When is a city entitled to Section 351.156 tax revenue from a planned hotel-and-convention-center project, and which nearby restaurants and retail count as 'connected to' the qualified hotel or convention center?

Note: This ruling is also indexed on STAR as a sales-tax document under accession 202305007L and a mixed-beverage-tax document under 202305009L; it is the same ruling.

Plain-English summary

A Texas city and a developer signed a Chapter 380 master development agreement (April 27, 2023) for a "super-regional destination center" on ~117 acres — a hotel building, a convention center building (minimum 30,000 sq. ft.), parking, infrastructure, and restaurants/bars/retail. Nothing is built yet. The city asked whether it is entitled to the Section 351.156 tax revenues from the project. The answer: yes — but conditioned on the land transfers, and with a precise line drawn around which nearby businesses count.

• Eligible city (Section 351.152(31)): population 48,000–95,000 in two counties, one of which has 900,000–1.7 million people.
• Entitlement is conditional (Section 351.156): The city will receive the state sales/use tax (Ch. 151) and state hotel occupancy tax (Ch. 156) — plus, with written consent, local sales/use, local hotel, and mixed beverage taxes — from the qualified hotel and each restaurant, bar, and retail establishment in or connected to it or the convention center, but only if the developer conveys to the city the convention center building and the land under both the hotel and the convention center. The buildings meet the "qualified hotel" and "qualified convention center facility" definitions (Section 351.151(3), (2)) only upon that conveyance.
• The key interpretive holding — what "connected to" means (Section 351.156): A restaurant/bar/retail establishment is "connected to" the qualified hotel or convention center if it either:
  1. shares an adjoining wall or roofline, or is joined by an intervening structure whose walls/ceiling allow passage between buildings; or
  2. sits on a lot that shares any portion of a boundary line with the lot holding the qualified hotel/convention center (Lot 1) and is developed as part of the municipal hotel and convention center project.
• The exclusion: If a new lot is later carved out of the adjacent tract (Lot 2) and does not share a boundary line with Lot 1, that lot is excluded from the Section 351.156 entitlement.
• Timing: The Comptroller will not issue revenue until the qualified hotel and convention center are open for initial occupancy, and will verify all facts on a refund request. The city must pledge city and state revenues for its obligations (Section 351.155(e)).
• Rulemaking note: This "connected to" definition will be formally adopted in amendments to Rule 3.12 and published in the Texas Register for public comment.

What this means for you

Cities and developers structuring a destination-center project

Two practical levers stand out. First, conveyance controls eligibility: the hotel and convention center only become "qualified" when the land (and the convention center building) is deeded to the city free of liens — plan the plat-and-transfer sequence accordingly (here, Lot 1 transfers before any building permit issues). Second, the plat map is a tax map: whether a restaurant or shop shares in the rebate turns on whether its lot touches the hotel/convention-center lot's boundary. Subdividing the adjacent tract so a parcel no longer borders Lot 1 drops that parcel out of the entitlement.

Restaurants, bars, and retail tenants

Being physically near the hotel isn't enough — you need either a shared wall/roofline/passage or a lot that borders the hotel/convention-center lot and development as part of the project. A parcel across a non-adjoining lot line won't generate rebate-eligible revenue for the city.

Common questions

Q: Is the city entitled to the taxes right now?
A: Not yet. Entitlement depends on the developer conveying the convention center building and the land under both buildings to the city, and no revenue is issued until the hotel and convention center open for initial occupancy.

Q: What does "connected to" mean here?
A: Either sharing an adjoining wall/roofline (or an intervening passage), or being on a lot that shares any boundary line with the hotel/convention-center lot (Lot 1) and developed as part of the project.

Q: What happens if the developer re-plats the adjacent land?
A: Any new lot carved out that no longer shares a boundary line with Lot 1 is excluded from the Section 351.156 entitlement.

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

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 specific facts; material changes nullify the detrimental-reliance relief, and the "connected to" rule was still headed to formal rulemaking.

Citations and references

• Tex. Tax Code § 351.152(31) — the municipal-eligibility prong the city satisfied.
• Tex. Tax Code § 351.151(2),(3) — definitions of qualified convention center facility and qualified hotel, met upon conveyance of the land/building to the city.
• Tex. Tax Code § 351.156 — entitlement to state (and, with consent, local and mixed beverage) tax revenue from the qualified hotel and establishments in or connected to it; source of the "connected to" analysis.
• Tex. Tax Code § 351.155(e) — pledge/commitment condition on entitlement.
• Tex. Tax Code § 351.158 — period of entitlement.
• Tex. Tax Code § 183.051 — mixed beverage tax clearance fund.
• 34 Tex. Admin. Code Rule 3.12 — hotel-projects rule, to be amended to adopt the "connected to" definition.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=HOT
• Opinion: https://star.comptroller.texas.gov/view/202305008L

Original ruling text

Note: This document is also indexed as a SalesTax document (STAR 202305007L) and as Mixed Beverage Tax document (STAR 202305009L).

