Can a city's Advertising and Promotion Commission use 'hamburger tax' money to repay a city general-fund bond or to subsidize a privately owned convention center and water park?

Plain-English summary

Three Texarkana-area legislators (Senator Jimmy Hickey, Representative Mary P. Hickerson, and Prosecuting Attorney Carlton Jones) asked the AG about four practices involving the Texarkana Advertising and Promotion Commission. The "A&P tax," sometimes called the "hamburger tax," is a municipal tax on hotel and restaurant sales authorized by A.C.A. §§ 26-75-601 to -619.

The first practice was the "Franchise Fee Bond Swap." Starting in 2005, the A&P Commission had been writing an annual check to the city's general fund. The stated purpose was to reimburse the general fund for payments on a 2010 economic development bond paid out of franchise fee receipts. The voters had never approved using A&P money to retire the bond directly, so the structure was crafted as a "swap" rather than a direct bond payment.

The other three practices involved annual and lump-sum contributions to a privately owned convention center and water park, plus a pledge by the city manager to refund to those facilities the A&P taxes generated by their own sales for 15 and 20 years.

AG Dustin McDaniel declined to give yes-or-no answers on any of the four questions because the answers depend on facts he did not have. He did walk through the most problematic angles. On the bond swap, he raised the prospect that the arrangement is "indirectly" doing what Amendment 65 forbids: using tax revenues to retire bonds whose retirement is supposed to be funded by fees (per Harris v. City of Little Rock, 344 Ark. 95 (2001)). He also noted that the Act expressly prohibits using A&P revenue for "costs associated with the general operation of the city," which is what general-fund money is for. On the payments to private facilities, the central question is Article 12, § 5: are these donations (forbidden) or contractual consideration (permitted)? The convention-center payments appeared to be made under a written contract; the water-park payments looked less defensible because they appeared to be pledged outside any contract or by reference to a contract the AG did not have.

Currency note

This opinion was issued in 2014. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Common questions

Q: What is the "hamburger tax" or A&P tax?
A: A.C.A. §§ 26-75-601 to -619 authorizes Arkansas municipalities to levy a tax on hotel, restaurant, and similar sales. Revenue goes into the municipal Advertising and Promotion Fund and is managed by a municipal Advertising and Promotion Commission. The Act limits what the money can pay for.

Q: What is the "Franchise Fee Bond Swap" the legislators asked about?
A: An annual contribution from the Texarkana A&P Commission to the city's general fund. The stated purpose was to reimburse the general fund for payments the city was making on a 2010 franchise fee bond used for economic development. Voters had not approved direct use of A&P money to pay that bond, so the city structured the transfer as a swap rather than a bond payment.

Q: Was the bond swap legal?
A: The AG could not say definitively. He flagged three characterizations and the risks of each. If the swap is read as indirectly paying the franchise-fee bonds, Harris v. City of Little Rock, 344 Ark. 95 (2001), suggests Amendment 65 may forbid it: tax revenues cannot fill the gap left by using other money to pay non-A&P-authorized bonds. If the swap is read as A&P money flowing into the city's general fund without further restriction, it almost certainly violates A.C.A. § 26-75-606(c)'s prohibition on using A&P money for "general capital improvements" or "costs associated with the general operation of the city."

Q: Can A&P money go to a privately owned convention center?
A: The Act allows A&P money for "construction... improvement, maintenance, repair, and operation of a convention center." The Texarkana convention center is privately owned, which raises a separate constitutional issue under Article 12, § 5 (no public money for private entities). Where the payments are made under a valid contract with adequate consideration, City of Ft. Smith v. Bates, 260 Ark. 777 (1976), holds that Article 12, § 5 does not apply. Without adequate consideration, the payment is a donation and is unconstitutional.

Q: What about a privately owned water park?
A: Similar analysis but with thinner facts in the AG's hands. The Act authorizes A&P money for "operation of tourist-oriented facilities, including, but not limited to, theme parks and other family entertainment facilities," and for "maintenance... and operation of public recreation facilities." A privately owned park may not qualify as "public," which the AG noted was unsettled. The lump-sum $513,000 payment to the water park was not addressed in the contract the AG had seen, suggesting it might be a donation rather than contractual consideration.

Q: What is the test for whether a payment to a private entity violates Article 12, § 5?
A: Whether the payment is a donation or contractual consideration. Adequate consideration flowing to the city under a valid contract takes the payment out of Article 12, § 5 entirely (Bates, 260 Ark. at 777). Adequacy of consideration is a fact question the AG cannot decide.

