Does a city's hotel and convention center project, financed through a public facility corporation and a municipal development district, qualify for Texas's Chapter 351 state tax rebate, and how is the rebate obtained?

Plain-English summary

Note: STAR flags this ruling with a forward-looking legislative alert — see "Later legislative change" below. It doesn't undo the ruling's core holding, but it's directly relevant to this fact pattern (public-facility-corporation-owned improvements) and post-dates the ruling by more than three years.

A city planned a large municipal hotel and convention center project on land it owns, using an unusually layered ownership and financing structure: the city would lease the property to a Public Facilities Corporation (PFC) it created, the PFC would develop the hotel and convention center (through a private developer), then convey the convention center back to the city while keeping the hotel, and both facilities would ultimately be leased to a Municipal Development District (MDD) the city also created, which would issue bonds and hire a hotel brand to run day-to-day operations. The city asked the Comptroller to confirm this structure qualified for the Chapter 351 tax rebate and walked through eleven detailed questions about eligibility, revenue entitlement, and the refund process.

The Comptroller confirmed the project qualified at every step: the city met the population/county criteria in § 351.152(27) (a mid-size city split across a large county and a small county), the convention center and hotel met their statutory definitions even with the PFC/MDD layering, and the city's pledge of at least $100,000 annually in local hotel occupancy tax revenue toward its certificates of obligation satisfied the pledge requirements of § 351.155. That entitles the city to a 10-year rebate, running from the hotel's initial occupancy, of state sales and use tax, state hotel occupancy tax, and (with written agreement from the relevant political subdivision) local sales/use tax, local hotel occupancy tax, and mixed beverage tax collected at the hotel, convention center, and any connected restaurant/bar/retail space — even where a private entity other than the project operator leases those ancillary spaces. The refund process itself doesn't start until construction is complete: the city submits a written request to the Comptroller's Audit Division, which verifies the facts before approving benefits and paying rebates monthly (state sales/hotel tax) or quarterly (mixed beverage tax).

What this means for you

Cities using a public facility corporation or development district structure

Layering ownership through a PFC and MDD — rather than the city holding the hotel and convention center directly — does not by itself disqualify a project, as this ruling confirms. But make sure your interlocal agreements clearly document the flow of funds, booking arrangements, and each entity's role, since the Comptroller's analysis here worked through each layer of the structure individually.

Cities relying on public facility corporations for materials purchases — check current law

Later legislative change (post-dates this ruling): House Bill 2071 (88th Legislature, 2023) created a separate, new sales-and-use-tax exemption — effective June 18, 2023 — for purchases of materials by certain persons to improve the real property of a public facility corporation, because those materials benefit the corporation. This ruling (issued January 2020) predates that statute and doesn't address it. If your project involves a PFC and you're evaluating materials-purchase tax treatment today, check current law rather than relying solely on this ruling's 2020 analysis.

Accountants and tax professionals

The mechanics worth flagging to clients: the city cannot apply for the actual refund until the project is complete, verification by the Audit Division is a condition precedent, and the Comptroller retains audit/rescission rights if the city's representations turn out to be inaccurate. Also note this ruling is one of several issued the same week analyzing Chapter 351 qualified hotel projects with different ownership structures — useful to compare when a client's project doesn't match this exact PFC/MDD pattern.

Common questions

Q: Does using a public facility corporation to own the convention center or hotel disqualify a project from the rebate?
A: Not necessarily — this ruling confirms a PFC/MDD structure can satisfy the qualified-hotel-project requirements, as long as each entity's role and the statutory definitions are met.

Q: When can the city actually apply for the tax refund?
A: Only after the project is completed. The Comptroller has no statutory authority to approve benefits before then, and the Audit Division must verify all facts after a written refund request.

Q: Is there a newer, unrelated exemption for materials purchased for a public facility corporation's property?
A: Yes — House Bill 2071 (88th Leg., 2023), effective June 18, 2023, created a sales/use tax exemption for materials purchased to improve the real property of a public facility corporation. That's a separate provision enacted after this 2020 ruling; check current law for projects today.

