Has a city's 0.5% economic development sales tax been terminated by a letter that wasn't intended as formal cessation notice, blocking a Type B corporation from issuing bonds?

Plain-English summary

The Texas Comptroller confirmed that a city's voter-approved 0.5% economic development sales and use tax — collected since 1999 for the benefit of a nonprofit Type B economic development corporation — has never been terminated, clearing the way for the corporation to issue Sales Tax Revenue Bonds. This wasn't a taxability ruling in the usual sense; it was a formal factual/legal determination requested specifically because the corporation needed the Comptroller's confirmation before the Texas Attorney General's Public Finance Division would approve the bond issuance.

The wrinkle: Local Government Code § 505.258 requires collection of a Type B economic development tax to STOP once the corporation formally notifies the Comptroller that it has set aside enough money in trust to fully repay its bonds and other obligations. The corporation had sent the Comptroller a letter in February 2017 — but the corporation itself told the Comptroller the letter was NOT intended to be that formal cessation notice (largely because the corporation didn't actually have sufficient funds set aside to trigger it). Based on that clarification, the Comptroller ruled the tax was never terminated and continues to be validly collected — the specific factual confirmation the Attorney General's office needed to approve the bond issuance.

What this means for you

Economic development corporations planning bond issuances

If your Type B (or similar) corporation needs Attorney General approval to issue Sales Tax Revenue Bonds, and there's any ambiguity in the corporate/Comptroller correspondence history about whether a cessation notice was ever sent, a private letter ruling requesting formal confirmation that the tax remains active is a useful tool — as this taxpayer did here specifically to satisfy the AG's Public Finance Division requirement.

Municipalities and bond counsel

This ruling is a reminder that any communication to the Comptroller referencing fund balances or trust accounts should clearly state whether or not it's intended as the formal § 505.258 cessation notice — ambiguous language could otherwise create real uncertainty about whether a local tax remains validly in force, jeopardizing future bond issuances.

Accountants and tax professionals

Note this ruling doesn't turn on any taxability analysis — it's a factual/procedural confirmation that a specific document didn't meet a specific statutory notice requirement. It's a useful example of PLRs being used for confirmatory determinations, not just substantive tax questions.

Common questions

Q: What triggers the end of a Type B economic development corporation's local sales tax?
A: The corporation must formally notify the Comptroller under § 505.258 that it has set aside, in a dedicated trust account, the full amount needed to pay off its bonds and other obligations (excluding guaranteed interest) — only then must collection stop.

Q: Why didn't the corporation's 2017 letter trigger the tax's termination?
A: Because the corporation explicitly told the Comptroller the letter wasn't intended as the formal cessation notice, and in fact the corporation didn't have the necessary trust funds set aside to support cessation.

Q: Why did the corporation need this ruling at all?
A: The Texas Attorney General's Public Finance Division, which must approve Type B corporation bond issuances, required a Comptroller determination confirming the tax remained active before it would approve the corporation's Sales Tax Revenue Bonds.

Q: Can another economic development corporation rely on this ruling?
A: No. It binds the Comptroller only as to the taxpayer and facts in this specific request and cannot be relied on by any other taxpayer.

Citations and references

Statutes and rules:

• Tex. Loc. Gov't Code Ch. 505 (Type B Economic Development Corporations)
• Tex. Loc. Gov't Code § 505.003 (authority to create corporation)
• Tex. Loc. Gov't Code § 505.251 (tax authorized)
• Tex. Loc. Gov't Code § 505.258 (cessation of collection of taxes)
• Tex. Loc. Gov't Code § 501.201(c) (AG approval of bond issuance)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/201810005L

Original ruling text

October 10, 2018

RE: Private Letter Ruling No. 20180928084931

Dear **:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters. [1] We are responding to your request dated Sept. 11, 2018. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You requested guidance on the economic development sales and use tax authorized under Local Government Code, Chapter 505 (Type B Corporations).

Facts Presented

On Nov. 3, 1998, voters in the City of CITY City) approved a 0.5% tax for projects authorized by Section 4B, Art. 5190.6, Vernon's Texas Civil Statutes (now codified in Chapter 505). On Jan. 11, 1999, the City created the ** Corporation, dba ** Corporation (Taxpayer), which is a nonprofit economic development corporation. The City has collected the 0.5% economic development sales and use tax for the benefit of Taxpayer since Apr. 1, 1999.

In a 2017 letter to the Comptroller, Taxpayer indicated that it was not providing notice required under Section 505.258(2) (Cessation of Collection of Taxes) to stop collecting the economic development tax. Such notice would require Taxpayer to set aside in a trust sufficient funds to repay its bonds, which Taxpayer did not have.

Taxpayer now seeks to issue Sales Tax Revenue Bonds, which the Attorney General of Texas must approve under Section 501.201(c) (Authority to Issue Bonds). In order to give Taxpayer the necessary approval, the Attorney General's Public Finance Division requested a determination from the comptroller that the City has not ceased collection of the economic development sales and use tax.

Questions, Rulings, and Analysis

Your questions are restated below, followed by our responses and analysis.

Question One: Based on the facts provided, does the comptroller view the Feb. 13, 2017, letter from INDIVIDUAL A as a “notice” described in Section 505.258 that triggered the prohibition against collecting the economic sales and use tax in the City?

Ruling: No, the letter dated Feb. 13, 2017, is not considered notice that would cause collection of the economic development tax to cease.

Question Two: Does the comptroller have any reason to believe that collection of the economic development sales and use tax has been, or should now be, terminated in accordance with Section 505.258?

Ruling: No. Based on the facts provided, the comptroller has no reason to believe collection of the economic development sales and use tax has been or should now be terminated.

Question Three: Based on the facts provided, can the comptroller determine, and confirm to the Public Finance Division of the Attorney General of Texas, that the economic development tax has not been terminated under Section 505.258 and, therefore, continues to be imposed and collected in the City?

Ruling: Yes. The comptroller has determined that the tax has not been terminated and continues to be imposed and collected in the City.

Analysis

Under Section 505.003 (Authority to Create Corporation), a municipality may authorize the creation of a Type B corporation. However, the municipality may not authorize the creation of more than one Type B corporation. Section 505.003(b). A municipality may adopt a sales and use tax for the benefit of this type of corporation. Section 505.251 (Tax Authorized:).

Collection of a tax imposed under Chapter 505 must cease after the corporation notifies the comptroller that the total amount, exclusive of guaranteed interest, necessary to pay in full the bonds and other obligations has been set aside in a trust account dedicated to the payment of the bonds and other obligations. Section 505.258.

The Feb. 13, 2017, letter sent to the comptroller by Taxpayer states that Taxpayer does not intend for the letter to constitute the notice required by Section 505.258 to cease collection of the economic development tax in the City. Accordingly, the economic development tax has not been terminated and continues to be imposed and collected in the City.

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. 20180928084931.

Sincerely,

Tax Policy Division – Indirect Taxes

Texas Comptroller of Public Accounts

ENDNOTE

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