Background and statutory framework

The Advertising and Promotion Commission Act, A.C.A. §§ 26-75-601 to -619, authorizes Arkansas cities to levy a tax on prepared food, hotel rooms, and similar sales. Revenue flows into the municipal A&P fund and is administered by a city A&P commission. The Act specifies permitted uses in subsections (a) and (b) of A.C.A. § 26-75-606 and forbids certain uses in subsection (c).

The permitted uses include advertising and promotion, operation of convention centers and tourist-oriented facilities, and (under § 26-75-606(b)) maintenance and operation of "public recreation facilities." The prohibited uses include "general capital improvements within the city" and "costs associated with the general operation of the city." These prohibitions reflect the policy choice to keep A&P money targeted at tourism-related purposes, not at making the general government's job easier.

A separate Act provision, A.C.A. § 26-75-613, allows A&P revenue to be pledged to repay convention center bonds, "tourism revenue bonds," and certain other bonds issued under any law, not just the Act. But that pledge must be made by city ordinance at the time the bonds are issued. The AG suspected the 2010 franchise-fee bonds were not pledged with A&P revenue at issuance, which made the after-the-fact "swap" structure constitutionally awkward.

Amendment 65 to the Arkansas Constitution governs local government revenue bonds. Harris v. City of Little Rock, 344 Ark. 95 (2001), held that Amendment 65 "prohibits a city from doing indirectly that which it cannot do directly. Because Amendment 65 forbids repaying revenue bonds with assessments from local improvements or taxes, it correspondingly forbids pledging tax revenues to fill the gaps left by using other sources of monies to repay the bonds." The AG read Harris as putting the Texarkana bond swap on shaky ground.

Article 12, § 5 of the Arkansas Constitution prohibits a "county, city, town or other municipal corporation" from obtaining or appropriating money for any "corporation, association, institution or individual." The Arkansas Supreme Court has read this provision to forbid donations of public money to private entities, but not to forbid payments made under valid contracts supported by adequate consideration (Bates, 260 Ark. 777). The line between a donation and a contract sometimes turns on documentation: is there a written contract, what consideration flows back, and is that consideration genuine and adequate.

The opinion's repeated theme is that the A&P Commission has "broad discretion" to determine appropriate uses of A&P revenue under the Act, and that an administrative body's interpretation of the statute it administers is given considerable deference under Brookshire v. Adcock, 2009 Ark. 207. That deference does not save practices that fall outside what the Act permits or that violate independent constitutional limits.

Source

• Landing page: https://arkansasag.gov/divisions/opinions-foia/attorney-general-opinions-search/

Original opinion text

STATE OF ARKANSAS
THE ATTORNEY GENERAL
DUSTIN McDANIEL
Opinion No. 2013-136
January 21, 2014

The Honorable Jimmy Hickey Jr.
State Senator
1600 Arkansas Blvd., Suite 106
Texarkana, Arkansas 71854

The Honorable Carlton Jones
Prosecuting Attorney
Miller County Courthouse
400 Laurel Street, Room 6
Texarkana, Arkansas 71854

The Honorable Mary P. "Prissy" Hickerson
State Representative
2805 Forest Avenue
Texarkana, Arkansas 71854

Dear Senator Hickey, Representative Hickerson, and Mr. Jones:

This is my opinion on your questions about uses of revenues from a tax levied under the Advertising and Promotion Commission Act (the "Act"). The Act authorizes a municipal tax, sometimes referred to as the "hamburger tax," on hotel and restaurant sales (the "A&P tax"). Tax revenues are deposited in a municipal advertising and promotion fund (the "A&P fund"). A city levying the A&P tax must create a municipal advertising and promotion commission (the "A&P commission").

You provided background. In 2005, the Texarkana, Arkansas, Advertising and Promotion Commission began what it refers to as the "Franchise Fee Bond Swap." Since 2005, the A&P Commission has approved an annual contribution to the General Fund called a Franchise Fee Swap. The stated purpose of this contribution is to reimburse the General Fund for payments on an economic development bond. The bond payments are made using franchise fees collected in the General Fund. The A&P contribution could not be directly used to retire the debt service since there was not a vote by the citizens to approve this use of A&P Funds. As a result, it has been used to replace franchise fees in the General Fund for expenditures associated with economic development. The Franchise Fee Swap payments are currently replacing the franchise fees collected in General Fund to make payments on the 2010 Franchise Fee Bond.

In addition, in 2010, and in connection with the development, construction and operation of a Hotel/Convention center in Texarkana, Arkansas, the A&P Commission began awarding the convention center certain annual contributions and other lump sum amounts of advertising and promotion funds. In 2010, $100,000 was so contributed and, $150,000.00 has been likewise contributed for the years 2011, 2012 and 2013; for a total of $550,000.00 thus far. The contribution to the convention center has been pledged for total of 15 years. The convention center is privately owned and operated and the real property upon which the convention center building is constructed is privately owned. The City does own a parking lot that constitutes a portion of the convention center parking area.

