Can a Texas city use hotel occupancy tax money to build and run a performing arts center?

Plain-English summary

State Representative Dennis Bonnen, chairing the House Ways & Means Committee, asked the AG about the City of Lakeway's plan to use its local hotel occupancy tax for a performing arts center. The City had commissioned a feasibility study to build and operate a center with a theater seating 500 to 800 people, a small conference center for 150 to 200 people, and a hotel. The City believed the center would draw visitors regionally and statewide and help establish Lakeway as a culture and entertainment destination, filling its hotels and short-term rentals. The question was whether hotel occupancy tax revenue could pay for the study and then the construction, operation, and maintenance of the center.

The AG set out the two-part test that governs any spending of municipal hotel occupancy tax money under Tax Code chapter 351. First, the expenditure must directly promote tourism and the convention and hotel industry. The statute defines a "tourist" as someone who travels from home to a different municipality for pleasure, recreation, education, or culture, so the money has to directly guide or manage such visitors to the city. Second, the expenditure must fit one of the specific permissible uses the statute lists.

On the construction question, the AG drew a sharp line between two of those listed uses. One category covers convention center facilities, and it expressly allows acquisition, construction, operation, and maintenance. But chapter 351 defines a convention center facility as one "primarily used to host conventions and meetings." Only a facility that meets that primary-use test counts. A separate category covers the promotion of the arts, but that category does not mention construction at all. So the cost of building a theater, by itself, does not fall under the arts category; theater construction can be paid for with hotel tax money only if the facility qualifies as a convention center facility under the first category.

On the feasibility study, the AG was more cautious. A feasibility study by its nature examines whether a project should go forward, and might end in a decision not to build at all. Because of that, the AG suggested an expenditure for the study, considered by itself, may be too attenuated to count as directly attracting overnight guests and directly promoting tourism. The AG did not rule it out, but explained that the city's governing body would have to find that the study satisfies the direct-promotion element and fits a permitted use. Throughout, the AG stressed that whether a given expense is proper under section 351.101 is often a fact question, so the municipal governing body must make that call in the first instance, subject to judicial review.

Currency note

This opinion was issued in 2017. 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.

What the opinion meant for those who asked

The requesting legislator and the City of Lakeway (as the opinion described it): The opinion answered only in general terms, explaining that the City could spend hotel occupancy tax revenue on the arts center if the expenditure directly promoted tourism and the convention and hotel industry and fit a use listed in section 351.101, and that the City's governing body had to make that determination in the first instance.

Cities considering arts or convention projects (as the opinion described them): The opinion told them that building a theater is a permissible hotel-tax use only when the facility is primarily used to host conventions and meetings, because the "promotion of the arts" category in the statute did not authorize construction.

Hotel and tourism businesses (as the opinion described them): The opinion framed the entire fund as one that must be spent in ways that directly bring overnight visitors to the city, reflecting the statute's tie between the tax and the convention and hotel industry.

Common questions

Can a Texas city pay for a performing arts center with hotel occupancy tax money?
Under this opinion, only if the spending directly promotes tourism and the convention and hotel industry and fits one of the uses the statute lists. The construction part works only if the building qualifies as a convention center facility.

What makes something a "convention center facility"?
The opinion pointed to the statutory definition: a facility "primarily used to host conventions and meetings." A theater that is mainly for performances, not conventions, would not meet that test.

Doesn't the "promotion of the arts" provision allow building a theater?
No. The opinion explained that the arts category, unlike the convention center category, does not mention construction, so it cannot by itself pay for building a theater.

Can the city use the tax to pay for a feasibility study first?
The opinion was skeptical, saying a study by itself may be too attenuated to directly promote tourism, but left that determination to the city's governing body, subject to court review.

Who decides whether a specific expense is allowed?
The opinion said the municipal governing body decides in the first instance whether an expenditure is proper under section 351.101, and that decision is subject to judicial review.

Background and statutory framework

Municipal hotel occupancy taxes are governed by chapter 351 of the Tax Code (Tex. Tax Code §§ 351.001-.110). Subsection 351.002(a) authorizes the tax on the use or possession of a hotel room, and subsection 351.101(a) imposes two primary limits on how the resulting revenue may be spent (Tex. Tax Code §§ 351.002(a), 351.101(a)). The revenue must be expended in a manner directly enhancing and promoting tourism and the convention and hotel industry, with "directly" meaning "with nothing or no one in between" (Tex. Tax Code § 351.101(a)-(b); CHCA Bayshore L.P. v. Ramos, 388 S.W.3d 741, 748 (Tex. App.—Houston [1st Dist.] 2012, no pet.) (Jennings, J., dissenting); New Oxford Am. Dictionary 492 (3d ed. 2010)). The expenditure must also be for one of the specified permissible uses (Tex. Tax Code § 351.101(a)(1)-(11); Tex. Att'y Gen. Op. No. JM-965 (1988)). Those uses include the acquisition, construction, operation, and maintenance of convention center facilities or visitor information centers, and the encouragement, promotion, improvement, and application of the arts (Tex. Tax Code § 351.101(a)(1), (4)). Revenue may not be used for general revenue purposes or general governmental operations (Tex. Tax Code § 351.101(b)). A permissible expenditure may also be subject to limitations elsewhere in chapter 351 (Tex. Tax Code § 351.103).

