For A Tourism Plan, Uniquely Austin
To: City Council and the Citizens of Austin
From: Bill Bunch, Bill Aleshire, Robert Levinski, Fred I. Lewis, Jim Boyle
Date: August 5, 2019
Hotel Occupancy Tax Legal Memo
There is a lot of public confusion about the Hotel Occupancy Tax (“HOT”) and how it may be spent legally by the City of Austin. This legal memo explains the relevant state statutes and how they have been interpreted by the Texas Attorney General and the Courts.
This memo reaches three key conclusions, which are explained in detail below.
1) The City Has Broad Discretion On HOT-Funded Expenditures. The City of Austin generally is given broad discretion in determining whether expenditures from HOT taxes promote tourism and are allowable; if there is a reasonable basis for believing that an expenditure might directly benefit tourism, the city has discretion to make the expenditure. There also is likely no standing for a person who pays HOT tax to challenge City HOT-tax expenditure decisions.
2) The 15% HOT Expenditure Caps Do Not Apply To General Tourism Promotion Or Tourist Transportation. Although the statute limits cultural arts and historic preservation expenditures each to 15% of the HOT revenues, it has no limit on the use of HOT tax for tourism promotion and advertising, including for the arts and historic preservation. This is why the City has used in the past tourism promotion HOT funds to fund music, rather than out of the l5%- capped cultural arts funds.
3) The City’s Proposed 2% Additional HOT Tax (Including Any Surplus) May Only Be Used For Convention Center Expansion. Unlike the other HOT tax provisions, the law relied upon by Council for its proposed 2% increase for the convention center expansion specifically restricts its funds only for a convention center expansion. These funds cannot be used for the arts, historic preservation, or any other purpose. Nor may any surplus from the bonds or revenue be used for non-convention center expansion expenditures.
There Are 3 Different HOT Taxes
Under Texas state law, the Hotel Occupancy Tax is a tax that the state and local governments may levy on the price of a hotel room for each night that it is used. It is levied by these governments as a percentage of the price of the room. Local Hotel Occupancy Taxes are authorized under two separate sections of state law: 1) under Chapter 351 of the Texas Tax Code and 2) under Chapter 334, Subchapter H of the Texas Local Government Code. Both of these taxes are considered “Hotel Occupancy Taxes” and labeled as such in the statutes; they, however, have different purposes and restrictions. The state also levies a separate state HOT tax under Section 156 of the Texas Tax Code. State law caps the maximum amount of combined HOT taxes these governments may impose.
A. Section 351 Local HOT tax. Under Chapter 351 of the Texas Tax Code, a city generally may charge up to seven percent (7%) of the price paid for the use of the hotel room. Tex. Tax Code, Section 351.003(a). However, certain bracketed-amendments for only certain cities have been made to the state law over time that allow these cities to exceed this limit. Austin is one of those cities. Chapter 351 was amended so that Austin may charge a local rate of up to nine percent (9%), provided that the revenue derived from the additional 2% increased rate is used only for the “construction of an expansion of an existing convention center facility.” Tex. Tax Code, Section 351.1065. This provision is how Mayor Adler and Council propose to fund the newest expansion of the convention center.
B. Section 334 Local HOT Tax. Separately, under Chapter 334, Subchapter H of the Texas Local Government Code, a city and/or a county may also adopt a hotel occupancy tax up to two percent (2%) of the price paid for the use of the hotel room. This portion of the hotel occupancy tax is sometimes referred to as a “Venue Tax”, because it is intended to support a definable venue that has been approved by the voters of the city or county. This is how Austin expanded the convention center in 1998, but the tax may be used for a variety of venues, such as a renovated Travis County Expo Center.
C. State HOT tax. In addition, the state also collects hotel occupancy taxes, at a rate of six percent (6%) of the price paid for the use of the hotel room. Tex. Tax Code, Section 156.051.
D. The Maximum Combined HOT Tax Rate. If you combine the maximum Chapter 351 local HOT tax rate (9%) and the maximum Chapter 334 local HOT tax (2%), the City of Austin may charge up to 11%. State law generally limits the total state and local combined HOT tax rate to seventeen percent (17%), which includes the 6% state charge. Tex. Loc. Gov’t. Code §334.254(d). Therefore, Travis County’s adoption of a 2% hotel occupancy tax under Chapter 334 would limit the City’s permissible allotment; and, vice versa, the City’s adoption of the additional 2% for a convention center expansion would preclude the County’s 2% levy under Chapter 334.
