Can a Texas city spend hotel occupancy tax money on a public space at an apartment complex?

Plain-English summary

Representative Rafael Anchía asked the Attorney General whether a city could use hotel occupancy tax (HOT) revenue to fund a "public space" and clubhouse at an apartment complex. The agreement at issue called for HOT money to be paid once a developer completed the space, which the agreement described as a place inside the complex to display art exhibits and hold gatherings. The representative questioned whether that was a proper use of HOT revenue under Tax Code section 351.101.

The AG laid out the two-part test that governs every HOT expenditure. First, the money must be spent in a way that "directly" enhances and promotes tourism and the convention and hotel industry. Chapter 351 defines "tourism" as the guidance or management of tourists, and a "tourist" as someone who travels from their own residence to a different municipality for pleasure, recreation, education, or culture. So the spending has to directly guide or manage tourists to the city, not simply do something pleasant locally. Second, the expenditure has to fall within one of the specific permissible uses listed in subsection 351.101(a). The closest fit here is the arts category in subsection (a)(4), which is generally capped at fifteen percent of HOT revenue, and which the office had previously held does not by itself authorize construction of facilities (construction has to come in under the convention/visitor facilities category in (a)(1)).

Applying that framework, the AG looked at the agreement itself. While the office does not ordinarily construe contracts, it can address a legal question on the face of a document. The memorandum of understanding said the developer agreed to provide a public service "for the benefit of the residents" of the complex. Because a space built for the residents does not directly guide or manage tourists to the municipality, it fails the first part of the test, and the AG did not need to reach the second. The AG framed the ultimate determination as a fact question that belongs first to the municipality, subject to judicial review, but concluded that a court is unlikely to find the expenditure, as described, to be an authorized use of HOT revenue.

What this means for you

This describes what the 2021 opinion holds about spending hotel occupancy tax revenue. The opinion is now several years old, and chapter 351 of the Tax Code can change, so confirm current law before relying on this.

Cities and municipal finance officers

Based on this opinion, a HOT-funded project has to clear both parts of the test: it must directly promote tourism and the convention and hotel industry, and it must fit one of the listed statutory uses. A project framed in its own paperwork as benefiting local residents rather than drawing tourists is, on this analysis, unlikely to qualify. The opinion also notes the city makes the determination first, subject to court review.

Developers seeking HOT funding

The opinion treats how the agreement describes the project as significant. Language saying the space serves the complex's residents undercut the tourism rationale. The opinion does not bless or block any particular project outright; it says this one, as written, likely does not qualify.

Taxpayers and watchdogs

The opinion restates that HOT revenue cannot be used for general revenue or general governmental operations, and that arts spending is generally capped at fifteen percent, with construction limited to the convention/visitor facilities category. It does not resolve the specific facts but signals strong skepticism about the described expenditure.

Common questions

Q: What can a Texas city legally spend hotel occupancy tax money on?
A: Only on expenditures that directly promote tourism and the convention and hotel industry and that fall within one of the uses listed in Tax Code section 351.101(a), such as convention facilities, advertising, or promotion of the arts.

Q: Why doesn't a community art space at an apartment complex qualify?
A: Because the agreement described the space as benefiting the complex's residents. The AG concluded a space for residents does not directly guide or manage tourists to the city, so it fails the first requirement of section 351.101(b).

Q: Can hotel tax money pay for constructing a building?
A: Only under the right category. The opinion notes that the arts category in subsection (a)(4) does not authorize construction by itself; construction costs are proper only if they come in under the convention/visitor facilities category in subsection (a)(1).

Q: Who decides whether a particular expenditure is allowed?
A: The municipality makes the determination in the first instance, subject to judicial review. The AG can address the legal question but cannot resolve the underlying facts in an opinion.

Background and statutory framework

Chapter 351 of the Tax Code governs municipal hotel occupancy taxes. Section 351.002 authorizes the tax on the use or possession of a hotel room, and section 351.101 controls how the revenue may be spent. The statute works in two layers. The threshold requirement in subsection (b) is that revenue be expended in a manner directly enhancing and promoting tourism and the convention and hotel industry, read against the chapter's definitions of "tourism" and "tourist" in section 351.001. On top of that, subsection (a) lists the permissible categories, including the promotion of the arts in (a)(4), which carries a fifteen-percent cap under section 351.103(c) and related limits in sections 351.1035, 351.1075, and 351.1077. The office had addressed the "directly promote tourism" standard and the construction limitation before in KP-0281 and KP-0131, and the contract-construction limits on AG opinions in GA-0176. The opinion applies that settled framework to the apartment-complex agreement.

