When a city agrees with a municipal utility/management district to impose city sales tax and hotel occupancy tax in its extraterritorial jurisdiction (ETJ), when does the new city sales tax actually take effect?

Plain-English summary

A special state bill (HB 1424) let the City of Galveston and Galveston County Municipal District Number One jointly agree to impose the Galveston municipal hotel occupancy tax and the Galveston city sales tax within the city's extraterritorial jurisdiction (ETJ) -- an area outside city limits over which the city has certain regulatory authority. The parties had already held public hearings and signed an agreement, and wanted to start collecting both taxes right away. The Comptroller explained that the city sales tax can't start immediately: Tax Code § 321.102(c) requires the city to mail the Comptroller a dated copy of the agreement and a map of the ETJ area by U.S. registered or certified mail, and § 321.102(d) sets the tax's effective date as the first day of the first calendar quarter after a full calendar quarter has passed since the Comptroller received that agreement and map. Applying that formula to this timeline made the actual effective date October 1, 1997 -- well after the parties' own signing date. The hotel occupancy tax is different: it's administered directly by the city, so it isn't subject to this same Comptroller-notice-and-lag rule.

What this means for you

Cities and municipal districts extending taxes into an ETJ

Signing a joint agreement and holding public hearings isn't enough to start collecting a new city sales tax in your ETJ. You must mail the Comptroller a dated copy of the agreement plus a map of the territory, and the tax won't take effect until the first day of the first calendar quarter after a full quarter has passed following the Comptroller's receipt -- plan your effective date and vendor notifications around that lag, not your signing date.

Businesses operating in an ETJ near a city boundary

If you hear that a city and a nearby district have agreed to extend city sales tax into the ETJ, don't start collecting it on the announcement date -- check with the Comptroller for the actual effective date, which by law falls at least one full calendar quarter (often closer to two) after the Comptroller receives the agreement and map.

Accountants and tax professionals

The hotel occupancy tax and the city sales tax are NOT on the same clock here -- the hotel tax is city-administered with no Comptroller notice-and-lag step, while the sales tax specifically requires the § 321.102(c) mailed notice before the § 321.102(d) effective-date formula starts running.

Common questions

Q: Can a city start collecting sales tax in its ETJ as soon as it signs an agreement with a district?
A: No, per this letter -- the city must first mail the Comptroller a dated agreement and map, and the tax only becomes effective after the § 321.102(d) formula runs from the Comptroller's receipt.

Q: How is the effective date calculated once the Comptroller receives the agreement and map?
A: Per this letter, the first day of the first calendar quarter after a full calendar quarter has elapsed following receipt.

Q: Does the same rule apply to the municipal hotel occupancy tax?
A: No, per this letter -- the hotel occupancy tax is administered by the city itself, separate from this Comptroller notice-and-lag requirement for the city sales tax.

Citations and references

Statutes and rules:

• Tex. Tax Code § 321.102(c) (agreement and map sent to Comptroller by registered/certified mail)
• Tex. Tax Code § 321.102(d) (effective date formula for a city sales tax extended into an ETJ)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9705459L

Original ruling text

May 12, 1997

Dear ***:

Thank you for your letter of fax transmission of May 8, 1997, concerning HB
1424.

This bill allows the City of Galveston and Galveston County Municipal District
Number One to enter into a joint agreement whereby the Galveston municipal
hotel occupancy tax and the Galveston city sales tax may be imposed in that
city's extraterritorial jurisdiction (ETJ). The parties have already held
public hearings and have entered into an agreement to impose both taxes. The
parties wish to have these taxes collected immediately.

The municipal hotel occupancy tax is administered by the city and the city may
require taxpayers in the ETJ to do so. However, Texas Tax Code ¤321.102(c)
requires the city to send by United States registered or certified mail to the
comptroller a copy of the agreement and a map of the territory in the ETJ in
which the city sales tax will be collected. The agreement must be dated.

Texas Tax Code ¤321.102(d) establishes as the effective date the city sales tax
becomes effective in the area on the first day of the first calendar quarter
after the expiration of the first complete calendar quarter occurring after the
date on which the comptroller receives the agreement and map. This would make
the effective date of the sales tax in the affected ETJ October 1, 1997.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change.

You may call me toll free 1-800-531-5441, extension 3-4683. The direct line is
512/463-4683. You may also write to Tax Policy Division, Comptroller of Public
Accounts.

Sincerely,

Eddie C. Washington
Tax Policy Division