Does a city-owned golf-resort hotel and conference-center development qualify for Chapter 351 tax rebates, and are its design and construction contracts exempt from sales tax as improvements to public property?

Notes from the STAR record: This ruling addresses a "hotel project" under the older Section 351.102 program, not a "qualified hotel project" — Government Code § 2303.003(8) limits that term to a municipality of 1,500,000 or more (currently only the City of Houston). It is also cross-indexed under the same accession as a hotel-tax document.

Subject

Hotel Projects And Qualified Hotel Projects — Tax Rebates

Plain-English summary

A city, a global company (Company A), and a developer planned a large golf-resort development on city-owned land: a ~500-room golf-resort hotel, a 127,000 sq. ft. conference center (a main building plus two annexes), two public 18-hole golf courses, plus spas, shops, restaurants, bars, a golf clubhouse, and a tennis facility. The developer would build everything, keep the revenue, and hold options to buy the land/facilities for nominal prices ($100–$10,000). The city asked the Comptroller ten questions spanning two doctrines: the Chapter 351 hotel-project rebate program and the sales-tax exemption for construction contracts that improve an exempt entity's realty.

Rebate side (Q1–Q9):

• Eligible city (Q1 — Section 351.001(7)(C)): The city qualifies as an eligible central municipality once it adopts a capital improvement plan to build a conference center that meets the "convention center facility" definition (Section 351.001(2)).
• Conference center as a city convention-center facility (Q2): The main conference center and the annexes within 1,000 feet of the hotel, primarily used to host conventions/meetings, can each be city-owned convention center facilities. But if the developer later exercises its option to buy the conference center during the 10-year rebate period, it stops being a city-owned convention center facility.
• Not the whole hotel (Q3): The entire hotel facility is not a hotel project — only the hotel plus qualifying ancillary facilities.
• Which ancillary facilities qualify (Q4): Retail shops that exclusively sell or rent tangible personal property, restaurants, coffee shops, bars, and parking qualify (city-owned land, within 1,000 feet, built as part of the project). A spa/salon, shops that sell services (or services + goods), a tennis shop that sells court access, and the golf clubhouse (and any shop or restaurant inside it) do not qualify.
• What the city receives (Q5–Q6): For 10 years, the state sales/use and state hotel occupancy tax (Section 151.429(h)) from the hotel and its qualifying ancillary facilities, plus local ad valorem/sales-use/hotel/mixed beverage taxes a governmental body agrees in writing to rebate (Government Code § 2303.5055). The city still gets these even though private tenants run the businesses — because the city owns the land and the facilities are built as part of the project.
• Mixed beverage (Q7): The city receives its standard 10.7143% allocation of state mixed beverage gross-receipts and sales taxes from permittees in the city (Section 183.051) — but no rebate of state mixed beverage tax (see STAR 201803042L).
• Process & timing (Q8–Q9): Written request to the Audit Division with a defined document package; payments run for 10 years after the hotel opens and the convention center is operational — monthly for state taxes, quarterly for mixed beverage (Section 183.051(b)).

Construction-contract side (Q10 — the key "no"):

The design and construction contracts for the golf facilities, conference center, and hotel are NOT "exempt contracts" under Section 151.311. That exemption can reach a contract between a nonexempt developer and its contractors, but only if the improvement is for the primary use and benefit of a Section 151.309 exempt entity (here, the city). Rule 3.291(c)(2)(B) denies the exemption when the improvement to an exempt entity's property is for the primary use and benefit of the private party. Because the developer and Company A control the facilities, keep all the revenue, can restrict public/city access, and can buy the property for a nominal price, the primary use and benefit runs to the developer, not the city. So the materials and taxable services bought under those contracts are taxable — no contractor exemption.

What this means for you

Cities and developers structuring a public-private resort

You can win the Chapter 351 rebate for the hotel and its qualifying ancillary retail/food/parking even when private operators run them, as long as the city owns the land. But a nominal-price purchase option and developer control cut the other way on the construction-tax exemption: the more the private developer controls and profits, the less the project looks like an improvement "for the city," and the construction materials become taxable. These two doctrines pull in opposite directions — model both.

