Does a city's planned hotel-and-convention-center project qualify for the Chapter 351 'qualified project' program, entitling the city to rebates of state and (with consent) local taxes generated at the project?

Notes from the STAR record: This ruling is also indexed as a sales-tax document under accession 202001023L. The STAR text also carries an ALERT that House Bill 2071 (88th Leg., 2023, eff. 06/18/2023) exempts from sales and use tax certain purchases of materials to improve the real property of a public facility corporation — a later legislative change to keep in mind. This ruling itself addresses only Chapter 351 (Municipal Hotel Occupancy Taxes) questions; a separate ruling was to address the Chapter 151 sales-and-use-tax questions.

Plain-English summary

A Texas city planned a public hotel + convention center project on city-owned land and asked the Comptroller to confirm it fits the state's Chapter 351 "qualified project" rebate program. The structure uses a Public Facility Corporation (PFC) (Chapter 303, Local Government Code) and a Municipal Development District (MDD) (Chapter 377), with the city issuing certificates of obligation for the convention center and pledging municipal hotel tax to pay them. The Comptroller answered eleven questions — all favorably. The key holdings:

• Eligible city (Q1 — Section 351.152(27)): Yes. A city of 70,000–90,000 located in two counties, one with 4 million+ and one with fewer than 50,000 people, is an authorized municipality.
• Qualified convention center facility (Q2 — Section 351.151(2)): The ~33,600 sq. ft. center fits the definition — 10,000+ sq. ft. of continuous meeting space, primarily for conventions/meetings, connected to or within 1,000 ft of the qualified hotel, configurable for multiple simultaneous events, and wholly owned by the municipality.
• Qualified hotel (Q3 — Section 351.151(3)): A hotel the city designates as part of the qualified project, on city-owned land, connected to or within 1,000 ft of the qualified convention center (and may be multiple towers).
• Entitlement to tax revenue (Q4 & Q8 — Section 351.156): The city receives the state sales/use tax (Ch. 151) and state hotel occupancy tax (Ch. 156) generated by the qualified hotel and each restaurant, bar, and retail establishment in or connected to it — even if leased to a private third party — and, if the other taxing unit agrees in writing, the local sales/use (Ch. 322/323), local hotel (Ch. 352), and mixed beverage (Section 183.051) taxes.
• Financing (Q5–Q7 — Section 351.155(a),(b),(e)): The city may pledge the Chapter 351 tax and its Section 351.156 entitlement to pay bonds/obligations for the project, so long as the qualified hotel benefits from the pledge; and the city's pledge of at least $100,000/year of municipal hotel tax satisfies the statutory pledge condition for entitlement.
• Mixed beverage (Q9 — Section 183.051): The city gets its standard 10.7143% allocation of state mixed beverage gross-receipts and sales taxes from permittees in the city — but there is no rebate of state mixed beverage taxes.
• Process & timing (Q10–Q11 — Rule 3.12(c)(2); Section 351.158): The owner applies in writing to the Audit Division after the project is completed; the Comptroller has no authority to approve benefits until completion and verification, reserves the right to audit and rescind, and pays monthly for state sales/use and hotel taxes. Entitlement runs until the 10th anniversary of the hotel's opening.

What this means for you

Cities and developers pursuing a Chapter 351 qualified project

This ruling is a useful roadmap of the whole framework: which city qualifies, what makes a convention center and a hotel "qualified," which taxes the city can capture (state automatically; local only with the other taxing unit's written consent), how the project can be financed with a pledge of hotel-tax revenue, and the 10-year entitlement window. Note the ownership theme: the convention center must be wholly municipally owned — contrast this approved project with the companion ruling that denied qualification where the convention center was conveyed only in a reversible determinable fee.

Restaurants, bars, and retail at the project

Taxes you generate can flow to the city's entitlement even if you're a third-party lessee — the entitlement follows establishments "in or connected to" the qualified hotel or convention center.

Timing and audit risk

No benefits are approved until the project is built, applied for, and verified, and the Comptroller can rescind the ruling and recover amounts if the representations prove inaccurate. Treat the ruling as conditional on the facts holding true.

Common questions

Q: Does the city get the local taxes automatically?
A: No. The state sales/use and state hotel taxes flow under Section 351.156, but local sales/use, local hotel, and mixed beverage taxes only if the political subdivision entitled to that revenue agrees in writing.

