Could a municipality use sales-tax revenue from a 10,000-square-foot public-facility expansion to repay newly issued bonds?

Subject

Public-facility expansion and bond dates did not qualify for sales-tax financing

Plain-English summary

Virginia said the municipality could not use sales-tax revenue from the proposed expansion to repay new bonds under the cited public-facility program. The existing facility measured 63,000 square feet and the addition would be about 10,000 square feet. The statute required an expansion of at least 50% over existing floor space, so the project was too small.

The bond timing independently failed. The law listed eligible issuance windows ending before July 1, 2007, while the proposed bonds had not yet been issued. Sales-tax revenue could not be transferred to repay bonds issued after the statutory cutoff.

The Department concluded that legislation would be needed to cover a smaller expansion financed with later bonds.

What this means for you

• Verify both the project-size test and every bond-issuance date requirement.
• A qualifying facility type alone does not establish eligibility.
• The historical program required at least a 50% floor-space expansion for an existing facility.
• Revenue transfers could begin only after construction and were limited to eligible bond repayment.

Common questions

Why did the 10,000-square-foot expansion fail?

It was far below 50% of the existing 63,000 square feet.

Could sales tax repay bonds issued after June 30, 2007?

Not under the statute described in this ruling.

What would have changed the result?

The Commissioner said legislative action was required.

Citations and references

• Va. Code § 58.1-608.3.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 09-18

Original ruling text

February 4, 2009

Re: Ruling Request: Retail Sales and Use Tax

Dear *:

This is in response to your letter requesting a ruling on the application of Va. Code § 58.1-608.3 to a proposal to issue bonds by the * (the "Municipality") to finance the construction of an expansion of the *** (the "Public Facility").

FACTS

In 1994, the Public Facility, a 63,000 square foot facility, was constructed using bonds issued by the Municipality. Pursuant to Va. Code § 58.1-608.3, sales tax revenues generated by the Public Facility are transferred back to the Municipality to pay the costs of the bonds. An expansion of approximately 10,000 square feet has now been proposed and the Municipality would like to issue new bonds to finance the expansion. The Municipality has asked the Department of Taxation ("TAX") whether the sales tax revenues generated by the expansion of the Public Facility may be transferred back to the Municipality to pay the costs of the new bonds.

DETERMINATION

Under Va. Code § 58.1-608.3 (formerly the "Public Facilities Act"), sales tax revenue generated by certain public facilities can be transferred back to municipalities to pay the costs of the bonds issued to finance such facilities. Qualifying public facilities include auditoriums, coliseums, convention centers, conference centers, and hotels that are owned by a Virginia county, city; town, or authority or other such public entity. Subsection A of Va. Code § 58.1-608.3 provides that:

[O]nly a new public facility, or a public facility which will undergo a substantial and significant renovation or expansion, shall be eligible under subsection B of this section. A new public facility is one whose construction began after December 31, 1991. A substantial and significant renovation entails a project whose cost is at least 50 percent of the original cost of the facility being renovated and shall have begun after December 31, 1991. A substantial and significant expansion entails an increase in floor space of at least 50 percent over that existing in the preexisting facility and shall have begun after December 31, 1991.

The municipality is entitled to sales tax revenues generated from all transactions taking place in the facility, including, but not limited to, vending machine sales and merchandise sales, for the lifetime of the bonds, not to exceed 35 years. All revenues are required to be applied to the repayment of the bonds, and no remittance is made until construction is complete.

Subsection B of Va. Code § 58.1-608.3, in pertinent part, provides that::

Any municipality which has issued bonds (i) after December 31, 1991, but before January 1, 1996, (ii) on or after January 1, 1998, but before July 1, 1999, (iii) on or after January 1, 1999, but before July 1, 2001, (iv) on or after July 1, 2000, but before July 1, 2003, (v) on or after July 1, 2001, but before July 1, 2005, or (vi) on or after July 1, 2004, but before July 1, 2007, to pay the cost, or portion thereof, of any public facility shall be entitled to all sales tax revenues generated by transactions taking place in such public facility. Such entitlement shall continue for the lifetime of such bonds, which entitlement shall not exceed 35 years, and all such sales tax revenues shall be applied to repayment of the bonds.

Sales tax revenues generated by a public facility may only be applied to repayment of bonds issued by a municipality between the dates listed in Va. Code § 58.1-608.3(B). The Municipality would like to apply the sales tax revenues generated from the expansion of the Public Facility to bonds that have not yet been issued. Unfortunately, only substantial and significant expansions are eligible under Va. Code § 58.1-608.3(B). At its current size, the proposed expansion would not qualify. Nor does Va. Code § 58.1-608.3(B) apply to bonds issued on or after July 1, 2007 and sales tax revenues generated by the expansion of the Public Facility cannot currently be applied to the repayment of bonds issued on or after July 1, 2007. Legislative action would be required to expand the application of Va. Code § 58.1-608.3 to bonds issued on or after July 1, 2007 for a smaller expansion of a public facility.

CONCLUSION

The Va. Code section cited, along with other reference documents, are available on-line in the Tax Policy Library section of TAX's web site, located at www.policylibrary.tax.virginia.gov. If you have any questions about this determination, you may contact * in the Office of Tax Policy, Policy Development Division, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

PD/1-2642524882