Which on-site businesses count

Only tangible-personal-property retail, restaurants, coffee shops, bars, and parking feed the rebate. Service businesses (spa/salon), mixed goods-and-services shops, a tennis shop bundling court access, and the golf clubhouse are outside it — even on the same resort.

Contractors on exempt-entity projects

Don't assume a project on city-owned land is an "exempt contract." Rule 3.291 looks at who gets the primary use and benefit. If a private party controls, profits from, and can buy the improvement cheaply, the contract is taxable regardless of nominal public ownership.

Common questions

Q: Does the whole hotel building qualify for rebates?
A: No. Only the hotel plus qualifying ancillary facilities (TPP-only retail, restaurants, coffee shops, bars, parking) qualify — not the spa/salon, service shops, tennis shop selling court access, or golf clubhouse.

Q: Can the city get rebates if private companies operate the shops and restaurants?
A: Yes, as long as the facilities sit on city-owned land, are within 1,000 feet, and are built as part of the hotel project. Ownership of the businesses themselves is not required.

Q: Why weren't the construction contracts exempt from sales tax?
A: Because Rule 3.291 grants the Section 151.311 exemption only when the improvement is for the primary use and benefit of the exempt entity. Here the developer controlled the facilities, kept the revenue, and could buy them for a nominal price, so the benefit ran to the developer — making the contracts taxable.

Q: Does the city get the state mixed beverage tax?
A: No. It receives the standard 10.7143% allocation under Section 183.051 but no rebate of the state mixed beverage tax (consistent with STAR 201803042L).

Q: Is this a "qualified hotel project"?
A: No — that term (Government Code § 2303.003(8)) is limited to cities of 1.5 million or more (only Houston). This is a "hotel project" under Section 351.102.

Q: Can another city rely on this ruling?
A: No. A private letter ruling binds the Comptroller only as to the requesting taxpayer and its facts, and it is subject to verification by the Audit Division.

Citations and references

• Tex. Tax Code § 351.001(7)(C) — "eligible central municipality," which the city meets after adopting a capital improvement plan.
• Tex. Tax Code § 351.001(2) — defines "convention center facilities."
• Tex. Tax Code § 351.102(b), (c) — the city hotel project and its entitlement to the Section 151.429(h)/2303.5055 rebates.
• Tex. Tax Code § 151.429(h) — the state sales/use and state hotel occupancy tax refund for a qualified hotel project.
• Tex. Gov't Code § 2303.5055 — the local taxes a governmental body may agree in writing to rebate.
• Tex. Gov't Code § 2303.003(8) — "qualified hotel project" (1.5 million-plus cities only).
• Tex. Tax Code § 183.051(b) — the 10.7143% municipal mixed beverage allocation (no state rebate).
• Tex. Tax Code § 151.311 — the exemption for taxable items used to perform a contract improving an exempt entity's realty.
• Tex. Tax Code § 151.309(5) — governmental entities exempt from sales/use tax.
• 34 Tex. Admin. Code Rule 3.291(a)(5), (c)(2)(B) — defines an "exempt contract" and denies it when the improvement primarily benefits the private party.
• Putnam v. City of Irving, 331 S.W.3d 869 (Tex. App.—Dallas 2011, pet. denied) — ancillary facilities need not be physically connected to the hotel to qualify.
• 34 Tex. Admin. Code Rules 3.1 and 3.10 — authority for the private letter ruling and detrimental-reliance relief.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=HOT
• Opinion: https://star.comptroller.texas.gov/view/201811003L

Original ruling text

NOTE: This document is also indexed as a hotel tax occupancy document under STAR 201811003L.