The statute defines "tourism" as the guidance or management of tourists, and a "tourist" as an individual who travels from the individual's residence to a different municipality for pleasure, recreation, education, or culture (Tex. Tax Code § 351.001(5), (6)). It defines "convention center facilities" as facilities primarily used to host conventions and meetings (Tex. Tax Code § 351.001(2)). Because section 351.101 spending often raises fact questions, the AG explained it could not always decide permissibility as a matter of law, so the municipal governing body must make the determination, subject to judicial review (Tex. Att'y Gen. Op. No. GA-0124 (2003); Tex. Att'y Gen. LO-92-051 (1992); Tex. Att'y Gen. LO-92-016 (1992)). Briefing argued a feasibility study could be a permissible administrative cost, but even such costs must be incurred directly in the promotion and servicing of authorized expenditures (Tex. Tax Code § 351.101(e)).

Citations

Statutory provisions:

• Tex. Tax Code §§ 351.001-.110, 351.002(a), 351.101(a), 351.101(a)-(b), 351.101(a)(1)-(11), 351.101(a)(1), 351.101(a)(4), 351.101(b), 351.101(e), 351.103, 351.001(2), 351.001(5), 351.001(6)

Texas Attorney General opinions:

• Tex. Att'y Gen. Op. No. JM-965 (1988)
• Tex. Att'y Gen. Op. No. GA-0124 (2003)
• Tex. Att'y Gen. LO-92-051 (1992)
• Tex. Att'y Gen. LO-92-016 (1992)

Cases:

• CHCA Bayshore L.P. v. Ramos, 388 S.W.3d 741 (Tex. App.—Houston [1st Dist.] 2012, no pet.)

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/ken-paxton/kp-0131
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/2017/kp0131.pdf

Original opinion text

Best-effort transcription from the official PDF. Minor extraction artifacts were corrected; the linked PDF is authoritative.

KEN PAXTON
ATTORNEY GENERAL OF TEXAS

January 30, 2017

The Honorable Dennis Bonnen Opinion No. KP-0131
Chair, Committee on Ways & Means
Texas House of Representatives Re: Authority of a municipality to use hotel
Post Office Box 2910 occupancy tax revenue to fund a feasibility
Austin, Texas 78768-2910 study and the construction, operation, and
maintenance of a performing arts center
(RQ-0122-KP)

Dear Representative Bonnen:

    You inquire about a municipality's authority to use revenue from its local hotel occupancy tax to fund a feasibility study for a performing arts center as well as the construction, operation, and maintenance of the center. [1] You tell us the City of Lakeway ("City") has commissioned a feasibility study to build and operate a performing arts center (the "Center") "that includes a theater with 500 to 800 fixed seats." See Request Letter at 1. You also tell us that the Center would include "a small conference center that would accommodate 150 to 200 people and a hotel." Id. at 1-2. You explain that the City indicates the "use of the [Center] would directly promote tourism and the hotel and convention industry in the City" as the Center "would be designed to ... have a regional and statewide draw." Id. Finally, you state that the City expects the Center "will help to establish the City as a destination location for culture and entertainment, and to attract visitors to the City for an overnight stay in its hotels or short-term rentals." Id. at 2.

    Municipal hotel occupancy taxes are governed by Tax Code chapter 351. See generally TEX. TAX CODE §§ 351.001-.110. Subsection 351.002(a) authorizes the imposition of a tax on the use or possession of a hotel room. See id. § 351.002(a). But subsection 351.101(a) imposes two primary limits on the use of the resulting tax revenue. [2] See id. § 351.101(a). First, an expenditure of hotel occupancy tax revenue must directly "promote tourism and the convention and hotel industry." Id. § 351.101(a)-(b) ("Revenue derived from the tax authorized by this chapter shall be expended in a manner directly enhancing and promoting tourism and the convention and hotel industry."); see also NEW OXFORD AM. DICTIONARY 492 (3d ed. 2010) (defining "directly" to mean "with nothing or no one in between"); CHCA Bayshore L.P. v. Ramos, 388 S.W.3d 741, 748 (Tex. App.—Houston [1st Dist.] 2012, no pet.) (Jennings, J., dissenting) (using same definition). Second, the expenditure must be for the specified permissible uses in subsection 351.101(a). See id. § 351.101(a)(1)-(11); Tex. Att'y Gen. Op. No. JM-965 (1988) at 2. The list of permissible uses includes:

    (1) the acquisition of sites for and the construction, improvement, enlarging, equipping, repairing, operation, and maintenance of convention center facilities or visitor information centers, or both; ... , [and]

    (4) the encouragement, promotion, improvement, and application of the arts, ... and exhibition of the[] major art forms.