Q: Can another city with a similar project rely on this ruling?
A: No. It binds the Comptroller only for the taxpayer and facts presented, and pre-dates at least one relevant legislative change (HB 2071); a different structure — or current law — could yield a different result.

Citations and references

Statutes and rules:

• Tex. Tax Code § 351.152(27) (municipal eligibility); § 351.151(2)-(3) (qualified convention center facility, qualified hotel definitions)
• Tex. Tax Code § 351.155(a), (b), (e) (pledge/commitment of tax revenue); § 351.156 (entitlement to tax revenue); § 351.157 (additional entitlement); § 351.158 (10-year period of entitlement)
• Tex. Tax Code § 183.051 (mixed beverage tax clearance fund)
• 34 Tex. Admin. Code § 3.12(c)(2) (refund application procedure)

Later legislative change (not part of this ruling's analysis):

• House Bill 2071 (88th Leg., 2023), effective 06/18/2023 — new sales/use tax exemption for materials purchased to improve the real property of a public facility corporation

Note: This document is also indexed on STAR as a hotel tax document under Accession No. 202001022L.

Source

• Landing page (STAR search): https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/202001023L

Original ruling text

NOTE: This document is also indexed as a hotel tax document under STAR 202001022L.

ALERT: House Bill 2071 (88th Leg. Session, 2023) exempts from the sales and use tax purchases of materials by certain persons to improve the real property of a public facility corporation because the materials are for the benefit of the corporation. Effective 06/18/2023.

January 29, 2020

RE: Private Letter Ruling No. PLR 20191030101104

**, Taxpayer No. **

Dear **:

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 Oct. 28, 2019, supplemental correspondence on Dec. 16, 2019, and supplemental correspondence on Jan. 14, 2020. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You requested guidance on the proposed development and construction of a municipal hotel and convention center project.

Please note that this private letter ruling addresses only those questions in your request and supplemental correspondence relating to certain qualified projects under Chapter 351 (Municipal Hotel Occupancy Taxes). We will issue a separate private letter ruling at a later date in response to your question regarding sales and use taxes under Chapter 151 (Limited Sales, Excise, and Use Tax).

Facts Presented

CITY A Texas (City) is located in COUNTY A and COUNTY B. According to the 2010 census, the City has a population of 71,802, which is 70,000 or more but less than 90,000; COUNTY A has a population 4,092,459, which is four million or more; and COUNTY B has a population of 35,096, which is less than 50,000.

The City owns approximately 7.745 acres of real property (Property). The City will lease the Property to ** Public Facilities Corporation (PFC), a corporation that the City created under Chapter 303, Local Government Code. PFC will enter into a development management agreement with COMPANY (Developer) to construct and develop a hotel (Hotel), convention center facilities (Convention Center), surface parking, and infrastructure improvements on the Property (collectively, the Project).

The Hotel will consist of at least 200 guest rooms, a full-service restaurant and bar, a lounge, meeting space, fitness center, outdoor swimming pool, other ancillary facilities, and necessary infrastructure improvements. The City will designate the Hotel as the hotel that is part of a qualified project.

The Convention Center will consist of public conference rooms and meeting space of approximately 33,600 square feet, including a ballroom of approximately 12,000 square feet, along with a surface parking lot and necessary infrastructure improvements. PFC will be required to use the Convention Center as public meeting and convention center facilities and public parking spaces in connection with the Hotel.

Upon completion of the Project, the Hotel and Convention Center will be owned pursuant to a condominium declaration. PFC will convey the Convention Center to the City, and PFC will own the Hotel. The City will lease the Convention Center and PFC will lease the Hotel to CITY A Municipal Development District (“MDD”), a district that the City created under Chapter 377, Local Government Code.

