Which ancillary facilities count toward a Texas hotel project's 1,000-foot tax-rebate zone, and does a spa/fitness center qualify as a 'shop'?

Plain-English summary

The Texas Comptroller ruled on how a city can structure a hotel-and-convention-center project so that state and local taxes generated at the hotel and its supporting facilities get pledged or rebated back to fund the project under Tax Code § 351.102(b). A private developer planned to build a hotel and a wide range of ancillary facilities — offices, food and beverage outlets, retail shops, a spa/fitness center, performance venues, and recreational amenities like a waterpark and climbing wall — with the city holding fee-simple title to the land under a ground lease.

The Comptroller confirmed the city qualifies to pledge hotel project revenue without meeting the "eligible central municipality" test (it instead qualifies through a population/river-headwaters test unique to this city), and that the city retains "ownership" of the land for rebate purposes even while leasing it to the developer, so long as the developer hasn't exercised its purchase option.

The most consequential holding is a narrow reading of "ancillary facilities": a spa/fitness facility does not qualify because Rule 3.12(a)(1)(J) defines an eligible "shop" as a retail store that exclusively sells tangible personal property — a spa sells services, not just goods. Retail shops, restaurants, and office space used to support hotel operations do qualify. Convention-center entertainment-related facilities (performance halls, stages, amphitheaters) also qualify, but only if designed and primarily used for convention events — a waterpark, museum, zoo, or sports venue is excluded by definition even if it sits right next to the hotel. All qualifying facilities must also sit within 1,000 feet of the hotel or convention center and be built, developed, or remodeled as part of the project (pre-existing buildings nearby don't count).

This letter replaces an earlier 2017 ruling to the same taxpayer that hadn't defined "shop" — the Comptroller filled that gap here.

What this means for you

Municipalities and hotel-project developers

If you're structuring a Chapter 351 hotel project to capture tax rebates, plan your ancillary facilities carefully: retail shops, restaurants, and office space that support the hotel are rebate-eligible, but amenity-driven attractions like spas, waterparks, museums, or sports venues are not — regardless of how close they are to the hotel. The 1,000-foot distance is measured from the closest exterior wall (single-tenant buildings) or the closest demising wall (multi-tenant buildings) to the hotel or convention center, and only new construction/development/remodeling as part of the project counts, not facilities that already existed nearby.

Municipal finance officers and bond counsel

The ruling separates what state law entitles the city to pledge: state sales/use and hotel occupancy tax revenue flows under § 151.429(h), while local ad valorem, hotel occupancy, sales/use, and mixed beverage tax revenue flows under Gov't Code § 2303.5055 by separate agreement with each taxing body. The convention center itself is not part of the "hotel project" for rebate purposes — it's only a measuring point for the 1,000-foot zone — so tax revenue generated at the convention center itself doesn't qualify for rebate.

Accountants and tax professionals

Note the ruling is fact-bound to this city's specific statutory qualification path (population plus river-headwaters county) and doesn't extend the "eligible central municipality" shortcut to other cities. The Comptroller also flagged that it retains audit authority to verify facts before any refund is actually paid, and reserved the right to rescind the ruling if the taxpayer's representations turn out to be inaccurate.

Common questions

Q: Does a hotel spa or fitness center qualify for the tax rebate as an ancillary facility?
A: No. The Comptroller ruled that spa and fitness facilities don't exclusively sell tangible personal property, so they don't meet the definition of a "shop," and they aren't convention-center entertainment-related facilities either.

Q: What kinds of facilities DO qualify as "ancillary to the hotel"?
A: Office space supporting hotel/convention operations, food and beverage operations, retail shops that exclusively sell tangible personal property, and convention-center entertainment-related facilities (performance halls, stages, amphitheaters, pavilions) designed and primarily used for convention events — all within 1,000 feet of the hotel or convention center and built/developed/remodeled as part of the project.

Q: Does the convention center itself generate rebate-eligible tax revenue?
A: No. Under § 351.102(b), the convention center facility is a measuring point for distance purposes but is not itself part of the "hotel project," so its tax revenue isn't eligible for the § 351.102(c) rebate.

Q: Can other cities rely on this ruling?
A: No. A private letter ruling binds the Comptroller only as to the taxpayer and facts in the request, and cannot be relied on by any other taxpayer. It's useful as a guide to the Comptroller's reasoning, not as blanket authority.

