Can the City of Nacogdoches get a rebate of state hotel occupancy and sales taxes for a rehabilitated downtown hotel/convention center project, and does it matter whether the city or the developer owns the convention center building?

Plain-English summary

The City of Nacogdoches asked the Comptroller whether it could receive a 10-year rebate of state hotel occupancy tax (State HOT) and state sales and use tax (State SUT) generated by a proposed rehabilitation of a closed, adjoining hotel and convention center. A private LLC would purchase and rehabilitate the project, then contribute fee-simple title to the land and portions of the project to the City before operations began. The City offered the Comptroller two alternative ownership structures:

• Option 1: City owns the land under both the hotel and convention center (leased back to the LLC), and the City also owns the convention center itself (leased back to the LLC). The hotel is owned by the LLC.
• Option 2: Same land ownership, but the convention center itself would be owned by the LLC, with the City merely "managing it in part."

The Comptroller ruled the City qualifies as an eligible central municipality (ECM) under Section 351.001(7)(D) because Nacogdoches has a population under 50,000 and hosts a general academic teaching institution. As an ECM, it's eligible under Section 351.102(b)-(c) for the tax rebate only if its hotel project meets two requirements: the hotel must be owned by or located on land owned by the City, and it must be located within 1,000 feet of a City-owned convention center facility.

The land-ownership piece was satisfied under both options. But the convention-center-ownership piece was not satisfied under Option 2. The City argued that the general definition of "convention center facility" in Section 351.001(2) — which includes facilities merely managed (not owned) by a municipality — should let Option 2 qualify. The Comptroller disagreed: where a specific statutory requirement (Section 351.102(b)'s City-ownership rule for the hotel-project rebate) conflicts with a more general definition (Section 351.001(2)'s facility definition), the specific provision controls. So under Option 2, the City would NOT be eligible for the rebate; only Option 1 (City-owned convention center) qualifies.

The Comptroller separately declined to rule on two related questions — whether rebated funds would count as unrestricted City general revenue, and whether the City could use its own local hotel occupancy tax to fund Chapter 380 grants to the LLC — noting Chapter 351 doesn't give the Comptroller authority over either question, consistent with the Texas Attorney General's own past refusals to rule on municipal hotel-tax expenditure questions (citing Tex. Att'y Gen. Op. GA-0124 and two earlier letter opinions).

What this means for you

Smaller Texas cities pursuing hotel/convention center redevelopment

If your city qualifies as an "eligible central municipality" (e.g., via a population threshold combined with hosting a qualifying academic institution, per Section 351.001(7)), don't assume a "managed by the city" convention center satisfies the rebate eligibility test — the specific hotel-project rebate statute requires actual City ownership of the convention center facility, not just management.

Hotel developers and their lenders

Structure the ownership of the convention center facility itself (not just the underlying land) with City ownership if the deal depends on state tax rebate eligibility — a management arrangement alone, even a substantial one ("in part"), won't satisfy Section 351.102(b) per this ruling.

Municipal finance and economic development officials

The ruling is a reminder that the Comptroller has limited jurisdiction: questions about how rebated state funds may be spent, or whether local hotel occupancy tax revenue may fund Chapter 380 economic development grants, are outside the Comptroller's ruling authority and fall instead to the city's own governing body (and potentially the Attorney General, who also generally declines fact-based hotel-tax-use questions).

Common questions

Q: Does the hotel itself need to be owned by the city?
A: No. Section 351.102(b) only requires the hotel to be owned by the municipality OR located on land owned by the municipality — not both, and not necessarily the hotel building itself if the land ownership condition is met.

Q: Why did "managed in part by the City" fail to qualify the convention center under Option 2?
A: The general definition of "convention center facility" in Section 351.001(2) does include facilities managed (not just owned) by a municipality, but the more specific hotel-project rebate provisions in Section 351.102(b)-(c) require actual City ownership of the convention center. Under Texas statutory-construction rules, the specific provision controls over the general one.

Q: Can Nacogdoches use this ruling if it later changes the deal structure?
A: Only for the exact facts presented. Any change to the ownership or management structure of the convention center facility would take the situation outside this ruling and require its own analysis.

Q: Can another Texas city rely on this ruling?
A: No. This is a private letter ruling binding only on the Comptroller as to the City of Nacogdoches and the specific facts presented, and cannot be relied upon by any other municipality — though the underlying statutory reasoning (specific ownership requirements controlling over general definitions) illustrates how the Comptroller is likely to analyze similar fact patterns.

