Does a small city's luxury hotel-and-convention-center project qualify for a 10-year Chapter 351 tax rebate, are resort fees included, and can the city back more than one such project?

Note: This ruling is also indexed on STAR as a sales-tax document under accession 202001024L and a mixed-beverage-tax document under 202001028L; it is the same ruling.

Plain-English summary

A small Texas city partnered with a hotel brand to build a full-service luxury hotel and convention center (a nine-story, ~257-room hotel with a signature duck fountain and twice-daily duck parade, restaurants, bar, spa, pool, and a ~42,000 sq. ft. convention center on city-owned fee-simple land). The city asked the Comptroller to confirm the project fits the Chapter 351 "qualified project" rebate program and to answer thirteen related questions. The Comptroller answered favorably throughout. Highlights:

• Eligible city (Q1 — Section 351.152(17)): Yes. This prong covers a very specific municipality: under 6,000 population, largely in a 600,000+ county adjacent to a 2-million+ county, partly in an 1.8-million+ county adjacent to a 2-million+ county, with a 19th-century rock-building visitor center/museum downtown and a public waterpark.
• Qualified facility, hotel, and project (Q2–Q4 — Section 351.151(2),(3),(4)): The convention center (10,000+ sq. ft. of continuous meeting space, wholly city-owned, connected to the hotel) qualifies; the city-designated hotel on city land qualifies; and the overall development — including restaurants, bar, retail, spa, the parking structure within 1,000 ft, and related infrastructure — is a "qualified project."
• Financing (Q5 — Section 351.155(a)): The city may pledge its Chapter 351 hotel-tax revenue and Section 351.156 entitlement to pay bonds/obligations for the project.
• What's rebated (Q6, Q8, Q9 — Section 351.156): A 10-year entitlement to the state sales/use tax and state hotel occupancy tax collected at the hotel, convention center, parking structure, gift shop, bars, both restaurants, spa, pool bar/grill, club lounge, and business center — plus local and mixed beverage taxes with written consent of the entitled subdivision. (Ruling Nine points back to this rule for nearby establishments.)
• Resort fees (Q7): Resort fees are subject to hotel occupancy tax, so they're included in the rebate (citing STAR 201710003L).
• Duration (Q10–Q11 — Section 351.158): The entitlement runs until the 10th anniversary of the hotel's opening — and continues even if the city retires its debt early.
• One project only (Q12 — Section 351.155(c)): A municipality may pledge revenue for only one qualified project. Once it does, it may never again pledge revenue for another qualified project — so no second qualified project.
• Process (Q13 — Rule 3.12(c)(2)): Apply in writing to the Audit Division after completion; no benefits are approved until the project is completed, applied for, and verified, and the Comptroller may audit and rescind.

What this means for you

Cities weighing a Chapter 351 qualified project

Two limits stand out. First, the one-project-forever rule (Section 351.155(c)): committing hotel-tax revenue to one qualified project permanently forecloses backing another — a major strategic decision. Second, the 10-year clock runs from the hotel's opening regardless of when the debt is paid off, so retiring bonds early doesn't shorten (or lengthen) the entitlement.

Hotel operators

Resort fees you charge guests are taxable as part of the room charge and, in a qualified project, flow into the city's rebate. Amenities-heavy establishments across the property — restaurants, spa, gift shop, lounges, parking — are all within the entitlement when in or connected to the qualified hotel/convention center.

Common questions

Q: Are resort fees taxed and included in the rebate?
A: Yes. The ruling states resort fees are subject to hotel occupancy tax and would be included with the rebate.

Q: Can the city do a second qualified project later?
A: No. Under Section 351.155(c), a municipality may pledge revenue for only one qualified project and may never again pledge revenue for another.

Q: If the city pays off its bonds early, does the rebate stop?
A: No. Entitlement runs until the 10th anniversary of the hotel's opening under Section 351.158, independent of when the debt is retired.

Q: Does the city automatically get the local and mixed beverage taxes?
A: Only if the political subdivision entitled to that revenue agrees in writing. The state sales/use and state hotel taxes flow without that consent.