Q: Are third-party restaurants/retail included?
A: Yes. The entitlement covers each restaurant, bar, and retail establishment in or connected to the hotel or convention center, even if leased to a private entity other than the project operator.

Q: How long does the entitlement last?
A: Until the 10th anniversary of the date the qualified hotel opens for initial occupancy (Section 351.158).

Q: Does the city get a rebate of state mixed beverage tax?
A: No. It receives the standard 10.7143% allocation under Section 183.051, but there is no rebate of state mixed beverage taxes.

Q: When and how does the city claim the money?
A: After the project is completed, by written request to the Comptroller's Audit Division with the information required by Rule 3.12(c)(2); payments for state sales/use and hotel taxes are made monthly, and mixed beverage allocations quarterly.

Q: Can another city rely on this ruling?
A: No. A private letter ruling binds the Comptroller only as to the requesting taxpayer and its facts, and here it is expressly subject to verification, audit, and possible rescission. A later law (HB 2071, 2023) also changed related sales-tax treatment.

Citations and references

• Tex. Tax Code § 351.152 — lists the municipalities eligible for the qualified-project program; the city qualifies under subsection (27).
• Tex. Tax Code § 351.151 — defines "qualified convention center facility" (2) and "qualified hotel" (3).
• Tex. Tax Code § 351.155 — pledge/commitment of tax revenue for a qualified project, including the benefit requirement and the pledge condition for entitlement.
• Tex. Tax Code § 351.156 — the taxes the municipality is entitled to receive (state sales/use, state hotel, and, with consent, local sales/use, local hotel, and mixed beverage).
• Tex. Tax Code § 351.158 — 10-year period of entitlement measured from the hotel's opening.
• Tex. Tax Code § 183.051 — mixed beverage tax clearance fund; the 10.7143% municipal allocation with no state rebate (see also STAR 201803042L).
• 34 Tex. Admin. Code Rule 3.12(c)(2) — the application process for refunds/rebates on hotel projects.
• 34 Tex. Admin. Code Rules 3.1 and 3.10 — authority for the private letter ruling and detrimental-reliance relief.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=HOT
• Opinion: https://star.comptroller.texas.gov/view/202001022L

Original ruling text

NOTE: This document is also indexed as a sales tax document under STAR 202001023L.

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.

January 29, 2020

RE: Private Letter Ruling No. PLR 20191030101104

**, Taxpayer No. **

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. 28, 2019, supplemental correspondence on Dec. 16, 2019, and supplemental correspondence on Jan. 14, 2020. 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 municipal hotel and convention center project.

Please note that this private letter ruling addresses only those questions in your request and supplemental correspondence relating to certain qualified projects under Chapter 351 (Municipal Hotel Occupancy Taxes). We will issue a separate private letter ruling at a later date in response to your question regarding sales and use taxes under Chapter 151 (Limited Sales, Excise, and Use Tax).

Facts Presented

CITY A Texas (City) is located in COUNTY A and COUNTY B. According to the 2010 census, the City has a population of 71,802, which is 70,000 or more but less than 90,000; COUNTY A has a population 4,092,459, which is four million or more; and COUNTY B has a population of 35,096, which is less than 50,000.

The City owns approximately 7.745 acres of real property (Property). The City will lease the Property to ** Public Facilities Corporation (PFC), a corporation that the City created under Chapter 303, Local Government Code. PFC will enter into a development management agreement with COMPANY (Developer) to construct and develop a hotel (Hotel), convention center facilities (Convention Center), surface parking, and infrastructure improvements on the Property (collectively, the Project).

The Hotel will consist of at least 200 guest rooms, a full-service restaurant and bar, a lounge, meeting space, fitness center, outdoor swimming pool, other ancillary facilities, and necessary infrastructure improvements. The City will designate the Hotel as the hotel that is part of a qualified project.

The Convention Center will consist of public conference rooms and meeting space of approximately 33,600 square feet, including a ballroom of approximately 12,000 square feet, along with a surface parking lot and necessary infrastructure improvements. PFC will be required to use the Convention Center as public meeting and convention center facilities and public parking spaces in connection with the Hotel.

