Type A and Type B Sales Tax

In the State of Texas you are likely to encounter a sales tax called the economic development sales tax, also known as the 4A or 4B, or Type A or Type B sales tax. This is a tool that many municipalities have added to their arsenal of incentives, and one that is subject to interpretation. It has also been subject to some controversy over the years. But it is a pretty commonplace economic development tool and can be a boon for businesses locating in Texas.

We’ll give an overview in this blog post, but if you’re really into public policy (or just want detailed information) you can visit the Texas Ahead website, which is maintained by the Texas State Comptroller’s Office and contains a wealth of useful information about this incentive and many others. Please note that the sections on the Type A and Type B taxes below are quoted almost verbatim from Texas Ahead, which is quoting almost verbatim from the Local Government Code. The rules about what you can use the taxes for are pretty cut and dry, and there aren’t too many ways you can paraphrase it.

In a Nutshell

In a nutshell, the economic development sales tax is a tax of up to one half of one percent that can be used for economic development purposes. It was authorized by the Development Corporation Act of 1979, which gives cities the ability to finance new and expanded business enterprises through economic development corporations, or EDC’s.  There are two types: Type A and Type B, and cities may have one or both taxes in place. The adoption of either type of tax requires voter approval, and both types are subject to restrictions. The main requirement is that the businesses bring new money into the community.

Local Government Code

The rules governing the use of the tax can be found in sections Chapters 501, 504, and 505 of the Local Government Code, and specific legal requirements and procedures are in the Attorney General’s Economic Development Handbook (pdf), which any good economic developer should have on his or her bookshelf. The allowable use of Type A and Type B funds changes from time to time as bills are introduced and passed, so the Attorney General’s office leads seminars throughout the year at various locations in Texas so that economic developers, EDC board members, local elected officials and others can stay up-to-date on the latest news and information about how the Type A and Type B funds can and cannot be used.

Primary Jobs

The creation of primary jobs is the main sticking point for the economic development sales tax funds, particularly Type B funds. So we thought we should explain what that means, according to the Texas Comptroller’s Office. Here is their definition:

A primary job is one at a company that exports a majority of its products or services to markets outside the local region, infusing new dollars into the local economy. Primary jobs are further limited to specific industry sectors such as agriculture, mining, manufacturing and scientific research and development. Those industry limitations can be found in Local Government Code, Chapter 501.

(Source: Texas Ahead)

The primary jobs definition is the subject of numerous discussions, and sometime arguments within municipal governments. There are many times when a local government would like to use Type A or Type B funds to lure a specific retail establishment or company with good name recognition to their community, only to learn to their dismay that the jobs the company provides don’t qualify as primary jobs, regardless of how badly the community wants the company there.

Type A Sales Tax

The Type A sales tax is primarily intended for manufacturing and industrial development.  EDC’s may use Type A revenue to fund land, buildings, equipment, facilities expenditures, targeted infrastructure and improvements for projects including:

  • manufacturing and industrial facilities, recycling facilities, distribution centers, and small warehouse facilities;
  • research and development facilities, regional or national corporate headquarters facilities, primary job training facilities operated by higher education institutions, job training classes, telephone call centers and career centers not located within a junior college taxing district;
  • certain infrastructure improvements that promote or develop new or expanded business enterprises;
  • aviation facilities;
  • commuter rail, light rail or commuter bus operations;
  • port-related facilities, railports, rail switching facilities, marine ports, inland ports; and maintenance and operating costs associated with projects.

(Source: Texas Ahead)

Type B Sales Tax

The Type B sales tax may be used for any project eligible under Type A rules and several other project types, including quality of life improvements. Type B corporations may pay for land, buildings, equipment, facilities, targeted infrastructure and improvements for:

  • professional and amateur sports and athletic facilities, tourism and entertainment facilities, convention facilities and public parks;
  • related store, restaurant, concession, parking and transportation facilities;
  • related street, water and sewer facilities; and
  • affordable housing.

To promote and develop new and expanded business enterprises that create or retain primary jobs, a Type B EDC may fund:

  • public safety facilities;
  • recycling facilities;
  • streets, roads, drainage and related improvements;
  • demolition of existing structures;
  • general municipally owned improvements; and
  • maintenance and operating costs associated with projects.

(Source: Texas Ahead)

If you want to bring a project into a community that meets one of the requirements above, you might enquire about whether or not the community has a Type A or Type B EDC. A map showing the communities that have Type A and Type B EDC’s is on the Texas Ahead website (see the “Resources” sidebar on the right).

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2013 TEDC Legislative Conference: Day 2

Gallery

In my opinion Day 2 (February 28) of the TEDC Legislative Conference was very positive–lots of useful sessions, good dialogue, and information about the current legislative session. Highlights were the morning keynote from Roy Spence of GSD&M Advertising and the … Continue reading