Citations and references

Statutes and rules:

• Tex. Tax Code § 351.102(b), (c), (d) (pledge/rebate of hotel project tax revenue)
• Tex. Tax Code § 151.429(h) (state tax refunds for enterprise/hotel projects)
• Tex. Gov't Code § 2303.5055 (refund/rebate/payment of tax proceeds to qualified hotel project)
• Tex. Gov't Code § 2303.003(8) (definition of "qualified hotel project")
• Tex. Tax Code § 351.001(7) (definition of "eligible central municipality")
• 34 Tex. Admin. Code Rule 3.1, 3.10, 3.12(a)(1)(A), (E), (J)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/201903025L

Original ruling text

Note: This document is also indexed as a Hotel Tax document at STAR 201903026L.

March 13, 2019

Re: Private Letter Ruling No. 20180612155721

Dear **:

This letter replaces Private Letter Ruling No. 2017010126 we issued to you, dated Oct. 13, 2017. 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 Nov. 18, 2016, and supplemental submissions dated Dec. 16, 2016, and Jan. 24, 2017. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You requested guidance on the proposed development and construction of a hotel project and convention center facility, including facilities ancillary to the hotel.

This letter incorporates the provisions in 3.12 (Hotel Projects, Project Financing Zones, and Qualified Hotel Projects) regarding the rebate of taxes. The letter on Oct. 13, 2017, did not define the term “shop.” Rule 3.12(a)(1)(J) defines “shop” to mean a retail store that exclusively sells tangible personal property. Spa/fitness facilities do not exclusively sell tangible personal property and therefore are not facilities ancillary to the hotel eligible for tax rebates under Section 351.102(c).

Additionally, this letter clarifies that Rule 3.12(a)(1)(A) provides the definition of “convention center entertainment-related facility.” This new letter also clarifies that pursuant to Rule 3.12(a)(1)(E)(iii)(II), existing facilities within 1,000 feet of the hotel or convention center facility must be constructed, developed, or remodeled as part of the hotel project to be considered facilities ancillary to the hotel.

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.

The Comptroller previously concluded the ** (City) “is a municipality described in Section 351.102(b), (Pledge for Bonds) and is entitled to the benefits under Tax Code Section 151.429(h) (Tax Refunds for Enterprise Projects) or Government Code Section 2303.5055 (Refund, Rebate, or Payment of Tax Proceeds to Qualified Hotel Project), as they relate to a hotel project under Section 351.102(b).…” See STAR Accession No. 201606833L (June 7, 2016).

COMPANY A is proposing to develop and construct a hotel and ancillary facilities (hotel project) and convention center facility on 351.7 acres of land located within the corporate limits of the City (Land). COMPANY A currently owns the Land. COMPANY A will transfer the Land to the City prior to development and construction of the hotel project.

The City will have fee simple title ownership to the Land. The City will enter into a ground lease with an affiliate of COMPANY A (Ground Tenant) to develop the hotel project and a convention center facility. The Ground Tenant will have a leasehold interest in the Land with an option to purchase the Land. The Ground Tenant will also own the hotel project. The City will own the convention center facility. The City will execute an operating lease with the Ground Tenant for the convention center facility.

If the hotel project is located on the same platted lot as the convention center facility (Consolidated Lot), the Ground Tenant will build the hotel project within 1,000 feet of the closest exterior walls of the convention center building. If the hotel project is located on a separate platted lot (Hotel Lot), the Ground Tenant will build the hotel project within 1,000 feet of the boundary of the platted lot on which the convention center facility is located (the Convention Center Lot).

The facilities that the Ground Tenant will construct as part of the hotel project include the following:

Office space facilities used by hotel, convention center, and related staff;

Food and beverage operations, retail outlets, and spa/fitness facilities;

Performance venues (e.g., permanent and temporary stages, amphitheaters, pavilions and theaters); and

Entertainment and recreation facilities (e.g., indoor-outdoor waterpark, tennis and basketball courts, game room, virtual reality room, driving range, rock-climbing wall, ropes course, and museum or zoo facilities).

These facilities will be located within 1,000 feet of the boundary of the Consolidated Lot, the Hotel Lot, or the Convention Center Lot, depending on the platting of the lots.

Questions, Rulings, and Analysis

Our restatement of your questions are shown below, followed by our responses and analysis.

Question One: Is the City required to meet the definition of an “eligible central municipality” under Section 351.001(7) including the requirement to adopt a capital improvement plan in order to pledge revenue from a hotel project under Section 351.102(b)?