Allowable Uses Of HOT Taxes
The use of HOT taxes is controlled by state law. Texas Tax Code, Section 351.101 specifies what HOT tax revenue may be spent on (other than the 2% convention expansion funds, which are under a different code section). The statute has a two-part statutory test for HOT-funded expenditures. (This section is set out in full in the Appendix).
A. The Two-Part Test for HOT Expenditures. Under Chapter 351.101 expenditures from HOT tax revenue st satisfy the following two-part test:
(1) the revenue may only be used to “promote tourism and the convention and hotel industry”; and
2) the uses must fall under one of the listed expenditure categories under Sec. 351.101(a) of the Texas Tax Code.
B. First Test: Does the Expenditure Directly Promote Tourism? The first requirement is that the expenditure must “promote tourism and the convention and hotel industry.” Tex. Tax Code, Section 351.001 (a). The statute also clarifies that such expenditure must enhance and promote tourism and the convention and hotel industry “directly” and may not be used for “general revenue purposes or general governmental operations” of the City. Tex. Tax Code, Section 351.101 (b).
The statute’s definition of tourism is broad. Chapter 351 defines “tourism” as the “guidance or management of tourists.” Tex. Tax Code, Section 351.001(5). A “tourist” is defined as an “individual who travels from the individual’s residence to a different municipality . . . for pleasure, recreation, education, or culture.” Tex. Tax Code, Section 351.001(6). This broad definition would include activities that would both attract visitors to Austin or help direct them to places while they are here. The statute does not define “convention and hotel industry”. It does prosaically define “hotel” as “a building in which members of the public obtain sleeping accommodations for consideration” (Tex. Tax Code, Sections 351.001(4), 156.001) and “convention center facility” as a facility that is “primarily used to host conventions and meetings” (Tex. Tax Code, Sections 351.001(2)). There, however, is no definition of the industry itself. The statute repeatedly refers to the “convention and hotel industry” collectively as one industry, rather than singling out conventions or hotels separately. Thus, as long as an expenditure is promoting overnight stays at hotels, it is unnecessary that the expenditure be tied to conventions. This is because it is still benefiting the “convention and hotel industry” as a whole.
1. Cities Have Broad Discretion In Determining What Expenditures Promote Tourism. Texas cities get to decide within their discretion if an expenditure promotes tourism: “It is for the city’s governing body to determine in the first instance whether a proposed expenditure is among the permissible uses section 351.101 (a) lists and will ‘directly enhance and promote tourism and the convention and hotel industry.’” Atty. General Op. No. GA-124 (2003). In this instructive opinion, Attorney General Abbott held that it was a fact issue for the city to determine whether funding of a Senior Activity Center promoted tourism, because the Center might hold a quilt or other exhibition that might attract tourists.
2. The Texas Hotel and Lodging Association Publications Acknowledge Cities Have Broad Discretion. In its official 2018 HOT tax publication for cities, the Texas Hotel and Lodging Association recognizes that the cities have broad discretion and that there is no rigid formula cities that must follow for determining what is allowable as tourism promotion: “There is no statutory formula for determining the level of impact an event must have to satisfy the requirement to directly promote tourism and hotel and convention activity… Entities applying for hotel occupancy tax revenue funding should indicate how they will market the event to attract tourists and hotel guests.” What Cities Need to Know to Administer Municipal Hotel Occupancy Taxes (Texas Hotel and Lodging Association, 2018), p. 7. In short, if the city makes a reasonable case that the expenditure might directly benefit tourism, then it is allowable. Otherwise, many arts and other events that cities have funded with HOT taxes for years could not prove that they directly benefit tourism.
C. Second Test: Does The Expenditure Fit One Of The Hot Categories? The second test is whether the expenditure falls into one of the delineated categories under 351.101(a). A plain reading of this section shows that there is a long list of potential options for HOT revenue expenditures that have nothing to do with convention centers.