Citations and references

Statutory provisions:

• Tex. Tax Code § 351.101 (use of hotel occupancy tax revenue); § 351.002(a) (the tax); § 351.001(5), (6) (definitions)
• Tex. Tax Code §§ 351.103(c), 351.1035, 351.1075, 351.1077 (limits on arts spending)

Related AG opinions:

• Tex. Att'y Gen. Op. No. KP-0281 (2020) (directly promoting tourism; municipality decides first, subject to review)
• Tex. Att'y Gen. Op. No. KP-0131 (2017) (construction not authorized by the arts category alone)
• Tex. Att'y Gen. Op. No. JM-965 (1988) (permissible uses must fit the statutory list)
• Tex. Att'y Gen. Op. No. GA-0176 (2004) (AG opinions do not construe contracts but may address authority as a matter of law)

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/ken-paxton/kp-0350
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/2021/kp-0350.pdf

Original opinion text

KEN PAXTON
ATTORNEY GENERAL OF TEXAS

January 25, 2021

The Honorable Rafael Anchía
Chair, Committee on International Relations & Economic Development
Texas House of Representatives
Post Office Box 2910
Austin, Texas 78768-2910

Opinion No. KP-0350

Re: Whether hotel occupancy tax revenue may be used to fund a public space at an apartment complex under section 351.101 of the Tax Code (RQ-0368-KP)

Dear Representative Anchía:

You ask about the use of hotel occupancy tax revenue to fund a public space at an apartment complex under section 351.101 of the Tax Code.¹ You describe an agreement which calls for the payment of hotel occupancy tax revenue upon completion of a public space and clubhouse. See Request Letter at 1. You tell us the agreement describes "the space located within the apartment complex as a 'public space' [to be used] to display art exhibits and [for] gatherings." Id. You question the propriety of the expenditure from hotel occupancy tax revenue. See id. As an initial matter, this office cannot always determine whether a particular expenditure satisfies Tax Code section 351.101 as a matter of law because of the fact issues involved. See Tex. Att'y Gen. Op. Nos. KP-0281 (2020) at 1 (noting also that the determination lies in the first instance with the municipality, subject to judicial review), KP-0131 (2017) at 2 (same).

Chapter 351 of the Tax Code governs municipal hotel occupancy taxes. See TEX. TAX CODE §§ 351.001–.160. Section 351.002 authorizes a municipal tax on the use or possession of a hotel room. Id. § 351.002(a). Section 351.101 provides for the use of the resulting tax revenue. See id. § 351.101. In its operation, section 351.101 has two primary aspects. First, an expenditure of hotel occupancy tax revenue must be used only to "promote tourism and the convention and hotel industry." Id. § 351.101(a), (b) (requiring that "[r]evenue 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 as permitted by Subsection (a)"). This first aspect requires the expenditure to "directly" promote tourism and the hotel industry. Id. § 351.101(b); see also Tex. Att'y Gen. Op. Nos. KP-0281 (2020) at 3 (discussing directly), KP-0131 (2017) at 1–2 (same). Chapter 351 defines "tourism" as the "guidance or management of tourists." TEX. TAX CODE § 351.001(5). And 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). This aspect thus requires a hotel occupancy tax revenue expenditure to be "one that directly guides or manages tourists to the municipality for pleasure, recreation, education, or culture." Tex. Att'y Gen. Op. No. KP-0131 (2017) at 2.

The second aspect limits the expenditure to one of the specified permissible uses in subsection 351.101(a).² TEX. TAX CODE § 351.101(a)(1)–(11); Tex. Att'y Gen. Op. No. JM-965 (1988) at 2. Of these, the permissible use most relevant to your request is the one that allows for promotion of the arts:

(4) the encouragement, promotion, improvement, and application of the arts, including instrumental and vocal music, dance, drama, folk art, creative writing, architecture, design and allied fields, painting, sculpture, photography, graphic and craft arts, motion pictures, radio, television, tape and sound recording, and other arts related to the presentation, performance, execution, and exhibition of these major art forms.