Upon completion of the Project, the Hotel and Convention Center will be owned pursuant to a condominium declaration. PFC will convey the Convention Center to the City, and PFC will own the Hotel. The City will lease the Convention Center and PFC will lease the Hotel to CITY A Municipal Development District (“MDD”), a district that the City created under Chapter 377, Local Government Code.

The City, PFC, and MDD will enter into an interlocal agreement governing the flow of funds, booking arrangements, and other agreements regarding the Project. MDD will issue bonds and use bond proceeds for the development costs of the Hotel. The City will issue certificates of obligation to pay for the development costs of the Convention Center. The City will pledge at least $100,000 annually in municipal hotel occupancy tax revenue towards payment of the certificates of obligation.

The City’s lease of the Property to PFC, the City’s lease of the Convention Center to MDD, and PFC’s lease of the Hotel to MDD will terminate at the earlier of 40 years or the date of the repayment of the bonds and certificates of obligation.

MDD will enter into a hotel services agreement with a nationally recognized hotel brand (Brand) to manage the day-to-day operations of the Hotel. The term of the hotel services agreement initially will be 15 years. The Brand at its sole discretion may extend the term of the hotel services agreement for an additional 15 years.

Questions, Rulings, and Analysis

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

Question One: Does the City qualify as one of the municipalities under Section 351.152?

Ruling One: Yes. Section 351.152(27) (Applicability) authorizes certain tax rebates for a municipality with a population of 70,000 or more but less than 90,000 that is located in two counties, one of which has a population of four million or more and the other of which has a population of less than 50,000.

Question Two: Does the Convention Center meet the requirements of a “qualified convention center facility” under Section 351.151(2)?

Ruling Two: Section 351.151(2) (Definitions) states that a qualified convention center facility means a facility that has been or will be constructed with at least 10,000 square feet of continuous meeting space; primarily used to host conventions or meetings; is connected to a qualified hotel or has an exterior wall that is located not more than 1,000 feet from the nearest exterior wall of a qualified hotel; is not located in a hotel, sports stadium, or other structure but may share common infrastructure or facilities with a hotel; is configurable to simultaneously accommodate multiple events of different sizes and types; and is wholly owned by a municipality and none of which is or may be owned through an undivided common interest.

Question Three: Does the Hotel meet the requirements of a “qualified hotel” under Section 351.151(3)?

Ruling Three: A qualified hotel means a hotel that is designated by a municipality as the hotel that is part of a qualified project. A qualified hotel must be located on land owned by the designating municipality; must be connected to a qualified convention center facility or have an exterior wall that is located not more than 1,000 feet from the nearest exterior wall of the qualified convention center facility; and may consist of two or more towers, regardless of whether named differently, branded differently, reporting different addresses to the Comptroller under the Texas Tax Code, or reporting taxes separately to the Comptroller under the Texas Tax Code, that are constructed at the same time, connected to each other or to a qualified convention center facility, and that are each located on land owned by the municipality and connected to or having an exterior wall that is located not more than 1,000 feet from the nearest exterior wall of the qualified convention center facility. Section 351.151(3).

Question Four: Is the City entitled to receive the tax revenues described in Section 351.156 generated by the Project?

Ruling Four: Section 351.156 (Entitlement to Certain Tax Revenue) states that a municipality is entitled to receive the revenue derived from the following taxes generated, paid, and collected by a qualified hotel, and each restaurant, bar, and retail establishment located in or connected to the hotel or the related qualified convention center facility, that is located in the municipality:

1. The sales and use tax imposed under Chapter 151;

2. The hotel occupancy tax imposed under Chapter 156; and

3. If a political subdivision that is entitled to receive the revenue from the tax agrees in writing to the municipality receiving that revenue:

A. The sales and use tax imposed by the political subdivision under Chapter 322 or 323;

B. The hotel occupancy tax imposed by the political subdivision under Chapter 352; and

C. The mixed beverage tax issued under Section 183.051.

Question Five: Does the City’s issuance of its certificates of obligation meet the requirements of Section 351.155(a)?