1. Cities Also Have Broad Discretion In Determining Whether An Expenditure Fits A Statutorily Allowed Category. As with discussing the parameters of tourism promotion, Texas Attorney Generals have stated repeatedly that the City’s governing body should determine whether a particular expenditure fits an allowable HOT category: “It is for a municipal governing body to determine in the first instance whether an expenditure is for one of the specified uses listed in the statue.” Tex. Atty. Gen. Op. No KP-0131 (2017). See also Tex. Atty. General Op. No. GA-682(2008)(whether a particular HOT expenditure fits within a category is an issue “for the commissioners court, which approves the budget of the authorized program or activity, to determine in the first instance, subject to judicial review.”); Tex. Atty. General Op. No. JC-348 (2001). While the governing body’s determination is theoretically subject to judicial review (see below the discussion on lack of standing), broad deference is given to the City Council’s determination. So long as the City’s determination is not arbitrary or capricious, it would survive a legal challenge.
2. There Are Seven Separate Categories Of Allowable HOT Expenditures That Apply To Austin. Texas Tax Code, Section 351.101(b) sets out 11 specific expenditure categories allowed for HOT tax revenue. Only six of these eleven categories apply to Austin. In addition, Texas Tax Code Section 351.110 authorizes HOT expenditures for tourism-related transportation for Texas cities.
These 7 statutory use categories are as follows:
1) Convention and Visitor Information Centers. (“the acquisition… construction… and maintenance of convention center facilities or visitor information centers.” Tex. Tax Code, Section 351.101(b)(1)).
2) Registering Convention Attendees. (“the furnishing of facilities, personnel, and materials for the registration of convention delegates or registrants.” Tex. Tax Code, Section 351.101(b)(2)).
3) Promotional programs and advertising to attract tourists and convention attendees. (“advertising and conducting solicitations and promotional programs to attract tourists and convention delegates or registrants”. Tex. Tax Code, Section 351.101(b)(3)).
4) The Arts. (“the encouragement, promotion, improvement, and application of the arts, including instrumental and vocal music, dance, drama, folk art, creative writing, architecture, design and allied fields, painting, sculpture, photography, graphic and craft arts, motion pictures, radio, television, tape and sound recording and other arts related to the presentation, performance, execution, and exhibition of these major art forms.” Tex. Tax Code, Section 351.101(b)(4)).
5) Historic Preservation. (“restoration and preservation projects or activities or advertising and conducting solicitations and promotional programs to encourage tourists and convention delegates to visit preserved historic sites or museums…” Tex. Tax Code, Section 351.101(b)(5)).
6) Tourism Signage. (“signage directing the public to sights and attractions that are visited frequently by hotel guests.” Tex. Tax Code, Section 351.101(b)(9)).
7) Transportation for Tourism (“a transportation system to transport tourists from hotels in and near the municipality to:(1)the commercial center of the municipality; (2) a convention center in the municipality; (3) other hotels in or near the municipality; and (4) tourist attractions in or near the municipality.” Tex. Tax Code, Section 351.110)).
C. Tourism Promotion and Tourism Transportation Categories Are Not Capped Unlike Arts and Historic Preservation Categories. Five of the seven expenditure categories above are not limited in the amount of HOT taxes that may be spent on them. Nor is tourism transportation. Only two expenditure categories, for Austin and certain other cities, are capped at 15% each: the arts and the historic preservation categories. Tex. Tax Code, Sec. 351.103(c).
D. Tourism Advertising and Promotion Is a Separate Expenditure Category from the Arts and Historic Preservation And Is Not Capped. In addition to the 15% in HOT taxes that may be spent on the arts, the HOT tax may be spent in Section 351.101(b)(3) on unlimited advertising, marketing and promotional tourism promotion programs that features artists, musicians, and filmmakers (and on hiring them directly to help in those endeavors). The precise statutory language is important because the arts category’s language is more narrow than the tourism promotion category’s. Under the arts category, Section 351.101(a)(4), the City may allocate HOT revenue for “the encouragement, promotion, improvement, and application of the arts, including instrumental and vocal music, dance, drama, folk art, creative writing, architecture, design and allied fields, painting, sculpture, photography, graphic and craft arts, motion pictures, radio, television, tape and sound recording, and other arts related to the presentation, performance, execution, and exhibition of these major art forms.” The City of Austin first allocated the 15% maximum towards this art category in 1999. These funds are transferred to the Cultural Arts Fund, which is then distributed to various cultural arts groups through an annual grants process.