In 2012, and in connection with the development, construction and operation of a water park that is adjacent to the convention center, the A&P Commission began awarding to the water park annual advertising and promotion contributions of $250,000.00 for the maintenance and operations of the Holiday Springs Water Park. From that pledge, $250,000 was paid in 2012 and $100,000 has been paid so far in 2013. The A&P Commission has pledged the continuation of this contribution for 20 years in total. Furthermore, as part of an incentive package to the water park, the A&P Commission also awarded a lump sum amount of $513,000 on December 20, 2012, to the water park making a total of $863,000 which has been paid to date. The water park is privately owned and operated and the real property upon which the physical water park improvements (slides, concessions, etc.) are located is privately owned. However, the City does own a parking lot that constitutes a portion of the water parking lot (and which is separate from the convention center parking owned by the City and described above). In 2009 the City Manager entered into an agreement with the Hotel/Convention Center which pledged the A&P Commission to refund the A&P taxes generated by sales at the new Hotel/Convention Center for a period of 15 years. There have never been similar refund agreements of A&P taxes to other A&P taxpayers.

In 2012 the City Manager entered into an agreement with Holiday Springs Water Park which pledged the A&P Commission to refund the A&P taxes generated by sales at the Waterpark for a period of 20 Years. There have never been similar refund agreements of A&P taxes to other A&P taxpayers.

Your questions are:

1. Is the Franchise Fee Bond Swap as described above a permissible use of advertising and promotion funds?
2. Is the annual award or the lump sum award to the convention center as described above a permissible use of advertising and promotion funds?
3. Is the annual award or the initial lump sum award to the water park as described above a permissible use of advertising and promotion funds?
4. Is the pledge to return A&P taxes generated by the Hotel/Convention Center and Holiday Springs Water Park to the entities permissible?

RESPONSE

I am unable to opine with confidence on any of your questions because the answers are heavily dependent on the totality of the attendant facts and circumstances. Although you have provided considerable factual background, it is clear to me that I do not possess all facts relevant to the transactions. I have neither the resources nor the statutory charge to act as a finder of fact in connection with rendering written opinions, and the opinions process is not the sort of adversarial proceeding that tends, due to the parties' opposing interests, to elicit all material facts. While I accordingly cannot provide definitive answers to your questions, I will discuss how applicable law might apply.

In general with respect to all your questions, A&P tax revenues may be used for the purposes set forth in a section of the Act entitled "Use of funds collected," provided a proposed use is not prohibited by another subsection thereof. Another provision of the Act appears to authorize certain other bond-payment-related uses of A&P tax revenues. Whether A&P tax revenues can be used for a particular purpose is a question that turns on the facts and circumstances of the case. The A&P commission is the body that determines how A&P tax revenues will be used. The A&P commission has broad discretion to determine whether a proposed use is appropriate under the Act. An administrative body's interpretation of a statute it is charged with administering is given considerable deference and will not be overturned unless clearly wrong.

Question 1 — Is the Franchise Fee Bond Swap as described above a permissible use of advertising and promotion funds?

This question is complicated by the fact that it is not entirely clear what a court would characterize the use to be. Depending on the characterization, the use might or might not be permitted under the Act.

One might maintain that A&P tax revenues are being used to indirectly pay the franchise fee bonds. Does the Act permit such a use? The franchise fee bonds clearly were not issued under the Act, which appears to contemplate that A&P tax revenues normally will be pledged to the repayment of bonds issued under the Act. The Act does permit the pledge of A&P tax revenues to the repayment of convention center bonds issued under any law, "tourism revenue bonds," and certain other bonds issued other than under the Act. But the pledge of A&P tax revenues to the repayment of bonds not issued under the Act contemplates that the pledge will be made at the time the bonds are issued: the Act requires an authorizing ordinance of the municipality. I do not know whether the Franchise Fee Bond Swap is performed pursuant to an express pledge of A&P tax revenues to the repayment of the franchise fee bonds. Nor do I know whether one or more authorizing ordinances were enacted. I accordingly cannot determine how plausible would be an argument that the Franchise Fee Bond Swap amounts to a use of A&P tax revenues authorized by the Act to repay bonds issued other than under the Act.