TEX. TAX CODE § 351.101(a)(4). This provision generally limits an expenditure in support of the arts to not more than fifteen percent of the occupancy tax revenue.³ See id. § 351.103(c). Further, this office opined that subsection 351.101(a)(4) does not expressly authorize construction of facilities. See Tex. Att'y Gen. Op. No. KP-0131 (2017) at 2; compare TEX. TAX CODE § 351.101(a)(1), with id. § 351.101(a)(4). Opinion KP-0131 concluded that construction costs, considered alone, are not within the scope of subsection 351.101(a)(4), and that 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). Tex. Att'y Gen. Op. No. KP-0131 (2017) at 2. An expenditure made under subsection 351.101(a)(4) must conform to these limitations to satisfy the second aspect.

Using this analytical framework, we consider the expenditure you describe for the public space in the apartment complex. While this office does not ordinarily construe contracts in an attorney general opinion, it can address certain issues if they can be answered as a matter of law. See Tex. Att'y Gen. Op. No. GA-0176 (2004) at 2 (noting that attorney general opinions do not construe contracts but may "address a public entity's authority to agree to a particular contract term, if the question can be answered as a matter of law"). The agreement you attach to your request letter provides that the developer "agrees to provide a public service for the benefit of the residents [and] will hold monthly exhibitions and performances at the property highlighting artists and musicians from throughout the valley." Attachments, "Memorandum of Understanding" at 2, (Terms and Other Conditions ¶ 3) (emphasis added). To the extent the proposed space is for the "residents" of the apartment complex and does not directly guide or manage tourists to the municipality for pleasure, recreation, education, or culture, or otherwise promote tourism and the convention and hotel industry, then it does not satisfy the first aspect in subsection 351.101(b), and we need not consider whether the expenditure also satisfies the second aspect subsection 351.101(a)(4). While that question is ultimately a fact question, a court is unlikely to determine that the expenditure as you describe it is an authorized expenditure of hotel occupancy tax revenue.

¹ See Letter and Attachments from Honorable Rafael Anchía, Chair, House Comm. on Int'l Relations & Econ. Dev., to Honorable Ken Paxton, Tex. Att'y Gen. at 1 (July 31, 2020), https://www2.texasattorneygeneral.gov/opinions/opinions/51paxton/rq/2020/pdf/RQ0368KP.pdf ("Request Letter" and "Attachments").

² Section 351.101 further provides that the hotel occupancy tax revenue may not be used for the "general revenue purposes or general governmental operations of a municipality." TEX. TAX CODE § 351.101(b).

³ Chapter 351 imposes other limitations on expenditures in support of the arts. See id. §§ 351.1035(c) (imposing same fifteen percent limitation on certain municipalities in border counties), 351.1075 (imposing higher percentage limitation on revenue spending in certain municipalities of which a portion is designated as a cultural arts district provided the municipality makes certain findings), 351.1077(c) (authorizing additional expenditure of revenue for the arts for municipalities with specified demographics and construction bond issuance).

S U M M A R Y

Chapter 351 of the Tax Code authorizes an expenditure of hotel occupancy tax revenue in the direct promotion of tourism and the convention and hotel industry, provided the expenditure is for one of the specified uses listed in the statute. To the extent the particular agreement about which you ask expressly provides that the public space is intended to benefit the residents of the apartment complex and does not promote tourism and the convention and hotel industry, it does not satisfy section 351.101. While it is ultimately a fact question, a court is unlikely to determine that the expenditure as described is an authorized expenditure of hotel occupancy tax revenue.

Very truly yours,

KEN PAXTON
Attorney General of Texas

BRENT E. WEBSTER
First Assistant Attorney General

LESLEY FRENCH
Chief of Staff
Acting Deputy Attorney General for Legal Counsel

VIRGINIA K. HOELSCHER
Chair, Opinion Committee

CHARLOTTE M. HARPER
Assistant Attorney General, Opinion Committee