In contrast, the tourism promotion language in Sec. 351.101(a)(3) is much broader, applying to all tourism promotion categories, including the arts: “advertising and conducting solicitations and promotional programs to attract tourists and convention delegates or registrants to the municipality or its vicinity.” Nothing in this language excludes expenditures for advertising and promotional programs that are tailored towards the arts. In fact, Visit Austin already uses marketing dollars in this way to fund the Austin Music Office and the Austin Film Commission. See Visit Austin 2018 Budget and Council Presentation.
Therefore, the general tourism promotion category in Section 351.101(a)(3) allows the City to hire artists, musicians, filmmakers, writers, etc. to produce outward-facing “promotional programs to attract tourists.” For example, these marketing dollars could be used to fund a tour of Austin musicians to encourage potential tourists to visit Austin. This would be an outward-facing expense, designed to attract tourism, rather than one that is meant to promote the arts while visitors are already here.
We are not saying that the City of Austin could increase its appropriation above 15% for cultural arts grants. For example, a grant to a local theatre company to produce a play would still be clearly contained within the limits of 351.101(a)(3), because it’s primary purpose is the improvement/application of the arts. It would not be a “promotional program” or other advertising expense that is designed to attract tourists to the city.
E. Tourism Transportation Expenditures are Unlimited and May Be Used By Tourists and Residents. Tex. Tax Code Section 351.110 (a) authorizes HOT revenue to be used for a transportation system to transport tourists from hotels in and near the city to downtown, convention centers, other hotels in or near the city, and tourist attractions in or near the city: “a municipality may use the revenue derived from the tax imposed under this chapter for a transportation system to transport tourists from hotels in and near the municipality to: (1) the commercial center of the municipality; (2) a convention center in the municipality; (3) other hotels in or near the municipality; and (4) tourist attractions in or near the municipality.”
While HOT transportation funds must serve and benefit tourists, and not just the general public, but it may be used by the general public as well. Section 351.110 (c) provides that “this section does not authorize the use of revenue derived from the tax imposed under this chapter for a transportation system that serves the general public other than for a system that transports tourists as described by Subsection (a).” (emphasis added). The last part of this sentence clarifies that a transportation system that serves tourists under 351.110(a) may also serve the general public.
F. There Is Likely No Standing In Court To Challenge HOT Tax Expenditures However One Defines These Categories. It appears that no one has standing in Texas to challenge an allowable HOT expenditure, regardless of the correct legal scope. “As a general rule of Texas law, to have standing, unless it is conferred by statute, a plaintiff must demonstrate that he or she possesses an interest in a conflict distinct from that of the general public, such that the defendant’s actions have caused the plaintiff some particular injury.” Williams v. Lara , 52 S.W.3d 171, 178 (Tex. 2001). A limited exception to this general rule exists. A taxpayer has standing to enjoin the illegal expenditure of certain public funds, without a demonstrated particularized injury, if the plaintiff proves it is (i) a taxpayer of public funds covered by taxpayer standing, and (ii) the public funds are spent on an allegedly illegal activity. Id. However, the Texas Supreme Court has not extended taxpayer standing to a person who makes incidental purchases (such as a hotel room) while temporarily in the taxing jurisdiction.
In Williams, the Texas Supreme Court found that the payment of sales taxes was not sufficient to give rise to taxpayer standing. Id. at 180. Giving taxpayer status to anyone who happens to pay HOT tax (essentially a sales tax on temporary lodging) appears to be controlled by Williams. And following Williams, the San Antonio Court of Appeals held that a visitor who paid a hotel occupancy tax and a car rental tax does not have taxpayer standing. Teneyuca v. Bexar County Performing Arts Ctr. Found., 04-11-00488-CV, 2012 WL 2053534, at *2 (Tex. App.—San Antonio June 6, 2012, no pet.).