The City, PFC, and MDD will enter into an interlocal agreement governing the flow of funds, booking arrangements, and other agreements regarding the Project. MDD will issue bonds and use bond proceeds for the development costs of the Hotel. The City will issue certificates of obligation to pay for the development costs of the Convention Center. The City will pledge at least $100,000 annually in municipal hotel occupancy tax revenue towards payment of the certificates of obligation.

The City’s lease of the Property to PFC, the City’s lease of the Convention Center to MDD, and PFC’s lease of the Hotel to MDD will terminate at the earlier of 40 years or the date of the repayment of the bonds and certificates of obligation.

MDD will enter into a hotel services agreement with a nationally recognized hotel brand (Brand) to manage the day-to-day operations of the Hotel. The term of the hotel services agreement initially will be 15 years. The Brand at its sole discretion may extend the term of the hotel services agreement for an additional 15 years.

Questions, Rulings, and Analysis

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

Question One: Does the City qualify as one of the municipalities under Section 351.152?

Ruling One: Yes. Section 351.152(27) (Applicability) authorizes certain tax rebates for a municipality with a population of 70,000 or more but less than 90,000 that is located in two counties, one of which has a population of four million or more and the other of which has a population of less than 50,000.

Question Two: Does the Convention Center meet the requirements of a “qualified convention center facility” under Section 351.151(2)?

Ruling Two: Section 351.151(2) (Definitions) states that a qualified convention center facility means a facility that has been or will be constructed with at least 10,000 square feet of continuous meeting space; primarily used to host conventions or meetings; is connected to a qualified hotel or has an exterior wall that is located not more than 1,000 feet from the nearest exterior wall of a qualified hotel; is not located in a hotel, sports stadium, or other structure but may share common infrastructure or facilities with a hotel; is configurable to simultaneously accommodate multiple events of different sizes and types; and is wholly owned by a municipality and none of which is or may be owned through an undivided common interest.

Question Three: Does the Hotel meet the requirements of a “qualified hotel” under Section 351.151(3)?

Ruling Three: A qualified hotel means a hotel that is designated by a municipality as the hotel that is part of a qualified project. A qualified hotel must be located on land owned by the designating municipality; must be connected to a qualified convention center facility or have an exterior wall that is located not more than 1,000 feet from the nearest exterior wall of the qualified convention center facility; and may consist of two or more towers, regardless of whether named differently, branded differently, reporting different addresses to the Comptroller under the Texas Tax Code, or reporting taxes separately to the Comptroller under the Texas Tax Code, that are constructed at the same time, connected to each other or to a qualified convention center facility, and that are each located on land owned by the municipality and connected to or having an exterior wall that is located not more than 1,000 feet from the nearest exterior wall of the qualified convention center facility. Section 351.151(3).

Question Four: Is the City entitled to receive the tax revenues described in Section 351.156 generated by the Project?

Ruling Four: Section 351.156 (Entitlement to Certain Tax Revenue) states that a municipality is entitled to receive the revenue derived from the following taxes generated, paid, and collected by a qualified hotel, and each restaurant, bar, and retail establishment located in or connected to the hotel or the related qualified convention center facility, that is located in the municipality:

1. The sales and use tax imposed under Chapter 151;

2. The hotel occupancy tax imposed under Chapter 156; and

3. If a political subdivision that is entitled to receive the revenue from the tax agrees in writing to the municipality receiving that revenue:

A. The sales and use tax imposed by the political subdivision under Chapter 322 or 323;

B. The hotel occupancy tax imposed by the political subdivision under Chapter 352; and

C. The mixed beverage tax issued under Section 183.051.

Question Five: Does the City’s issuance of its certificates of obligation meet the requirements of Section 351.155(a)?

