language in Section 351.102(c) states:

“Except as provided by this subsection, a municipality to which Subsection (b) or (e) applies is entitled to receive all funds from a project described by Subsection (b) that an owner of a project may receive under Section 151.429(h) or Section 2303.5055, Government Code, and may pledge the funds for the payment of obligations issued under this section.”

Section 151.429(h), in part, provides that the owner of a qualified hotel project shall receive a rebate, refund, or payment of the state’s sales and use tax and the state’s hotel occupancy tax generated at the qualified hotel project.

Government Code Section 2303.5055(a) states:

“For a period that may not exceed 10 years, a governmental body, including a municipality, county, or political subdivision, may agree to rebate, refund, or pay eligible taxable proceeds to the owner of a qualified hotel project at which the eligible taxable proceeds were generated.” (Emphasis added.)

Subsection (e) of that same section defines eligible taxable proceeds as “taxable proceeds generated, paid, or collected by a qualified hotel project or a business at a qualified hotel project, including hotel occupancy taxes, ad valorem taxes, sales and use taxes, and mixed beverage taxes.”

Section 351.1015(e) (Certain Qualified Projects) also provides certain municipalities identified in that section the ability to pledge local tax revenue for bonds. The section states those municipalities may pledge “the local tax revenue from eligible tax proceeds as defined in Section 2303.5055(e), Government Code.” The Comptroller interprets the nearly identical phrases “eligible tax proceeds” in Government Code Section 2303.5055 and “eligible taxable proceeds” in Section 351.1015(e) to mean only local tax receipts. Therefore, based on a review of all of the relevant statutes, the Comptroller considers eligible taxable proceeds to be only local tax revenue.

The statutory provisions outlined above provides that an owner of a qualified hotel project receives a rebate, refund, or payment of the state’s sales and use tax and the state’s hotel occupancy tax generated at the qualified hotel project. The owner may also receive, if the local governing body agrees, the local taxes generated at the qualified hotel project.

Additionally, the Comptroller most recently explained what funds are available to entities seeking to pledge bonds for hotel projects in STAR Accession Nos. 201710017L (Oct. 13, 2017) and 201801009L (Jan. 9, 2018). These letters clarified what funds a city could pledge for payment of obligations in building a hotel project. In each letter, the city qualified to receive funds that an owner of a qualified hotel project could receive pursuant to Section 351.102(b) and (c). Specifically, the Comptroller explained that the city may pledge: (1) state sales and use taxes and state hotel occupancy taxes that it receives under Section 151.429(h); and (2) ad valorem taxes, local hotel occupancy taxes, local sales and use taxes, and local mixed beverage taxes that a governmental body agrees to rebate under Government Code Section 2303.5055.

According to the City, state mixed beverage taxes are eligible funds for the City to use to pledge bonds for its hotel projects without an agreement from the State.

The City refers to Putnam v. City of Irving, 331 S.W.3d 869 (Tex. App.—Dallas 2011, pet. denied) as supporting its argument that it can pledge the state’s portion of mixed beverage taxes for hotel projects because the court was silent on this issue and did not prohibit the City from doing so.

The central issue in Putnam was whether a taxpayer group was entitled to a temporary injunction preventing the City of Irving from issuing bonds for a hotel project. Id at 872. The taxpayer group had to show that it had a probable right to relief, and it argued, in part, that the city could not pledge the state’s portion of the mixed beverage taxes. Id. at 874-78. In addressing this issue, the court did not rule on whether Government Code Section 2303.5055 allowed the city to pledge the state’s portion of mixed beverage tax. Id. at 876- 777. Therefore, Putnam does not provide guidance or support for the City’s requested ruling.

However, Ex Parte City of Irving, 343 S.W.3d 850, 858 (Tex. App.—Dallas 2011, pet. granted, judgm’t vacated w.r.m.) explicitly addressed the administration of tax rebates in accordance with Government Code Section 2303.5055. Ex Parte City of Irving was the result of the Attorney General appealing the district court decision granting the City of Irving’s request to pledge the state hotel occupancy, sales and use, and mixed beverage taxes. Id. at 853.

The court provided that the City of Irving is not entitled to the state’s portion of mixed beverage taxes. Id. at 858. The court stated, “Even if we were to decide that ‘governmental body’ includes the State, section 2303.5055 cannot be interpreted to permit one government body, such as a municipality, to make an agreement on behalf of another government body, such as the State.” Id. The court further found that “[Section 2303.5055(c)] states that the agreement between the government body… and the owner of the qualified hotel project…must be in writing.” Id. There was no evidence to support that the state and City of Irving had an agreement in writing to rebate the state mixed beverage tax. Id. Thus, the trial court erred in granting access to the City of Irving to pledge the state’s portion of mixed beverage taxes. Id.

The City also asserts that the Comptroller previously allowed another city to receive rebates of state mixed beverage taxes. The Comptroller has not authorized any city to receive a rebate of state mixed beverage taxes under Section 351.102. Certain municipalities described in Section 351.1015 may receive a rebate of state mixed beverage taxes under that section, but Section 351.1015 does not apply to the City.

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). 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 during the first 10 years after the hotel is open for initial occupancy.

This response is based on the facts presented, which are subject to verification by the Comptroller’s Audit Division. Different facts may yield different conclusions.

STAR documents cited are available on the Comptroller’s State Tax Automated Research (STAR) system. The Texas Tax Code, Texas Administrative Code, and the STAR system 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 #20171101120345.

Sincerely,

Tax Policy Division – Indirect Taxes

Texas Comptroller of Public Accounts

ENDNOTE:

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