Q: When can the city apply?
A: After the project is completed, by written request to the Comptroller's Audit Division under Rule 3.12(c)(2); the Comptroller cannot approve benefits until completion and verification.

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 expressly subject to verification, audit, and possible rescission.

Citations and references

• Tex. Tax Code § 351.152(17) — the specific municipal-eligibility prong the city satisfied.
• Tex. Tax Code § 351.151(2),(3),(4) — definitions of qualified convention center facility, qualified hotel, and qualified project.
• Tex. Tax Code § 351.155 — pledge/commitment of tax revenue, including the one-project-only limit in subsection (c).
• Tex. Tax Code § 351.156 — the state (and, with consent, local and mixed beverage) taxes the city may receive.
• Tex. Tax Code § 351.158 — 10-year period of entitlement from the hotel's opening.
• Tex. Tax Code § 183.051 — mixed beverage tax clearance fund.
• 34 Tex. Admin. Code Rule 3.12(c)(2) — the refund/rebate application process.
• STAR 201710003L (Oct. 19, 2017) — resort fees are subject to hotel occupancy tax.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=HOT
• Opinion: https://star.comptroller.texas.gov/view/202001027L

Original ruling text

Note: This document is also indexed as a sales tax document under STAR 202001024L and a mixed beverage tax document under STAR 202001028L.

January 31, 2020

RE: Private Letter Ruling No. PLR20191121152139

**, 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 Nov. 20, 2019. 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.

Facts Presented

CITY (City) and HOTEL reached an agreement to design, develop, construct and operate a full-service hotel with a convention center (Project).

In 2018 the City was conveyed 3.27 acres of land in fee simple and intends to maintain ownership for at least the next 10 years. The Project will be built on this site.

The hotel will be a full-service luxury hotel in a nine-story single tower building that will have approximately 257 rooms. The hotel will include and be served by the traditional back-of-the-house space, including an in-house laundry facility, administrative and sales offices, a kitchen to service the convention center space and the food and beverage outlets. The hotel will offer 24 hour a day room service. Additional facilities at the hotel include a lobby area including the HOTEL signature duck fountain that will host a twice-daily duck parade at 11am and 5pm; guest registration and concierge desk; outdoor courtyard; retail gift shop; bar; all-day service restaurant; high-end steak and seafood restaurant; spa; pool and pool deck with cabanas and lounge space; bar and grill at the pool; fitness center; club level lounge; duck palace on the rooftop; and business center.

The hotel will be constructed in conjunction with a convention center facility that is approximately 42,000 gross square feet containing approximately 23,800 square feet of continuous meeting space comprised of an approximately 12,000 square foot main ballroom, an approximately 4,000 square foot junior ballroom, approximately 5,500 square feet of meeting rooms, and approximately 2,000 square feet of board rooms plus 9,000 square feet of pre-function space. The remaining square footage will contain the traditional back-of-the-house elements.

The convention center will be primarily used to host conventions and meetings and can be configured to simultaneously accommodate multiple events of different sizes and will hold approximately 1,200 guests. The convention center will be wholly owned by the City and is not owned through an undivided common interest.

The convention center will be connected to the hotel and will comprise one building envelope. As reflected in the site plan, condominium ownership will be established by creating two distinct areas of space to be used as the hotel and convention center. While the two facilities are under the same building envelope, or conditioned air space, there will be a common wall between the two facilities in certain parts. The legal documents of ownership will clearly illustrate that the convention center is owned by the City.

The Project will be benefitted by a below-ground, multi-level parking structure containing approximately 325 underground spaces and will be located directly beneath the hotel and convention center. The parking structure will be a real property structure where the majority of the parking will be permitted for a fee while some spaces will be open to the public for free.

Questions, Rulings, and Analysis

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

Question One: Does the City meet the statutory requirements of Section 351.152(17)?

Ruling One: Yes, the City meets the statutory requirements of Section 351.152(17) (Applicability). Section 351.152(17) authorizes certain tax rebates for a municipality with a population of less than 6,000 that is almost wholly located in a county with a population of 600,000 or more that is adjacent to a county with a population of two million or more; is partially located in a county with a population of 1.8 million or more that is adjacent to a county with a population of two million or more; has a visitor center and museum located in a 19th-century rock building in the municipality’s downtown; and has a waterpark open to the public.