Citations and references

Statutes and rules:

• Tex. Tax Code § 351.001(2) (convention center facility definition)
• Tex. Tax Code § 351.001(7)(D) (eligible central municipality definition)
• Tex. Tax Code § 351.101(a), (b) (permissible uses of municipal hotel occupancy tax)
• Tex. Tax Code § 351.102(b), (c) (hotel project eligibility; State HOT/SUT refund)
• Tex. Tax Code § 151.429(h); Tex. Gov't Code § 2303.5055 (state hotel-project tax rebate)
• Tex. Educ. Code § 61.003 (general academic teaching institution)
• Tex. Local Gov't Code ch. 380 (municipal grant programs)
• 34 Tex. Admin. Code Rule 3.1 (Private Letter Rulings and General Information Letters)
• 34 Tex. Admin. Code Rule 3.10 (Taxpayer Bill of Rights; detrimental reliance)

Prior authority discussed:

• Holmes v. Morales, 924 S.W.2d 920, 923 (Tex. 1996) (specific statute controls over general)
• Serv. Life & Cas. Co. v. Montemayor, 150 S.W.3d 649, 651 (Tex. App.—Austin 2004) (same)
• Tex. Att'y Gen. Op. GA-0124 (STAR Accession No. 200311228A); Tex. Att'y Gen. LO-92-51; Tex. Att'y Gen. LO-92-16 (Attorney General declines to rule on municipal hotel-tax expenditure questions)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/201603751L

Original ruling text

This document is also available as a Hotel Tax Document under STAR 201603745L

March 16, 2016

Re: Private Letter Ruling # 152460840

Dear *****:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter

Rulings and General Information Letters [ENDNOTE1], in response to your request dated

September 5, 2015. Detrimental reliance relief is provided in accordance with

Rule 3.10, the Taxpayer Bill of Rights.

You requested guidance regarding the eligibility of the city of Nacogdoches (City)

under Section 351.102(c) to receive refunds of state hotel occupancy tax (State

HOT) and state sales and use taxes (State SUT) generated by a proposed

development project.

Relevant Facts:

***** (Hotel) is located in Nacogdoches, Texas. The main building of the Hotel

is adjacent to and abuts a convention center facility (Convention Center)

having a shared wall and connecting doorway. Immediately across the street and

within 1,000 feet is the Hotel’s annex building that contains additional hotel

rooms. The Hotel and Convention Center are located on 3.6 acres of land that

also includes land used for parking, common areas, and other operational

purposes (Land). For purposes of this ruling, the “Project” means the Hotel,

Convention Center, and Land.

The Project has been closed and unused since November 2013. ***** (LLC)

is a private organization formed for the sole purpose of acquiring,

rehabilitating, and operating the Project. LLC will purchase the Project and

will rehabilitate and remodel the Project. Specifically, the Hotel will be a

full-service hotel with parking, restaurants, a bar, and a gift shop; and the

Convention Center will be used primarily to host conventions and meetings and

will consist of meeting rooms, auditoriums, and exhibition halls. Upon

completion of the Project but prior to commencement of the Project operations,

the LLC will contribute to the City fee simple title to the Land and to

portions of Project.

The City provided two options of how the ownership of the Land, Hotel, and

Convention Center will be divided between the City and the LLC.

Option 1:

• Land under Convention Center and Hotel—owned by City and leased back to LLC

• Hotel—owned by LLC

• Convention Center—owned by City and leased back to LLC

Option 2:

• Land under Convention Center and Hotel—owned by City and leased back to LLC

• Hotel—owned by LLC

• Convention Center—owned by LLC but managed “in part” by City

The City provided additional facts regarding leases and economic development

programs and expenditures. These facts are not relevant to the analysis

provided and are not discussed in this ruling.

Rulings and Analysis

The rulings specifically requested are shown below, followed by responses and

analysis.

Request #1. City requests a ruling that based on the factual representations in

the ruling request, the Comptroller does not find anything that would preclude

the City from being eligible under Section 351.102(c) to receive refunds from

the Comptroller of State HOT and State SUT generated by the Project for ten

years after the first occupancy of the Hotel following its rehabilitation and

reopening.

Response

City will be eligible under Section 351.102(c) to receive refunds from the

Comptroller of State HOT and State SUT under Option 1 only. The City will not

be eligible under Option 2.

Section 351.102(b) states, “an eligible central municipality…may pledge the

revenue derived from the tax imposed under this chapter from a hotel project

that is owned by or located on land owned by the municipality,…and that is

located within 1,000 feet of a convention center facility owned by the

municipality for the payment of bonds or other obligations issued or incurred

to acquire, lease, construct, and equip the hotel and any facilities ancillary

to the hotel, including convention center entertainment-related facilities,

meeting spaces, restaurants, shops, street and water and sewer infrastructure

necessary for the operation of the hotel or ancillary facilities, and parking

facilities within 1,000 feet of the hotel or convention center facility.”