TEX. TAX CODE § 351.101(a)(1), (4); see also id. § 351.101(b) (limiting the revenue from use for "general revenue purposes or general governmental operations of a municipality").

    As this office previously recognized, we cannot always determine whether an expenditure under section 351.101 is permissible as a matter of law because of the fact issues involved. See Tex. Att'y Gen. Op. No. GA-0124 (2003) at 3; see also Tex. Att'y Gen. LO-92-051 (1992) at 2, LO-92-016 (1992) at 3. In such instances, the governing body of the municipality must make the determination regarding the propriety of a hotel occupancy tax expenditure, subject to judicial review. See Tex. Att'y Gen. Op. No. GA-0124 (2003) at 3. Thus, we advise you only generally.

    The first element of subsection 351.101(a) requires that the expenditure from the tax must directly promote tourism and the convention and hotel industry. See TEX. TAX CODE § 351.101(a)-(b). "Tourism" is defined as the "guidance or management of tourists." Id. § 351.001(5). A "tourist" is an "individual who travels from the individual's residence to a different municipality ... for pleasure, recreation, education, or culture." Id. § 351.001(6). Thus, the first element requires an expenditure from hotel occupancy taxes to be one that directly guides or manages tourists to the municipality for pleasure, recreation, education, or culture.

    With regard to the list of specific permissible uses as the second element of subsection 351.101(a), chapter 351 defines "convention center facilities" as "facilities that are primarily used to host conventions and meetings." Id. § 351.001(2) (emphasis added). The definition also includes certain hotel facilities. See id. Only if a particular facility is primarily used to host conventions or meetings is it a convention center facility and thus a permissible use under subsection 351.101(a)(1).

    In contrast to subsection 351.101(a)(1), the promotion "of the arts" use under subsection 351.101(a)(4) does not expressly authorize construction of facilities. Compare id. § 351.101(a)(1), with id. § 351.101(a)(4). Thus, construction costs of theater facilities, considered alone, are not within the scope of subsection 351.101(a)(4). Any construction costs associated with any particular facility are proper costs for the hotel occupancy tax revenue only if they are incurred under subsection 351.101(a)(1). Id. § 351.101(a)(1).

    You also inquire about the propriety of hotel occupancy tax revenues for a feasibility study regarding the Center. See Request Letter at 1. Briefing submitted to this office argues that a feasibility study "can be a necessary component of moving forward with this type of project" and is authorized under the plain language of subsection 351.101(a). [3] As we noted previously, expenditures under subsection 351.101(a) must directly promote tourism and the convention and hotel industry. See supra page 1 (citing TEX. TAX CODE § 351.101(a)-(b)). It is the nature of a feasibility study to examine a given project, which examination could result in either a conclusion that the project is not feasible and a decision not to proceed with the project or a conclusion that the project is feasible and a decision to proceed. See NEW OXFORD AM. DICTIONARY 632 (3d ed. 2010) (defining "feasibility study" to mean "an assessment of the practicality of a proposed plan or method"). Yet, irrespective of such a study's ultimate outcome, an expenditure for the study considered by itself may be too attenuated to be legitimately characterized as actually attracting overnight guests in the direct promotion of tourism and the convention and hotel industry. [4]

    In the event a feasibility study is found by the governing body of a municipality to satisfy the first element of section 351.101, the expenditure must also be for one of the permitted uses to satisfy the second element.

                                SUMMARY

                  Under section 351.101 of the Tax Code, a municipality may expend its municipal hotel occupancy tax revenue in the direct promotion of tourism and the convention and hotel industry, provided that the expenditure is for one of the specified uses listed in the statute. It is for a municipal governing body to determine in the first instance whether an expenditure of hotel occupancy tax revenue is proper under section 351.101.

                                       Very truly yours,

                                       KEN PAXTON
                                       Attorney General of Texas

JEFFREY C. MATEER
First Assistant Attorney General

BRANTLEY STARR
Deputy First Assistant Attorney General

VIRGINIA K. HOELSCHER
Chair, Opinion Committee

CHARLOTTE M. HARPER
Assistant Attorney General, Opinion Committee

[1] See Letter from Honorable Dennis Bonnen, Chair, House Ways & Means Comm., to Honorable Ken Paxton, Tex. Att'y Gen. at 1 (Aug. 1, 2016), https://www.texasattorneygeneral.gov/opinion/requests-for-opinion-rqs ("Request Letter").

[2] A permissible expenditure under section 351.101 may also be subject to limitations imposed by section 351.103 of the Tax Code and elsewhere in chapter 351. See TEX. TAX CODE § 351.103.

[3] See Letter from Bill Longley, Legis. Counsel, Tex. Mun. League at 2 (Aug. 31, 2016) ("TML Brief") (on file with the Op. Comm.).

[4] Briefing submitted to this office suggests that the costs for a feasibility study may constitute a permissible administrative cost under subsection 351.101(e). See TML Brief at 3-4. Even such costs must be "incurred directly in the promotion and servicing [of] expenditures" authorized by the statute. TEX. TAX CODE § 351.101(e).