May 11, 2023

RE: Private Letter Ruling No. PLR20230316163456

Dear **:

We issue this response to your request for a private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters. [ENDNOTE 1] Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You requested guidance on whether ** (City) is entitled to receive state tax revenues pursuant to Section 351.156 (Entitlement to Certain Tax Revenue).

Facts Presented

The relevant facts are based upon the final Master Development Agreement (Agreement) that was executed under Chapter 380, Local Government Code on April 27, 2023.

The City states that, based on the 2010 Census, it is the municipality described in Section 351.152(31) (Applicability), which is a municipality with a population of 48,000 or more but less than 95,000 that is located in two counties, one of which has a population of 900,000 or more but less than 1.7 million.

The City and COMPANY C (Developer), a subsidiary of COMPANY A. and a wholly-owned subsidiary of COMPANY B, initially entered into a master development agreement effective Dec. 9, 2021, for the development of a super-regional destination center. However, City indicates that agreement was replaced with the final Agreement executed on April 27, 2023. The final Agreement describes the development of a super-regional destination center that includes a convention center that will be a minimum of 30,000 square feet (Convention Center Building), a hotel (Hotel Building), parking areas or structures, infrastructure, and restaurants, bars, and retail establishments. The City will designate the Hotel Building as the hotel that is part of a qualified project. On Dec. 16, 2021, an affiliate of the Developer acquired approximately 117 acres (the Property) for construction of the super-regional destination center.

The Hotel Building and the Convention Center Building will be located on Lot 1 as depicted in Exhibit H of the Agreement (Lot 1). The City states that when constructed, the Hotel Building and the Convention Center Building will either be connected to each other or the Hotel Building will have an exterior wall that is located not more than 1,000 feet from the nearest exterior wall of the Convention Center Building.

The proposed restaurants, bars, and retail establishments that will be constructed on the Property will be located either on Lot 1 in the Hotel Building or the Convention Center Building or will be located on another lot as depicted in Exhibit H of the Agreement (Lot 2). Lot 1 and Lot 2 are not currently platted, but such lots will be platted pursuant to the City’s subdivision and platting process. The size of Lot 1 and Lot 2 may be increased or decreased as the project is being developed and constructed.

Neither the Hotel Building, the Convention Center Building, nor the restaurants, bars, or retail establishments have been constructed.

Ownership of Lot 1 will be transferred to the City after a final plat of Lot 1 is recorded in the county real property records and before a building permit is issued by the City to construct the Hotel Building or the Convention Center Building. Pursuant to Section 2.2 of the Agreement, ownership of the Convention Center Building and the land on which the Convention Center Building will be located will also be transferred to the City.

As part of the City's subdivision and platting process, new platted lots may be carved out of Lot 2, which may result in lot line segments varying in length from what is described and depicted in Exhibit H of the Agreement. After any lots are platted either (1) Lot 2 and any subdivided portion will continue to share a boundary line with Lot 1; or (2) a new lot carved out of Lot 2 may not share a boundary line with Lot 1.

Pursuant to the Agreement, the City will pledge both state and city tax revenues from the project for the payment of contractual obligations related to the project.

Question, Ruling, and Analysis

Our restatement of your question is shown below, followed by our response and analysis.

Question One: Under Section 351.156, is the City entitled to receive state tax revenues generated, paid, and collected by a qualified hotel, and each restaurant, bar, and retail establishment located in or connected to the qualified hotel or the related qualified convention center facility?

Ruling One: Based on the facts presented, Section 351.156 entitles the City to receive state tax revenues generated, paid, and collected by a qualified hotel, and each restaurant, bar, and retail establishment located in or connected to the qualified hotel or the related qualified convention center facility if the Developer conveys to the City the qualified convention center facility and the land on which the qualified hotel and qualified convention center facility are located.