Question Two: Does the convention center constitute a “qualified convention center facility” per 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 facility constitute a “qualified hotel” per 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 looted 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 this code, or reporting taxes separately to the comptroller under this code that are constructed at the same time, are connected to each other or to a qualified convention center facility and each are located on land owned by the municipality and meet the distance requirement. Section 351.151(3).

Question Four: Does the overall project constitute a “qualified project” per Section 351.151(4)?

Ruling Four: Qualified project means a project to acquire, construct, repair remodel, expand, or equip a qualified convention center facility and acquire, lease, construct, repair, remodel, expand, or equip a qualified hotel; and that may include acquiring, leasing, constructing, repairing, remodeling, expanding, or equipping a restaurant, bar, retail establishment, or spa located in a qualified convention center facility or qualified hotel or connected to a qualified convention center facility or qualified hotel including by a covered walkway or a parking are or structure the nearest property line of which is located not more than 1,000 feet from the nearest property line of a qualified convention center facility or qualified hotel. A qualified project may also include acquiring, constructing, repairing, remodeling, or expanding infrastructure that is directly related to and necessary for the qualified convention center facility or qualified hotel and is located within the property lines of the qualified convention center facility or qualified hotel, or not more than 1,000 feet from the nearest property line of the facility or hotel. A qualified project may include acquiring a property right, including a fee simple interest, or easement. Section 351.151(4).

Question Five: Is the City authorized per Section 351.155(a) to pledge the local hotel occupancy taxes collected at the qualified hotel project for the payment of bonds issued for a qualified hotel project?

Ruling Five: 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 pay of bonds or other obligations issued for a qualified project and contractual obligations related to the project, including obligation 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).

Question Six: Is the City entitled to a 10 year rebate of the state hotel taxes and state sales taxes collected at the: hotel; convention center; parking structure; retail gift shop; lobby bar; restaurant 1; restaurant 2; spa; bar and grill at the pool; club level lounge; and business center?

Ruling Six: 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 Seven: Do the state hotel tax rebates include the state hotel taxes collected from a “resort fee” that is charged to hotel guests and will that be included in the state rebate?

Ruling Seven: Resort fees are subject to hotel occupancy tax, and therefore, would be included with any rebate. See STAR Accession No. 201710003L (Oct. 19, 2017).

Question Eight: Assuming the City enters into a written agreement authorizing it, may the City receive rebate for a period of 10 years for the local mixed beverage taxes collected at the qualified project?

Ruling Eight: See Section 351.156(3)(C).

Question Nine: Is the City entitled to a rebate of state sales taxes collected at the restaurants, bars, and retail facilities located within 1,000 feet of the qualified hotel project but not within the qualified hotel project and not located on City owned property (i.e. neighboring retail and restaurants)?

Ruling Nine: See Ruling Six.

Question Ten: When does the 10 year period for the rebate of state taxes begin and end?

Ruling Ten: 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).

Question Eleven: If the City retires its debt obligation before the 10 year rebate period expires, is the City still entitled to receive a rebate of state taxes for 10 years?

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.

Question Twelve: Would the City be entitled to a rebate of state hotel and sales taxes at a second qualified project located in the City assuming a future project meets all of the statutory requirements?

Ruling Twelve: Section 351.155(c) (Pledge or Commitment of Certain Tax Revenue for Obligations for Qualified Project) states that a municipality may pledge or commit revenue for only one qualified project. After a municipality pledges or commits revenue for a qualified project, the municipality may not ever again pledge or commit revenue for a qualified project.

Question Thirteen: When can the City formally apply to the Comptroller’s Office for the tax rebates and what procedures should the City follow to successfully obtain the rebates?

Ruling Thirteen: Pursuant to Rule 3.12(c)(2), 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 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 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.

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.

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. 20191121152139.

Sincerely,

Tax Policy Division – Indirect Taxes

Texas Comptroller of Public Accounts

ENDNOTE:

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.