November 20, 2018

RE: Private Letter Ruling No. 20181001160142

Dear ** and **:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters. [ENDNOTE 1] We are responding to your request dated Sept. 28, 2018, supplemental letter dated Oct. 25, 2018, and email message dated Nov. 6, 2018. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You requested guidance on whether the described hotel project is a qualified hotel project that entitles the city of ** (City) to a rebate or refund of taxes under Section 151.429(h) (Tax Refunds for Enterprise Projects) and Government Code Section 2303.5055 (Refund, Rebate, or Payment of Tax Proceeds to Qualified Hotel Project), pursuant to Section 351.102(c) (Pledge for Bonds).

You also requested guidance on the exemption in Section 151.311 (Taxable Items Incorporated Into or Used for Improvement of Realty of an Exempt Entity) for tangible personal property and taxable services purchased for use in the performance of a contract to improve realty for an organization exempt under Section 151.309 (Governmental Entities). You asked if the design and construction contracts for the golf facilities, conference center, and hotel project are “exempt contracts,” and whether taxable services and materials purchased under the contracts are exempt from state and local sales and use taxes under Rule 3.291 (Contractors).

This response addresses a “hotel project” rather than a “qualified hotel project.” Government Code Section 2303.003(8) (Definitions) defines “qualified hotel project” to apply to “a municipality having a population of 1,500,000 or more,” which is currently only the City of Houston.

Facts Presented

The relevant facts are based on the information provided in the initial request and supplemental submissions with attachments.

The City, COMPANY A, and COMPANY B on behalf of COMPANY C (Developer), intend to enter into a Master Development Agreement (MDA) to develop, finance, and operate a golf-related development. The development will include a COMPANY A global headquarters facility and education center (headquarters facility), golf facilities, and a hotel project. The headquarters facility will be located on private land. The golf facilities and hotel project will be located on land owned by the City. The MDA contemplates design and construction contracts for the golf-related development between the Developer and contractors.

The Hotel Project and Conference Center

The MDA provides that the Developer construct a golf resort hotel facility with conference center space and other business facilities. The hotel facility will include approximately 500 rooms, indoor and outdoor meeting spaces, dining and event spaces, conference center space, and indoor and outdoor recreational facilities (pools, hot tubs, and putting green).

The Developer will convey the land to the City for the hotel facility and other business facilities. The City will execute the Hotel Ground Lease to lease the land for a term of 10 years to the Developer to construct the hotel facility and other business facilities. The MDA requires the Developer to use the land for the primary purpose of operating the hotel facility.

The Developer will have the right to all revenues generated from the hotel facility and other business facilities. Except for the conference center, the Developer will own the hotel facility and other business facilities during and after the term of the hotel ground lease. The Developer will have an option to purchase the land after 20 years for one hundred dollars or at any time during a ten-year option period for ten thousand dollars.

The other business facilities are likely to include:

inside the hotel facility, a spa and salon facility, retail shops, food and beverage outlets, a tennis shop that sells and rents tennis-related items and access to the tennis court, and parking facilities;

outside the hotel facility, retail shops selling golf-related items, and golf clubhouse, which includes restaurants, coffee shops, bars, sale and rental of golf-related items, reservations for the golf facilities, and clubhouse memberships.

The request and subsequent information provides the Developer will construct 127,000 square feet of conference center space as three or more separate facilities. The main conference center will be located in a separate building adjacent to the hotel building and will comprise approximately 95,250 square feet. Each of the two conference center annexes will be located within the hotel facility or within a building housing other business facilities and together will comprise approximately 31,750 square feet. The main conference center and two conference center annexes will constitute the conference center.

The Developer will convey title of the conference center to the City, and the City will enter into an operating lease with the Developer to operate the conference center. The operating lease requires the Developer to use the conference center for a public conference, meeting, and exhibit center to hold conventions, meetings, and events to attract conventions and tourists. The City and City Independent School District (CISD) may collectively use the conference center for 10 days per year at no cost, but only when available. The City asserts that the convention center will be for the benefit of the City.

The Developer will retain net revenue from the conference center and will have an option to purchase the conference center under an agreement with the City for the fair market value of the conference center with deduction for capital expenditures and other costs.

