The Hotel Occupancy Tax (AKA “HOT Tax” or “Bed Tax”)

The San Jacinto Monument, a popular tourist attraction in Southeast Houston.

The San Jacinto Monument, a popular tourist attraction in Southeast Houston.

Not everyone equates tourism with economic development, but in my experience the two go hand-in-hand–while it may not pull in the revenue that a million dollar capital investment expansion project does, tourism adds to the bottom line of any local economy that has something to offer visitors, as numerous studies have shown. In that vein, the Hotel/Motel tax offers a really great economic development tool for cities that choose to impose it. In this post I’ll explain how the tax is assessed at the State, local, and county levels, and then explain how that tax can legally be used.

The State of Texas imposes a tax of six percent on travelers who pay for a room or space in a hotel costing $15 or more each day. Local taxing authorities are authorized to impose an additional tax of up to nine percent (cities) and seven percent (counties) of the cost of sleeping rooms costing $2 or more each day. Many entities are exempt from paying the tax; retailers, including hotel and motel operators, can search the Comptroller’s office to learn more about exemptions from Texas franchise tax, sales and use tax, and hotel occupancy tax.

There are very specific rules about how Hotel Occupancy Tax revenues can be used. What this means for you is that IF your business venture falls into one of these categories, you MAY be able to request Hotel Occupancy Funds to help with your costs. But please be cautioned that even if your project does qualify as a legal expenditure, the final decision on any expenditure rests with the individual taxing entity.

To qualify as a legal expenditure of hotel occupancy funds, an expenditure must meet both of the following criteria:

Criteria #1: Every expenditure must DIRECTLY enhance and promote
tourism AND the convention and hotel industry. 

Criteria #2: Every expenditure of the hotel occupancy tax must clearly fit into one of nine statutorily provided categories for expenditure of local hotel occupancy tax revenues. Those categories are as follows:

  1. Funding the establishment, improvement, or maintenance of a convention center or visitor information center.
  2. Paying the administrative costs for facilitating convention registration
  3. Paying for advertising, solicitations, and promotions that attract tourists and convention delegates to the city or its vicinity.
  4. Expenditures that promote the arts.
  5. Funding historical restoration or preservation programs.
  6. Funding certain expenses, including promotional expenses, directly related to a sporting event within counties with a population of under 1 million.
  7. Funding the enhancement or upgrading of existing sports facilities or sports fields for certain municipalities.
  8. Funding transportation systems for tourists
  9. Signage directing tourists to sights and attractions that are visited frequently by hotel guests in the municipality.

All of these criteria for cities are outlined in the Texas Municipal Code, Chapter 351. The rules for counties, which are similar, can be found in Chapter 352.

As you may imagine, there is some wiggle room in the interpretation of these criteria, and cities and counties often contact the Attorney General’s Office for an opinion on whether or not a particular expenditure is legal. There are also several exceptions and special circumstances that are outlined in the tax code. The best authority, but virtually all accounts, on the allowable use of Hotel Occupancy Tax revenue is Scott Joslove, the President and CEO of the Texas Hotel & Lodging Association (THLA). Mr. Joslove is an attorney and a registered lobbyist for the travel industry, and he often counsels local government officials on how best to use their hotel motel revenues. His guide, What Cities Need to Know to Administer Municipal Hotel Occupancy Taxes is available by calling the THLA at 512-474-2996. An abridged version is available online at the Texas Municipal League website.

Also, many cities choose to direct a portion of their hotel occupancy revenue to a local or regional Convention & Visitors Bureau. If you have an event or a business that you think would help attract visitors to the city or county where it is located, look for the local CVB and ask for their assistance–chances are good that they’ll be more than happy to assist you in publicizing your event or business to out-of-town visitors. The Texas Association of Convention and Visitors Bureaus can point you in the right direction.

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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).

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

2013 TEDC Legislative Conference: Day 1

Gallery

The Texas Economic Development Council, or TEDC, is an Austin-based, statewide, non-profit professional association dedicated to the development of economic and employment opportunities in Texas (I took that straight from their website, which you can find here). It’s a very active … Continue reading

What is Economic Development, Anyway?

Economic development is a vital part of any economy. But when pressed, few people actually know what “economic development” actually means. This is largely due to the fact that the very definition of the term will change from community to community, and the people who define it are generally the leaders who set the priorities and the long-term goals for a community. In today’s post we’ll define economic development in broad classical and practical terms, explain what an economic developer does, and briefly discuss the difference between economic development organizations and economic development corporations in the state of Texas.