Ruling Five: Yes. In addition to the authority of a municipality to issue debt under Chapter 1504, Government Code, a municipality may pledge or commit the revenue derived from the tax imposed under Chapter 351 from a qualified hotel and the revenue to which the municipality is entitled under Section 351.156 for the payment of bonds or other obligations issued for a qualified project and contractual obligations related to the project, including obligations under a contract authorized by Chapter 380, Local Government Code, for the project and an interlocal agreement directly related to the project. Section 351.155(a) (Pledge or Commitment of Certain Tax Revenue for Obligations for Qualified Project).

Question Six: Will the City’s pledge of local hotel occupancy taxes to pay for the City’s certificates of obligation for the Project satisfy the requirements of Section 351.155(b)?

Ruling Six: Yes. A municipality may pledge or commit revenue for the payment of bonds, other obligations, or contractual obligations only if the qualified hotel that is a component of the qualified project for which that revenue is pledged or committed benefits from the pledging or committing of that revenue. Section 351.155(b).

Question Seven (added based on email received on Jan. 14, 2020): Does the City’s pledge of local hotel occupancy taxes in the amount of at least $100,000 annually satisfy the requirements of Section 351.155(e)?

Ruling Seven: Yes. A municipality is not entitled to receive revenue under Section 351.156 or 351.157 (Additional Entitlement for Certain Municipalities) unless the municipality has pledged or committed a portion of the revenue derived from the municipal hotel occupancy tax collected by the qualified hotel for the payment of bonds, other obligations, or contractual obligations related to the project and issued and incurred for the qualified project. Section 351.155(e).

Question Eight: In the event any of the restaurants, bars, and retail establishments located in or connected to the hotel or convention center are leased to a private entity other than the operator of the Project, would the City still be able to receive revenues for such facilities?

Ruling Eight: Yes. A municipality is entitled to receive the revenue derived from the taxes described in Section 351.156 that are generated, paid, and collected by a qualified hotel, and each restaurant, bar, and retail establishment located in or connected to the hotel or the related qualified convention center facility. See Ruling Four.

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

Ruling Nine: Pursuant to Section 183.051 (Mixed Beverage Tax Clearance Fund), a municipality 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 municipality. A municipality is not entitled to receive rebates of state mixed beverage taxes. See STAR Accession No. 201803042L (Mar. 16, 2018).

Question Ten: Assuming the Comptroller agrees that the City is entitled to receive tax revenues under Section 351.156, what is the process for obtaining the tax revenues?

Ruling Ten: Pursuant to Rule 3.12(c)(2) (Hotel Projects, Project Financing Zones, and Qualified Hotel Projects), the owner of a qualified hotel project seeking a refund from the comptroller of state sales and use taxes, state hotel occupancy taxes, and eligible tax proceeds must submit a written request to the Comptroller’s Audit Division along with the information specified in Rule 3.12(c)(2), as applicable.

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.

The Comptroller’s office does not have statutory authority to approve a qualified project for any benefits until the project is completed and an application for benefits is submitted and verified.

The Comptroller will have to verify all relevant facts after receiving a request for refund of the taxes described in Section 351.156. We base this response on the facts presented, which are subject to verification by the Comptroller’s Audit Division. Different facts may yield different conclusions.

The Comptroller reserves the right to audit and investigate the City’s project to confirm the accuracy of the representations made in this private letter ruling. If the City’s representations are inaccurate, the Comptroller shall have the right to rescind this private letter ruling and may collect the amounts due from the project by any method allowed by Tax Code, Chapter 111, or any other applicable law.

Question Eleven: Assuming the Comptroller agrees that the City is entitled to rebates under Section 351.156, what would be the general timeline for payment of the rebates after the taxes are received by the Comptroller?

Ruling Eleven: A municipality is entitled to receive revenue until the 10th anniversary of the date the qualified hotel to which the entitlement relates is open for initial occupancy. Section 351.158 (Period of Entitlement). 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 to cities under Section 183.051(b).

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. 20191030101104.

Sincerely,

Tax Policy Division – Indirect Taxes

Texas Comptroller of Public Accounts

ENDNOTE:

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