Golf Facilities

The MDA requires the Developer to acquire a parcel of land and convey it to the City. In turn, the City will combine that parcel with another City-owned parcel to create the tract for the golf facilities. The City will lease the tract to the Developer to construct the golf facilities. The City will own the completed golf facilities pursuant to Government Code Section 1504.001(a)(2) (Authority for Certain Facilities). The City asserts that the golf facilities will be for the benefit of the City.

The golf facilities will include a public 18-hole championship-caliber golf course designed to host major golf championships, and a second public 18-hole golf course designed as a general recreational resort-style course. The MDA requires the City and the Developer to enter into a lease for the golf facilities (Golf Facilities Lease), which will last for a term of twenty-five years with an automatic extension of one fifteen-year period followed by two ten-year periods. The MDA provides COMPANY A or an affiliate will host a set amount of golf tournaments at the golf facilities. The Golf Facilities Lease provides the golf facilities will be open to the public at all times except when the Developer, the City, or the CISD are using the golf facilities. The MDA provides that COMPANY A or an affiliate will supervise, manage, and operate the golf facilities.

COMPANY A and Developer events will have priority over City and CISD events. Developer also has the right to restrict access to the hike and bike trails that are within the golf facilities. The City may use the golf facilities up to five days a year free of charge, provided the Developer and COMPANY A agree.

The City will grant the Developer a purchase option to purchase fee simple title to the golf facilities. If the City is not able to transfer fee simple title to any portion of the golf facilities, the City will grant Developer an exclusive easement to provide complete control over the use of the entire golf facilities as if the entire golf facilities had been conveyed to the Developer in fee simple. Under the purchase option, the purchase price for the golf facilities will be one hundred dollars.

During the term of the Golf Facilities Lease, Developer will pay an annual base rent for the first five years with a two percent increase each year going forward. Developer will be entitled to all revenues from any source generated by the golf facilities. Developer will pay the City two percent of the revenue derived from the naming rights of the golf facilities. Developer has the sole right to grant and enter into licenses, management agreements, and any agreements relating to the golf facilities. COMPANY A is a third party beneficiary with the right to enforce the obligations of the City and the Developer under the MDA to the same extent as the Developer and the City.

Questions, Rulings, and Analysis

Our restatement of your questions are shown below, followed by our responses and analysis.

Question One: Does the City qualify as an “eligible central municipality?”

Ruling One: The City will qualify as an eligible central municipality under Section 351.001(7)(C) (Definitions) upon adoption of a capital improvement plan to construct a conference center that is a convention center facility defined in Section 351.001(2).

Question Two: Is the conference center a “convention center facility owned by the City” as referenced in Section 351.102(b)? Will the hotel facility still qualify as a hotel project if only one conference center component is located within 1,000 feet of the hotel facility?

Ruling Two: The main conference center and the conference center annexes that are within a 1,000 feet of the hotel and are used primarily to host conventions and meetings may each qualify as convention center facilities owned by the City under Section 351.102(b).

The City may still qualify for a hotel project if the hotel is located within 1,000 feet of a conference center component that is a convention center facility. However, the facilities ancillary to the hotel must be located within 1,000 feet of that convention center facility or the hotel.

Should the Developer exercise its option to purchase the conference center during the ten-year rebate period, the conference center will no longer be a convention center facility owned by the City.

Question Three: Does the hotel facility meet the requirements of a “hotel project” under Section 351.102(b)?

Ruling Three: No, the entire hotel facility is not a hotel project. Certain components of the hotel facility, however, may meet the requirements of a hotel project.

Analysis for Rulings Two and Three: Section 351.102(b) provides that a hotel project for the City is:

a hotel that is owned by, or located on land owned by the City and located within 1,000 feet of an operational convention center facility owned by the City; and

any facilities ancillary to the hotel that are owned by, or located on land owned by, the City, 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 located within 1,000 feet of the hotel or convention center facility.