Alternatively, one might maintain that the use of the A&P tax revenues is whatever use is made of those dollars after they are deposited in the city's general fund. Your request for my opinion can be read to imply that the funds are used by the city for purposes that would be permissible were they used directly by the A&P Commission for the same purposes. If that is the case, the Act may permit the use but I deem it more likely that it does not. The Act provides that the A&P Commission "is the body that determines the use" of A&P tax revenues. It is not clear how the A&P Commission could maintain control of the funds, so as to direct their ultimate use in a manner permitted by the Act, after they are placed in the city's general fund.

As yet another alternative, one might maintain that the A&P Commission "uses" the A&P tax revenues simply by depositing them into the city's general fund, without looking to what the city ultimately uses the money for. If one accepts that characterization, the use is clearly impermissible. The Act expressly prohibits using A&P tax revenues for "general capital improvements within the city" or "costs associated with the general operation of the city..." It is my understanding that these two items, the latter in particular, substantially describe what a city's general fund is normally used for.

Question 2 — Is the annual award or the lump sum award to the convention center as described above a permissible use of advertising and promotion funds?

The Act provides that A&P tax revenues may be used for "[c]onstruction, reconstruction, extension, equipment, improvement, maintenance, repair, and operation of a convention center...." The payments apparently are made at least in part under a contract that calls for the payments to be "used exclusively for the convention center portion of the project." It thus appears likely from the facts of which I am aware that the payments at issue fall within this statutory description. In that sense, then, the use is probably a permissible one under the terms of the Act.

But because the convention center is privately owned, a constitutional prohibition on donating public money to private parties must be considered. As noted, there is a contract between the city and the convention center's owner pursuant to which the city agreed that the A&P Commission would pay $100,000 per year for 15 years. One could certainly argue, therefore, that there is no donation but rather payments under a contract supported by adequate consideration, and thus that the constitutional provision is not implicated. The constitutional provision's applicability will depend on the adequacy of the consideration flowing to the city under the contract, in exchange for the city's payments and other promises. The consideration's adequacy is a question of fact I cannot address.

Question 3 — Is the annual award or the initial lump sum award to the water park as described above a permissible use of advertising and promotion funds?

The Act provides that A&P tax revenues may be used for "operation of tourist-oriented facilities, including, but not limited to, theme parks and other family entertainment facilities." A contract between the city and the water park's owner provides that the "A&P Commission has already committed $250,000 per year for 20 years from 2012 for maintenance and operation" of the water park. I cannot determine the relevance a court might attach to the fact that the Act permits expenditures of A&P tax revenues for "operation" while the contract describes the payments as being for "maintenance and operation."

Separately, the Act provides that A&P tax revenues may be used for "maintenance... and operation of public recreation facilities...." I have little doubt that the water park would be deemed by a court to be a recreational facility but it is not as clear that a court would deem the water park to be "public." It is public in the sense that it is presumably open to the public, but I know of no authority on the question of whether a privately owned recreational facility can be a "public recreation facility" within the meaning of the Act.

It appears to me more likely than not that a court would hold that, insofar as the Act is concerned, the water park payments are permissible under one or both of the Act's provisions discussed above. As in the case of the convention center payments, however, a court would consider whether for constitutional purposes the payments are donations or consideration under a contract. The facts of which I am aware here are slightly less favorable to the city than are the facts of which I am aware concerning the convention center payments. The convention center contract itself requires the convention center payments. The water park contract of which I am aware, by contrast, states that the A&P Commission has "already committed" to make the water park payments. This usage suggests that there is another contract under which the water park payments are being made, or that they are being made outside any contract, and thus arguably are donations. In addition, the lump sum payment is not addressed at all in the water park contract of which I am aware, suggesting that it was made under another contract or that it was made outside any contract, and thus arguably was a donation.

Question 4 — Is the pledge to return A&P taxes generated by the Hotel/Convention Center and Holiday Springs Water Park to the entities permissible?

As far as the Act is concerned, the analysis here is much like that described in my answers to your second and third questions. The expenditures can be argued to be for construction, etc., of a convention center, and for operation of tourist-oriented facilities and/or public recreation facilities. The Act makes no distinction between uses in amounts that relate in a certain way to A&P tax collection amounts, and uses that do not so relate.

The more difficult question is, once again, the applicability of the constitutional provision that prohibits donation of public money to private entities. Arguing that A&P tax revenue rebates are not donations but rather consideration under contracts may be somewhat more problematic here because the amounts paid over by the A&P Commission depend solely on the sales made at the convention center and water park that are subject to the tax. Acknowledging that fact may compel a defender of the payments to argue that the consideration provided by the owner of the convention center and water park varies with sales.

Assistant Attorney General J. M. Barker prepared this opinion, which I approve.

Sincerely,
DUSTIN McDANIEL
Attorney General
DM:JMB/cyh