Ruling One: The City is not required to meet the definition of an “eligible central municipality” in Section 351.001(7) and is not required to adopt a capital improvement plan in order to pledge revenue under Section 351.102(b). The City qualifies to pledge revenue from a hotel project because the City is a municipality with a population of 96,000 or more that is located in a county that contains the headwaters of the San Gabriel River.

Question Two: For purposes of applying Government Code Section 2303.5055 and Section 151.429(h), is a “hotel project” referenced in Section 351.102(b) a “qualified hotel project” under Government Code Section 2303.003(8) (Definitions)?

Ruling Two: No, a “hotel project” referenced in Section 351.102(b) is not a “qualified hotel project” under Government Code Section 2303.003(8). The term “qualified hotel project” only applies to a city with a population of 1.5 million or more.

Question Three: Will the City “own” the Land following acquisition of the Land by the City, and continue to “own” the Land under the terms of the Ground Lease?

Ruling Three: The City will retain its fee simple ownership of the Land under the terms of the Ground Lease so long as the Ground Tenant does not exercise its option to purchase all or any portion of the land on which the hotel project or convention center facility is located.

Question Four: May the City’s “hotel project” include facilities that are not located within, or attached to, the hotel or located on the same platted lot as the hotel?

Ruling Four: Yes, the City’s hotel project may include facilities that are not located within the hotel, attached to the hotel, or located on the same platted lot as the hotel. The facilities must be located within 1,000 feet of the convention center facility or the hotel and be constructed, developed, or remodeled as part of the hotel project.

Question Five: If the facilities are located within 1,000 feet of the boundary of the Hotel Lot or the Consolidated Lot, must the facilities also be within 1,000 feet of the convention center facility to be “facilities ancillary to the hotel?”

Ruling Five: To be “facilities ancillary to the hotel” under Section 351.102(b), the facilities must be located within 1,000 feet of the convention center facility or the hotel, even if the facilities are located within 1,000 feet of the Hotel Lot or the Consolidated Lot.

Question Six: Are the 1,000-foot distances for the Project measured as follows: (a) the hotel project must be located within 1,000 feet of the boundary of the Convention Center Lot, or if the hotel project and the convention center facility are developed on the Consolidated Lot, not more than 1,000-foot distance will exist between the closest exterior wall of the hotel building and the convention center building; and (b) “facilities ancillary to the hotel” must be located within 1,000 feet of the boundary of the Consolidated Lot, the Hotel Lot, or the Convention Center Lot, depending on the platting of the Project?

Ruling Six: No, this is not how the 1,000 foot distances for the hotel project are measured. The hotel must be located within 1,000 feet of the convention center facility. The “facilities ancillary to the hotel” must be located within 1,000 feet of the hotel or the convention center facility.

Question Seven: For purposes of Section 351.102(b), may the facilities ancillary to the hotel include food and beverage operations, retail outlets (“shops”), entertainment and recreation facilities, spa/fitness facilities, museum/zoo facilities, performance and sporting venues, and office space facilities?

Ruling Seven: For purposes of Section 351.102(b), facilities ancillary to the hotel may include office space facilities used by hotel, food and beverage operations, shops that exclusively sell tangible personal property, and convention center entertainment-related facilities that are owned by or located on land owned by the City. Spa/fitness facilities do not exclusively sell tangible personal property and therefore do not qualify as facilities ancillary to the hotel. See Rule 3.12(a)(1)(J). Convention center entertainment-related facilities are facilities designed and primarily used for convention center events, activities, and performances. Rule 3.12(a)(1)(A). Other entertainment and recreation facilities such as museums, zoos, and sporting venues are not convention center entertainment-related facilities and cannot qualify as facilities ancillary to the hotel.

Question Eight: Pursuant to Section 151.429(h), Section 351.102(c), and Government Code Section 2303.5055, may the City pledge revenue from hotel occupancy taxes, ad valorem taxes, sales and use taxes, and mixed beverage taxes collected from the hotel project, the convention center facility, and the facilities ancillary to the hotel?

Ruling Eight: Under Section 351.102(b), the City may pledge state and local tax revenue generated at its hotel project, which includes the hotel and facilities ancillary to the hotel, but not the convention center facility. Specifically, 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.

Question Nine: Regarding the funds rebated, refunded, or paid to the owner of a qualified hotel project pursuant to Government Code Section 2303.5055 or Section 151.429(h), is there a restriction on the purpose for which the owner may use the funds?

Ruling Nine: No, there is no restriction on the owner’s use of the funds.

Analysis: Section 351.102(b) separately identifies the City as eligible for a hotel project. The City is not required to be or meet the definition of an eligible central municipality.