Section 351.001(2) defines “convention center facilities” as “facilities primarily used to host conventions and meetings. The term means civic centers, civic center buildings, auditoriums, exhibition halls, and coliseums that are owned by the municipality or other governmental entity or that are managed in whole or part by the municipality.”

If the conference center meets the definition of a convention center facility, the conference center will qualify as a convention center facility.

The entire hotel facility described by the City does not qualify. The hotel and other business facilities that meet the definition of facilities ancillary to the hotel may qualify as a hotel project.

Question Four: Are the other business facilities “facilities ancillary to the hotel” under Section 351.102(b) such that the City may receive the tax rebates described in Government Code Section 2303.5055 and Section 151.429(h), pursuant to Section 351.102(c)?

Ruling Four: Retail shops that exclusively sell tangible personal property, restaurants, coffee shops, bars, and parking facilities qualify as facilities ancillary to the hotel. The facilities must meet the ownership and distance requirements in Section 351.102(b) and be constructed, developed, or remodeled as part of the hotel project.

A spa and salon facility, retail shops that sell services or sell services and tangible personal property, the golf clubhouse, and any shops or restaurants within the golf clubhouse do not qualify as facilities ancillary to the hotel.

Analysis for Ruling Four: Section 351.102(b) uses but does not define the term facilities ancillary to the hotel. Section 351.102(b), provides that the facilities ancillary to the hotel are part of the hotel project. A hotel project must be owned by or located on land owned by the city or, for an eligible central municipality, by a nonprofit corporation acting on its behalf. Therefore, the facilities ancillary to the hotel must also be owned by or located on land owned by the city or a nonprofit corporation acting on behalf of an eligible central municipality. Section 351.102(b) further provides that facilities ancillary to the hotel must be located within 1,000 feet of either the hotel or the convention center facility.

The Tax Code references “ancillary” in various sections, such as:

“[g]roup of manufacturing and processing machines and ancillary equipment that together are necessary to create or produce….” Section 151.0047(b)(2) (Real Property Repair and Remodeling);

“…[p]iping through which the product … is recycled or circulated in a loop between the single item of manufacturing equipment and the ancillary equipment that supports only that single item of manufacturing equipment….” Section 151.318(c)(1)(B) (Property Used in Manufacturing); and

“… ‘[q]ualified property’ means … tangible personal property… that is first placed in service in the new building … if the personal property is ancillary and necessary to the business conducted….” Section 313.021(2)(C)(iii) (Definitions).

The Oxford Living Dictionaries defines “ancillary” as “providing necessary support to the primary activities or operation of an organization, institution, industry, or system.” Oxford Living Dictionaries, 2018, (https://en.oxforddictionaries.com/defintion/ancillary). The decision in Putman v. City of Irving, 331 S.W.3d 869 (Tex. App.–Dallas 2011, pet. denied) states that the facilities do not have to be physically connected to the hotel and the restaurants do not have to derive the majority of their revenue from hotel guests to qualify as “ancillary.” Putnam, 331 S.W.3d at 876. Therefore, the term facilities ancillary to the hotel means facilities that provide necessary support for the operation and function of the hotel.

Section 351.102(b) includes the term “shops” as a facility ancillary to a hotel, but does not define the term therein. Merriam-Webster's Dictionary defines “shop” as “a building or room stocked with merchandise for sale: store.” Merriam-Webster Dictionary, 2018, (https://www.merriam-webster.com/dictionary/shop). The term shop means a retail store that exclusively sells tangible personal property.

The other business facilities that are facilities ancillary to the hotel may qualify for rebates of sales and use taxes and mixed beverage sales taxes are the retail shops that exclusively sell or rent tangible personal property, parking facilities, coffee shops, restaurants, and bars. The facilities must meet the ownership and distance requirements in Section 351.102(b).

The following other business facilities do not qualify as facilities ancillary to the hotel: a spa and fitness facility, a tennis shop that sells access to the tennis court along with selling and renting tennis-related items, and the golf clubhouse, including any shops or restaurants within the golf clubhouse.