The same lack of standing also should apply to the hotel owners that collect HOT taxes. Texas recognizes as “taxpayers” both payor-customers and the collectors of sales taxes, because both are liable to the state. Williams, at 179. Thus, hotel owners that collect the HOT tax should lack standing under Williams. See Atlanta Americana Motor Hotel Corp. v. Undercofler, 222 Ga. 295 (Ga. 1966) (holding hotels don’t have HOT tax standing).
Answers to Three Key Questions
First Issue Presented: May a city use HOT taxes to fund tourism promotion by paying local artists, venues, radio/TV/film talent, and writers, to produce programs that promote tourism in addition to and outside the 15%-capped arts category ?
Answer: Yes. Tex. Tax Code Section 351.101(a)(3) provides for HOT tax funding for “advertising and conducting solicitations and promotional programs to attract tourists.” This authorization is uncapped and distinct from the 15%-capped category of Section 351.101(a)(4) that provides for “the encouragement, promotion, improvement, and application of the arts.” Subsection (a)(3) addresses advertising and the production of “promotional programs” to “attract tourists;” Subsection (a)(4) provides for supporting performances, productions, exhibits, etc. of the arts. It also provides for “promotion of the arts,” which is different than “promotional programs to attract tourists” provided in Subsection (3).
There is no suggestion or reason that artists, musicians, filmmakers, and writers cannot be funded to produce “promotional programs to attract tourists” under Subsection (a)(3). For example, under Subsection (a)(3), the City could fund Austin musicians to tour other cities to encourage visitors to come see those bands and other attractions in Austin. A “Visit Austin” tour could feature stage banners with “Come See Us In Austin” and tour buses emblazoned with “Come hear us in the Live Music Capital of the World” . Such funding would clearly be a “promotional program to attract tourists.”
Similarly, film, TV and video productions shot with local scenes, featuring locally owned businesses, musicians, artists, chefs, arts and music venues, or other cultural attractions, encouraging and inviting “voluntourism” and educational tourism visitors to Austin, lifestyle DIY projects, or other subjects that make Austin interesting to potential visitors could all be funded under the “promotional programs” category. By way of example, the New York Times recently reported on how Chip and Joanna Gaines’ “Fixer Upper” program has made Waco a major tourism destination. Taking this cue, Section 351.101(a)(3) promotional programs funds could be used to fund programs that both pay for and feature the “fixing up” of our cultural, natural, human, and educational resource treasures — the same ones that do or could draw tourists and support the people and activities that make Austin worth visiting.
Similarly, while set in “Dillon, Texas,” filming locations for the Friday Night Lights TV program are recognized Austin tourist attractions, as reported and promoted in New York magazine. Mike Blizzard’s “Also Starring Austin” documentary film shows that Austin’s film industry, intertwined with the history and life of the City itself, could and should be generously funded with hotel tax “”promotional program” dollars.
By contrast, a grant to a local theatre to produce a local play that would have the effect of encouraging tourism but was not a promotional program specifically produced to attract tourists would fall under the arts category in Section 351.101(a)(4). Similarly, a radio ad that played primarily in Austin saying “Go see Ballet Austin” tonight would primarily promote Ballet Austin to a local audience and, incidentally, to tourists and convention goers already here in Austin. Paying for such an ad would meet the Section 351.101(a) “only to promote tourism and the convention and hotel industry” test, while fitting only under the Subsection (a)(4) category of promoting local dance productions.
Any interpretation of these provisions concluding that all spending that benefits artists or the arts, even if it is for promotional programs, must fit under the 15% cap of Subsection (a)(4, has the effect of placing limits on Subsection (a)(3) that do not exist in that provision. In essence, this unsupported argument boils down to saying that the City may only spend 15% of our HOT promoting Austin as the “Live Music Capitol of the World,” thereby erasing Section 351.101(a)(3)’s tourism promotion expenditures from state law.
This interpretation also contrasts with the common sense observation that Austin artists, film and TV producers, musicians, writers, arts and music venues, and others who manage our cultural assets are best suited to produce promotional programs that attract tourists and feature their work, their places, their struggles, and the opportunities for visitors to come and be part of what makes Austin Austin.