Analysis: Section 351.156 provides that subject to Sections 351.155(e) (Pledge or Commitment of Certain Tax Revenue for Obligations for Qualified Project) and 351.158 (Period of Entitlement), a municipality is entitled to receive the revenue derived from the following taxes generated, paid, and collected by the qualified hotel and each restaurant, bar, and retail establishment located in or connected to the qualified hotel or the related qualified convention center facility, that is located in the municipality:

the sales and use tax imposed under Chapter 151;

the hotel occupancy tax imposed under Chapter 156; and

if a political subdivision that is entitled to receive the revenue from the tax agrees in writing to the city receiving that revenue

the sales and use tax imposed by the political subdivision under Chapters 322 or 323;

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

the mixed beverage tax issued under Section 183.051.

Based on the 2010 Census, the City is the municipality identified by Section 351.152(31) and is eligible to receive the entitlement provided by Section 351.156.

Section 351.151(3) (Definitions), in part, defines qualified hotel to mean 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 and 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.

Section 2.2 of the Agreement provides that the City will designate the Hotel Building as the hotel that is part of a qualified project. According to the Agreement, Developer will convey the land on Lot 1 for the Hotel Building to the City free and clear of all liens and with all warranties such that the Hotel Building will be located on land owned by the City. The Hotel Building and the Convention Center Building will either be connected to each other or the Hotel Building will have an exterior wall that is located not more than 1,000 feet from the nearest exterior wall of the Convention Center Building. The Hotel Building will meet the definition of a qualified hotel in Section 351.151(3) when Developer conveys to the City the land on which the Hotel Building will be located.

Section 351.151(2) defines qualified convention center facility to mean a facility that has been or will be constructed and that:

is primarily used to host conventions or meetings;

is wholly owned by a municipality to which Subchapter C of Chapter 351 applies, and none of which is or may be owned through an undivided common interest;

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, such as a heating, ventilation, and air-conditioning system, electrical system, or kitchen;

has at least 10,000 square feet of continuous meeting space; and

is configurable to simultaneously accommodate multiple events described by Paragraph (A) of different sizes and types.

Pursuant to the Agreement, the Developer will convey to the City the Convention Center Building and the land on which the Convention Center Building is located free and clear of all liens and with all warranties. Additionally, the Convention Center Building will be a minimum of 30,000 square feet and will either be connected to or have an exterior wall that is located not more than 1,000 feet from the nearest exterior wall of the Hotel Building. The Convention Center Building will meet the definition of a qualified convention center facility when the Developer conveys to the City both the Convention Center Building and the land on which the Convention Center Building is located.

The phrase “connected to” as used in Section 351.156 means:

sharing an adjoining wall or roofline, or joined by an intervening structure with walls or a ceiling that allows passage between buildings; or

located on a lot that:

shares any portion of the boundary line with the lot on which the qualified convention center facility or the qualified hotel is located, and

is developed as part of the municipal hotel and convention center project.

Exhibit H-2 shows Lot 1 on which the qualified hotel and the qualified convention center facility will be located. Lot 1 will share a portion of its boundary lines with the lots on which restaurants, bars, and retail establishments will be located and as provided in the City’s documentation, will be developed as part of the municipal hotel and convention center project.

Based on the documentation as provided, the restaurants, bars, and retail establishments located in Lot 2 will be connected to the qualified hotel or the qualified convention center facility.

New platted lots may be carved out of Lot 2, which may result in lot boundaries that are different from those depicted in Exhibit H of the Agreement. Any new lot carved out of Lot 2 that does not share a boundary line with Lot 1 will be excluded from the potential entitlements under Section 351.156.

Through the Agreement, the City will pledge city and state revenues from the project for the payment of its contractual obligations as required by Section 351.155(e).

Therefore, based on the facts presented, the City would be entitled to receive the revenues derived from those restaurants, bars, and retail establishments located on a lot that shares a boundary with Lot 1 pursuant to Section 351.156 if the Developer conveys to the City the Convention Center Building, the land on which the Convention Center Building is located, and the land on which the Hotel Building is located. The Comptroller’s office will not issue revenue to the City until the qualified hotel and the qualified convention center facility are open for initial occupancy.

The definition of “connected to” will be formally adopted in amendments to Rule 3.12, Hotel Projects, Project Financing Zones, and Qualified Hotel Projects, and will be made available for public comments once it is submitted to the Texas Register.

The Comptroller’s office will have to verify all relevant facts after receiving a request for refund of the taxes described in Sections 351.156.

This response is based on the documentation provided. Any material changes will nullify any detrimental reliance provided in this response.

The Texas Tax Code and Texas Administrative Code 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. PLR20230316163456.

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