Finally, the area of a hotel project may encompass existing facilities within 1,000 feet of the hotel or convention center facility. Because existing facilities may be built prior to and independent of the development of a hotel project, the definition excludes existing facilities located within 1,000 feet of the hotel or convention center facility that are not constructed, developed, or remodeled as part of the hotel project.

Question Five: Is the City entitled to receive tax rebates described in Section 151.429(h) and Government Code Section 2303.5055 that are generated at the hotel project?

Ruling Five: Under Section 351.102(c), the City is entitled to rebates from the hotel and the other business facilities that qualify as facilities ancillary to the hotel as described in Ruling Four.

Analysis for Ruling Five: Section 351.102(c) provides that a city to which Section 351.102(b) and Section 351.102(e) applies is entitled to receive the taxes generated at its a hotel project that the owner of a qualified hotel project may receive under Section 151.429(h) and Government Code Section 2303.5055. Section 151.429(h) allows the owner of a qualified hotel project to receive the state sales and use taxes and state hotel occupancy taxes generated at the project for ten years after the hotel’s initial opening. Government Code Section 2303.5055 allows the owner of a qualified hotel project to receive over the same ten-year period the ad valorem taxes, local sales and use taxes, local hotel occupancy taxes, and local mixed beverage taxes that a governmental body agrees in writing to rebate the city.

Question Six: Will the City receive rebates of taxes generated by the other business facilities that qualify as facilities ancillary to the hotel even though neither the City nor the Developer will own the businesses that rent the space and provide the goods or services?

Ruling Six: Yes, the other business facilities that qualify as facilities ancillary to the hotel, described in Ruling Four, are located on land owned by the City as required under Section 351.102(b).

Analysis for Ruling Six: Section 351.102(b) does not require the City or the Developer to own the facilities ancillary to the hotel as long as the City owns the land upon which the ancillary facilities are located, and the facilities are constructed, developed, or remodeled as part of the hotel project.

Question Seven: Would the total amount of mixed beverage taxes received by the City from the hotel project be equal to 10.7143% of the total of mixed beverage gross receipts taxes and mixed beverage sales taxes collected by the State at the hotel project?

Ruling Seven: Pursuant to Section 183.051 (Mixed Beverage Tax Clearance Fund), the City receives 10.7143% of the mixed beverage gross receipts and mixed beverage sales taxes remitted to the State from all mixed beverage permittees located within the City. The City is not entitled to receive rebates of state mixed beverage taxes. See STAR Accession No. 201803042L (March 16, 2018).

Question Eight: What is the process for obtaining the tax rebates?

Ruling Eight: Below are the current agency requirements to initiate a request for tax rebates. The City should submit a written request to the Comptroller’s Audit Division along with the following required information:

copy of the Certificate of Formation for Developer;

copy of the City’s Capital Improvement Plan;

copy of the architectural plan for the hotel project;

a map that shows the distances between the hotel project, including facilities ancillary to the hotel, and the convention center facility;

records from Developer and the City, such as guest folios and press releases, which show the date when the hotel project was or will open for initial occupancy;

name and address of the hotel and the Comptroller-issued taxpayer identification and location number that the hotel is using, or will use, to report sales and use, hotel occupancy, and mixed beverage taxes;

name and Comptroller-issued taxpayer identification and location numbers of each facility ancillary to the hotel;

waiver of confidentiality releases signed by the authorized officer or director of the hotel and each facility ancillary to the hotel allowing the Comptroller to release the facility’s sales and use tax and mixed beverage sales tax information to the City. A waiver of confidentiality release must be renewed annually, unless it specifically states that it is in effect for three years. The Comptroller will not approve a period longer than three years;

name and telephone numbers of the contact person for the municipality; and

completed direct deposit authorization form from the municipality.

After review, the Comptroller’s office will give the City written notice as to the results of that review and will initiate the rebate process as appropriate.