In short, Austin is the Live Music Capital of the World. And, it is entirely within the framework to market it that way, while hiring the musicians that help us retain this title. In fact, the current Marketing Plan for Visit Austin already lists this as its first objective, to “build upon Austin’s brand equity as the Live Music Capital of the World® to drive consideration and, ultimately, visitation among target audiences.”
Second Issue Presented: May HOT revenues be used to fund transportation services that serve tourists, hotel visitors, and conventioneers, but also are used by local residents for non-tourist transit purposes?
Answer: Yes. HOT-tax funded transportation services designed to serve tourists and convention visitors may incidentally benefit and serve local residents. So, for example, a bus route that connects the downtown hotel area with local restaurants, shops and live music venues on South Lamar, Barton Springs, the Long Center, South Congress, and other areas where there are hotels and/or places of interest to tourists could be funded by the HOT tax. Local residents would be allowed to use this bus route.
Like tourism transportation, there are other opportunities to direct municipal HOT revenues to benefit local arts and culture under other the funding categories in Section 351.101. Subsection (a)(1) provides for funding “visitor information centers.” Local restaurants, live music venues, and other places could be paid to be designated “visitor information centers” that, in addition to their normal course of business, also provided information about some aspect of Austin that would benefit and be of interest to visitors.
Section 351.101(a)(9) also authorizes HOT funding for “signage directing the public to sights and attractions that are visited frequently by hotel guests in the municipality.” Thus signs, or even billboards, marking local business districts, or, for example, pointing the way to or giving the address of Austin’s “Historic Victory Grill” could be paid for under this subsection.
Third Issue Presented: Does Chapter 351’s specific provision authorizing Austin to spend an additional 2% HOT tax “only for: (1) the construction of an expansion of an existing convention center facility” allow these funds, or their surplus, to be spent on live music or other cultural tourism purposes?
Answer: No. The general rule of legal interpretation is that mandatory language like “shall” and “only” carry their plain language meaning. This would appear to preclude funding for live music or other purposes from the proposed 2 cents increase for a convention center expansion.
This limitation on the usage of the proposed 2 cent hotel tax increase (which would take Austin above our current seven cents assessment) is reinforced by the following subjection (b), which provides: “Any interest income derived from the application of the tax at a rate of more than seven percent of the cost of a room may be used only for the purposes provided by this section.” Tex. Tx Code, Section 351.1065(b).
Nevertheless, the Texas Hotel and Lodging Association has circulated an email written by a Texas Municipal League attorney claiming that the 15% capped Subsection (a)(4) arts category may encompass be 15% of the entire, contemplated Section 351 HOT revenue, including the 2% additional tax for the convention center expansion. The email makes this claim without any legal analysis. This argument conflicts with a standard rule of legal interpretation: that a specific statutory provision controls over a more general provision. Here, the limitation in Section 351.1065 is the specific provision that applies to the City’s contemplated plan for funding a convention center expansion.
Texas law is clear that any surplus funds generated from the 2% additional HOT tax are restricted to its original purpose– convention center expansion — and cannot be used for other purposes. Tex. Atty Gen. Op. No. 851(2011). In this Attorney General opinion, the City of Galveston wanted to use surplus funds from HOT taxes for general purposes. The Attorney General rejected its request: “The City’s expenditure of this tax revenue for any purpose that does not satisfy the requirements in subsections 351.101(a) and 351.101(b)4 is not authorized. See Tex. Atty. Gen. LO-92-16, at 3 (concluding the ‘hotel occupancy tax funds may only be expended in conformity with chapter 351’)”. In short, since the 2% in additional HOT revenue under Section may only be used for convention center expansion, any surplus may be used only for that purpose.
1. Subsection (c) was introduced on May 9, 2007, as part of a committee substitute during the Senate Intergovernmental Affairs committee. The sponsor, Sen. Jane Nelson, clarified that this language was meant to clarify that this bill was not meant to fund a “traditional” mass transit system, like the “DART. This was in response to lobbying efforts by Scott Joslove of the Texas Hotel & Lodging Association (“THLA”). However, Sen. Nelson sponsored the bill to allow Southlake, Texas, to start up its own transit system, which would be available to residents and tourists alike. So the legislative history indicates the general public may use HOT-funded transportation systems that are designed for tourism.
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