Ruling Five: Yes. In addition to the authority of a municipality to issue debt under Chapter 1504, Government Code, a municipality may pledge or commit the revenue derived from the tax imposed under Chapter 351 from a qualified hotel and the revenue to which the municipality is entitled under Section 351.156 for the payment of bonds or other obligations issued for a qualified project and contractual obligations related to the project, including obligations under a contract authorized by Chapter 380, Local Government Code, for the project and an interlocal agreement directly related to the project. Section 351.155(a) (Pledge or Commitment of Certain Tax Revenue for Obligations for Qualified Project).

Question Six: Will the City’s pledge of local hotel occupancy taxes to pay for the City’s certificates of obligation for the Project satisfy the requirements of Section 351.155(b)?

Ruling Six: Yes. A municipality may pledge or commit revenue for the payment of bonds, other obligations, or contractual obligations only if the qualified hotel that is a component of the qualified project for which that revenue is pledged or committed benefits from the pledging or committing of that revenue. Section 351.155(b).

Question Seven (added based on email received on Jan. 14, 2020): Does the City’s pledge of local hotel occupancy taxes in the amount of at least $100,000 annually satisfy the requirements of Section 351.155(e)?

Ruling Seven: Yes. A municipality is not entitled to receive revenue under Section 351.156 or 351.157 (Additional Entitlement for Certain Municipalities) unless the municipality has pledged or committed a portion of the revenue derived from the municipal hotel occupancy tax collected by the qualified hotel for the payment of bonds, other obligations, or contractual obligations related to the project and issued and incurred for the qualified project. Section 351.155(e).

Question Eight: In the event any of the restaurants, bars, and retail establishments located in or connected to the hotel or convention center are leased to a private entity other than the operator of the Project, would the City still be able to receive revenues for such facilities?

Ruling Eight: Yes. A municipality is entitled to receive the revenue derived from the taxes described in Section 351.156 that are generated, paid, and collected by a qualified hotel, and each restaurant, bar, and retail establishment located in or connected to the hotel or the related qualified convention center facility. See Ruling Four.

Question Nine: Would the total amount of mixed beverage taxes received by the City from the State with respect to the Project be equal to 10.7143% of the total mixed beverage gross receipts taxes and mixed beverage sales taxes collected by the State at the project?

Ruling Nine: Pursuant to Section 183.051 (Mixed Beverage Tax Clearance Fund), a municipality receives 10.7143% of the mixed beverage gross receipts and mixed beverage sales taxes remitted to the State from all mixed beverage permittees located within the municipality. A municipality is not entitled to receive rebates of state mixed beverage taxes. See STAR Accession No. 201803042L (Mar. 16, 2018).

Question Ten: Assuming the Comptroller agrees that the City is entitled to receive tax revenues under Section 351.156, what is the process for obtaining the tax revenues?

Ruling Ten: Pursuant to Rule 3.12(c)(2) (Hotel Projects, Project Financing Zones, and Qualified Hotel Projects), the owner of a qualified hotel project seeking a refund from the comptroller of state sales and use taxes, state hotel occupancy taxes, and eligible tax proceeds must submit a written request to the Comptroller’s Audit Division along with the information specified in Rule 3.12(c)(2), as applicable.

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.

The Comptroller’s office does not have statutory authority to approve a qualified project for any benefits until the project is completed and an application for benefits is submitted and verified.

The Comptroller will have to verify all relevant facts after receiving a request for refund of the taxes described in Section 351.156. 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 Comptroller reserves the right to audit and investigate the City’s project to confirm the accuracy of the representations made in this private letter ruling. If the City’s representations are inaccurate, the Comptroller shall have the right to rescind this private letter ruling and may collect the amounts due from the project by any method allowed by Tax Code, Chapter 111, or any other applicable law.

Question Eleven: Assuming the Comptroller agrees that the City is entitled to rebates under Section 351.156, what would be the general timeline for payment of the rebates after the taxes are received by the Comptroller?

Ruling Eleven: A municipality is entitled to receive revenue until the 10th anniversary of the date the qualified hotel to which the entitlement relates is open for initial occupancy. Section 351.158 (Period of Entitlement). The Comptroller’s office will make monthly payments of state sales and use taxes and state hotel occupancy taxes. The Comptroller allocates mixed beverage taxes quarterly to cities under Section 183.051(b).

STAR documents cited can be found 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 No. 20191030101104.

Sincerely,

Tax Policy Division – Indirect Taxes

Texas Comptroller of Public Accounts

ENDNOTE:

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