Question Nine: Assuming the Comptroller’s Office approves the hotel project for tax rebates, what would be the general timeline for payment of the rebates after the taxes are received by the Comptroller?

Ruling Nine: The rebates will be for the first 10 years after the hotel is open for initial occupancy and the convention center facilities are operational. The Comptroller’s office will make monthly payments of state sales and use taxes and state hotel occupancy taxes. The Comptroller allocates mixed beverage taxes quarterly under Section 183.051(b) to cities.

Question Ten: Are the design and construction contracts for the golf facilities, the conference center, and the hotel project executed pursuant to the MDA considered “exempt contracts?”

Ruling Ten: The design and construction contracts for the golf facilities, the conference center, and the hotel project executed pursuant to the MDA are not considered “exempt contracts” under Section 151.311.

Analysis for Ruling Ten: Section 151.311 exempts from sales and use tax certain purchases of taxable items for use in the performance of a contract for an improvement to realty for exempt entities. This exemption applies even when the contract is between a nonexempt entity and a contractor, if the contract is an “exempt contract.” Comptroller’s Decision Nos. 44,896 and 47,235 (2009). Rule 3.291(a)(5) defines an “exempt contract” as “a contract with a nonexempt entity to improve real property for the primary use and benefit of an organization exempted under Tax Code, §151.309 . . . .”

Rule 3.291(c)(2)(B) further provides, “A contract with a private party to improve real property owned by an exempt entity, other than a governmental entity described in Tax Code, §151.309, is not an exempt contract if the improvement to real property is for the primary use and benefit of the private party.” See also Comptroller’s Decision No. 41,946 (2003); STAR Accession No. 201405903L (May 9, 2014); STAR Accession No. 200108598L (Aug. 20, 2001).

The design and construction contracts contemplated by the MDA involve the incorporation of tangible personal property for the improvement of real property. The City is an exempt entity under Section 151.309(5). The Developer will acquire and convey a portion of the land for the golf facilities to the City. The City will lease the combined tract to the Developer for the construction of the golf facilities. The Developer will also convey the land to the City for the hotel facilities, other business facilities, and conference center. The City will lease the land to the Developer for construction and management of the facilities.

The City will not be a party to the design and construction contracts. Therefore, to qualify for the exemption under Section 151.311, the design and construction contracts for the golf facilities, hotel facility, other business facilities, and conference center must be for the primary use and benefit of the City.

The Developer and COMPANY A control the use of the golf facilities, receive all revenues, and have the ability to restrict the City and the public’s access to use the golf facilities. The Developer controls the use of the hotel facility, other business facilities, and conference center; and receives all revenues.

Furthermore, Developer has the ability to purchase for a nominal price the golf facilities, land beneath the hotel facility and the other business facilities, and the conference center prior to the expiration of the lease. If the Developer exercises this option, the City no longer has an interest in the land or the improvements.

The design and construction contracts contemplated by the MDA will not be for the primary use and benefit of the City. Based on the provisions in the MDA and lease agreements concerning the control and ownership of the golf facilities and the receipt of revenues from the facilities, the Developer and COMPANY A receive the primary use and benefit of the golf facilities. For the same reasons, the Developer receives the primary use and benefit of the hotel facility, other business facilities, and conference center. Therefore, the contracts contemplated by the MDA are not exempt contracts under Rule 3.291(a)(5) and do not qualify for exemption under Section 151.311.

Comptroller’s Decisions and STAR documents cited can be found on the Comptroller’s State Tax Automated Research (STAR) system. The Texas Tax Code, Texas Administrative Code, and the STAR system are accessible at www.comptroller.texas.gov/taxes/.

If you have questions about this private letter ruling, please email us through our website at https://comptroller.texas.gov/web-forms/tax-help/ and reference Private Letter Ruling No. 20181001160142.

Sincerely,

Tax Policy Division – Indirect Taxes

Texas Comptroller of Public Accounts

ENDNOTE

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