Section 351.102(c) provides that a municipality “to which subsection (b) applies”

is also entitled to receive a refund of certain taxes, including State SUT and State HOT.

Eligible Central Municipality (ECM)

City is an ECM under Section 351.001(7)(D) because Nacogdoches is a

municipality with a population of less than 50,000 that contains a general

academic teaching institution that is not a component institution of a

university system, as those terms are defined by Section 61.003 of the

Education Code.

Hotel Project

Section 351.102(b) states the requirements of a hotel project for an ECM to be

eligible for a rebate of taxes described in Section 151.429(h) or Government

Code Section 2303.5055. The hotel project must be: 1) owned by or located on

land owned by the municipality; and 2) located within 1,000 feet of a

convention center facility owned by the municipality.

Hotel Project: owned by or located on land owned by municipality

Under both Option 1 and 2 above, City owns the land under the hotel project,

which satisfies this requirement. City had proposed that it might also own the

hotel, if required. There is no requirement that the City own the hotel and the

land on which the hotel sits; Section 351.102(b) only requires that the City

own the hotel or the land on which the hotel sits.

Hotel Project: located within 1,000 feet of convention center facility owned by municipality

For purposes of this ruling, we will assume, based on City’s representations,

that the hotel project is located within 1,000 feet of a convention center

facility. We have not independently verified the distance between the

buildings. City indicates that the convention center will be used primarily to

host conventions and meetings and will consist of meeting rooms, auditoriums,

and exhibition halls. This description meets the definition of convention

center facility in Section 351.001.

In Option 1, City represents that the convention center facility will be owned

by City and then leased back to LLC. This ownership meets the requirements of

Section 351.102(b). However, in Option 2, City proposes instead that convention

center facility will be owned by LLC, but managed “in part” by City.

City contends this ownership satisfies the requirements of Section 351.102(b)

because the definition of convention center facility in Section 351.001(2)

includes facilities that are owned by the municipality OR that are managed in

whole or in part by the municipality.

The general definition of the term “convention center facility” in Section

351.001(2) conflicts with the specific requirements for a hotel project to

qualify for rebates under Sections 351.102(b) and (c). When two statutory

provisions conflict, a canon of construction states that if one statute is

general and one is more specific in nature, the conflict can be avoided by the

specific provision controlling the general one [ENDNOTE 2]. Therefore, the specific

ownership requirements for the hotel project in Section 351.102(b) trump the general

definition of the term “convention center facility” in Section 351.001(2) and the

convention center facility must be owned by the City, not just managed by the City.

Request #2. City requests a ruling that any refunds received by the City from

the Comptroller under Section 351.102(c) of State HOT and State SUT taxes

generated by the Project will be general revenue funds of the City, and the

City will not be required to expend such funds only for purposes specified in

Chapter 351 of the Tax Code.

Response

Chapter 351 does not authorize the Comptroller to make a ruling or

determination that any refunds received by the City under Section 351.102(c)

will be general revenue funds of the City or how the funds can be used.

Request #3. City requests a ruling that the City will be authorized under

Section 351.101(a)(1) or (5) of the Tax Code to expend municipal hotel

occupancy taxes imposed by the City (City HOT) for the purpose of making grants

pursuant to Chapter 380 of the Texas Local Government Code to the LLC to

subsidize or reimburse the costs of the Project.

Response

The Comptroller does not have the authority to make a ruling or determination

regarding whether the City is authorized to expend municipal hotel occupancy

taxes for making grants pursuant to Chapter 380 of the Texas Local Government Code.

When presented with similar questions, the Attorney General has also indicated

that it cannot render rulings, guidance, or opinions regarding use of municipal

hotel occupancy tax revenue because fact issues are involved. The Attorney

General has stated that it is for the city’s governing body to determine whether a

proposed expenditure is among the permissible uses in Section 351.101(a) and

whether those expenditures will “directly enhance and promote tourism and the

convention and hotel industry” as required by Section 351.101(b). See Tex. Att’y Gen.

GA-0124 (STAR ACCESSION NO. 200311228A); Tex. Att’y Gen. LO-92-51; and

Tex. Att’y. Gen. LO-92-16.

If you have any questions about this private letter ruling, please email us

through our website at https://www.comptroller.texas.gov/taxhelp/ and reference

Private Letter Ruling #152460840.

Sincerely,

Indirect Taxes

Tax Policy Division

ENDNOTES:

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

2. See Holmes v. Morales, 924 S.W.2d 920, 923 (Tex. 1996); Serv. Life & Cas. Co. v. Montemayor, 150 S.W.3d 649, 651 (Tex.App.—Austin 2004).