The definition of economic development comes down to leadership and priorities. In some communities, economic development begins and ends with job creation. In other communities has to do with filling vacant buildings or improving the land. In some it’s about developing a strong tourism program that will attract visitor dollars from outside of the community, and in others it’s about laying the foundation for a strong infrastructure that will support future growth. It just depends on the needs and values of the people who reside in, work in, and lead a community. The International Economic Development Council (IEDC) is a non-profit membership organization dedicated to helping economic developers do their job more effectively and raising the profile of the profession. According to IEDC, economic development encompasses three major areas:

  • Policies that government undertakes to meet broad economic objectives including inflation control, high employment, and sustainable growth.
  • Policies and programs to provide services including building highways, managing parks, and providing medical access to the disadvantaged.
  • Policies and programs explicitly directed at improving the business climate through specific efforts, business finance, marketing, neighborhood development, business retention and expansion, technology transfer, real estate development and others.

They go on to (sort of) define economic development in terms of the community:

The main goal of economic development is improving the economic well being of a community through efforts that entail job creation, job retention, tax base enhancements and quality of life. As there is no single definition for economic development, there is no single strategy, policy, or program for achieving successful economic development. Communities differ in their geographic and political strengths and weaknesses. Each community, therefore, will have a unique set of challenges for economic development.

(Read the whole article on the IEDC website here.)

So an economic developer has two jobs: first, he or she must determine the needs of the community when it comes to improving the local economic climate, and then enact the best combination of strategies, policies, and programs that will help meet those needs, taking into account all of the strengths and weaknesses within the community and the overall needs of the community. Complicated, yes. But these are challenges that good economic developers will relish and embrace as they move forward with the task at hand.

The Economic Developer: A Business’s Best Friend

Economic Developers are either employed by a municipality or an EDC (more on that later) or by an economic development organization that may serve a specific city or a larger region. For example, in the City of La Porte I was the head (actually the only member) of the Economic Development department for the City. But I worked closely with several regional organizations that existed to serve the larger Houston Bay Area–they included the Economic Alliance, Houston Port Region and the Bay Area Houston Economic Partnership. While I was there specifically to look out for the economic development needs (which often spilled over into the community development needs) of the City of La Porte, those regional organizations helped steer business towards the greater bay area region, which benefitted me and my colleagues in surrounding cities. All of us worked towards the common goal of improving the overall economy in the region and, by extension  the quality of life for the people who lived, worked and played there.

Economic Developers have their fingers on the pulse of the community in many different areas. They are invaluable when seeking the right site for a particular project–they can work with their local real estate professionals and land owners to help find the right fit for your business that will take into account not only your geographic preferences but also your workforce, transportation, business climate, demographic, and infrastructure needs. They are knowledgeable about (and often serve as the gatekeepers for) possible financial incentives that may be available for a particular project, and they will know how and when to apply for myriad state, regional, and local programs established to entice businesses to an area. They will have a long list of resources to help with workforce development, transportation, basic utilities, importing and exporting, licensing, marketing, outreach, and key community contacts. In addition, economic developers work with local municipalities to understand and explain the local infrastructure, zoning issues, land use regulations, long-term planning goals, and building codes, and they can help navigate an often complex local political climate.

Business owners who are seeking to locate or relocate or expand a business in a particular community in Texas would be well served to seek out the economic developer for that community. Your economic developer will help you find a site that will allow your business to grow and thrive and help to hook you up with any available business incentives that will make your business more profitable. But perhaps more importantly, an economic developer will also help you understand the community, connect you to valuable resources and information, and introduce you to local and regional stakeholders that will help ensure your long-term success.

A Word About Economic Development Corporations, or EDC’s

Something that can be confusing to someone new to the Texas economic development scene is the difference between an ordinary economic development organization and an Economic Development Corporation (EDC). We’ll talk more about EDC’s and what they can do for businesses in a future post, but for now it’s important to understand that Texas law allows municipalities to pass up to a half-cent sales tax that can be used to further economic development in that community. The tax can be one of two types: Type A or Type B (some communities have both), and by law, if that tax is in effect, the funds must be managed by a non-profit corporation set up specifically for that purpose.  There are very specific rules in place for the use of Type A or Type B sales tax funds. The economic developer for a particular community may be employed directly by the EDC, or he or she may be employed by the City and serve as a liaison for the EDC. Either way, he or she must be educated and informed about the latest legislative rules governing the expenditure of those funds, and be aware of the community’s goals and intentions in passing the tax in the first place.

So that’s a brief overview of the complex topic of Economic Development in Texas. If you’d like some additional information about Economic Development, be sure to visit our resources page.

Next Up:

In our next post we’ll list some resources for finding a great site for your business. Be sure to subscribe to the blog (on the right) so you won’t miss future posts. You can also follow us on Twitter.

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Welcome to Doing Business in Texas, a blog designed to help business owners who want to establish, relocate, or expand a business in the great state of Texas. We’re glad that you’re joining us, and we’re excited to share information with you about how to go about doing business in our state.

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