A hotel project for the City under Section 351.102(b) is:

a hotel that is owned by, or located on land owned by, the City 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, 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.

The statute requires the City to either own the hotel or own the land on which the hotel is located, and to either own the facilities ancillary to the hotel or own the land on which these facilities are located. The City will meet these ownership requirements because it will own the Land on which the hotel project is located. Under the proposed terms of the Ground Lease, the City will maintain fee simple title of the Land indefinitely unless the Ground Tenant exercises its option to purchase any or part of the Land on which the hotel project is located. See STAR Accession No. 201603746L (March 16, 2016).

The statute also requires facilities ancillary to the hotel to be located within 1,000 feet of the hotel or convention center facility. The statute does not require the ancillary facilities to be located within, attached to, or located on the same platted lot as the hotel.

Rule 3.12(a)(1)(E) gives the measurement requirement for facilities ancillary to the hotel as:

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.

Facilities ancillary to the hotel include 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. Rule 3.12(a)(1)(E)(iii).

Finally, the area of a hotel project may encompass existing facilities within 1,000 feet of the hotel or convention center facility. Because existing facilities, such as restaurants and shops, may have been built prior to and independent of the development of a hotel project, existing facilities located within 1,000 feet of the hotel or convention center facility that are not constructed, developed, or remodeled as part of the hotel project are not considered facilities ancillary to the hotel. See Rule 3.12(a)(1)(E)(iii)(II).

The City’s facilities that include office spaces used by staff to provide necessary support for the operation and function of the hotel qualify as facilities ancillary to a hotel pursuant to Section 351.102(b).

Rule 3.12(a)(1)(J) defines “shop” as a retail store that exclusively sells tangible personal property. Food and beverage operations and shops that exclusively sell tangible personal property qualify as restaurants and shops respectively, and therefore, qualify as facilities ancillary to a hotel pursuant to Section 351.102(b) if constructed, developed, or remodeled as part of the hotel project.

Section 351.102(b) further provides that facilities ancillary to the hotel includes “convention center entertainment-related facilities.” Rule 3.12(a)(1)(A) defines convention center entertainment-related facilities as facilities owned by or located on land owned by the City and designed and primarily used for convention center events, activities, and performances. Examples of this term are a performance hall, permanent or temporary stage, amphitheater, and pavilion. The term does not include facilities designed for a specific use. Examples of facilities that do not meet this definition include an amusement park, fitness or sports center, museum, sports venue, waterpark, or zoo.

The City is entitled to receive from its hotel project the funds that the owner of a qualified hotel project receives under Section 151.429(h), or under Government Code Section 2303.5055, and the City may pledge those funds for its hotel project under Section 351.102. Under Section 151.429(h), the City is entitled to receive state sales and use taxes and state hotel occupancy taxes. Under Government Code Section 2303.5055(a), the City is entitled to receive “eligible taxable proceeds,” which are local 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 Section 351.102(b), the City-owned convention center facility is not part of the hotel project for tax rebate purposes, but is a measuring point for the hotel and the facilities ancillary to the hotel. Therefore, any tax revenue received from the convention center facility does not qualify for rebates under Section 351.102(c).

The statutory provisions do not provide restrictions on how the City, as the owner of the hotel project and convention center facility, may use the rebated funds, but it does require the City to spend a certain amount of the funds to promote the hotel project. Specifically, Section 351.102(d) provides that if the City uses its hotel occupancy tax revenue or funds pursuant to Section 351.102(c) for a hotel project, it must allocate at least the same average percentage amount of its hotel occupancy tax revenue on advertising and promotional programs to attract tourists and convention participants that the City spent during the 36-month period prior to using the revenue for a hotel project.

The Comptroller’s office does not have statutory authority to approve a hotel project for any benefits until the project is completed and an application for benefits has been submitted and verified. Although the Comptroller at this time does not find facts that would preclude the City from being eligible to request a refund related to the hotel project under the applicable statutory provisions, the Comptroller will have to verify all relevant facts after receiving a request for refund of the taxes described in Section 151.429(h) and Government Code Section 2303.5055. 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.

Comptroller reserves the right to audit and investigate Taxpayer to confirm the accuracy of the representations made by Taxpayer. If Taxpayer’s representations are inaccurate, the Comptroller shall have the right to rescind this private letter ruling and may collect the amounts due from Taxpayer by any method allowed by Tax Code, Chapter 111, or any other applicable law.

STAR documents are available on the Comptroller’s State Tax Automated Research (STAR) system. The Tax Code, Government 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 No. 20180612155721.

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.