                                            KEN PAXTON
                                       ATTORNEY GENERAL OF TEXAS




                                             January 30, 2017



The Honorable Dennis Bonnen                               Opinion No. KP-0131
Chair, Committee on Ways & Means
Texas House of Representatives                            Re: Authority of a municipality to use hotel
Post Office Box 2910                                      occupancy tax revenue to fund a feasibility
Austin, Texas 78768-2910                                  study and the construction; operation, and
                                                          maintenance of a performing arts center
                                                          (RQ-0122-KP)

Dear Representative Bonnen:

        You inquire about a municipality's authority to use revenue from its local hotel occupancy
tax to fund a feasibility study for a performing arts center as well as the construction, operation,
and maintenance of the center. 1 You tell us the City of Lakeway ("City") has commissioned a
feasibility study to build and operate a performing arts center (the "Center") "that includes a theater
with 500 to 800 fixed seats." See Request Letter at 1. You also tell us that the Center would
include "a small conference center that would accommodate 150 to 200 people and a hotel." Id
at 1-2. You explain that the City indicates the "use of the [Center] would directly promote tourism
and the hotel and convention industry in the City" as the Center "would be designed to ... have a
regional.and statewide draw." Id Finally, you state that the City expects the Center "will help to
establish the City as a destination location for culture and entertainment, and to attract visitors t<?
the City for an overnight Stay in its hotels or short-term rentals." Id at 2.

        Municipal hote.l occupancy taxes are governed by Tax Code chapter 351. See generally
TEX. TAX CODE§§ 351.001-.110. Subsection 351.002(a) authorizes the imposition of a tax on the
use or possession of a hotel room. See ief § 351.002(a). But subsection 351.lOl(a) imposes two
primary limits on the use of the resulting tax revenue. 2 See id § 351.lOl(a). First, an expenditure
of hotel occupancy tax revenue must directly "promote tourism and the convention and hotel
industry." Id.§ 351.lOl(a)-(b) ("Revenue derived from the tax authorized by this chapter shall be
expended in a manner directly enhancing and promoting tourism and the convention and hotel
industry."); see also NEW OXFORD AM. DICTIONARY 492 (3d ed. 2010) (defining "directly" to
mean "with nothing or no one in between"); CHCA Bayshore L.P. v. Ramos, 388 S.W.3d 741, 748

         1
         See Letter from Honorable Dennis Bonnen, Chair, House Ways & Means Comm., to Honorable Ken
Paxton, Tex. Att'y Gen. at 1(Aug.1, 2016), https://www.texasattomeygeneral.gov/opinion/requests-for-opinion-rqs
("Request Letter").
        2
         A permissible expenditure under section 351.101 may also be subject to limitations imposed by section
351.103 of the Tax Code and elsewhere in chapter 351. See TEX. TAX CODE § 351.103.
The Honorable Dennis Bonnen - Page 2               (KP-0131)



(Tex. App.-Houston [1st Dist.] 2012, no pet.) (Jennings, J. dissenting) (using same definition).
Second, the expenditure must be for the specified permissible uses in subsection 351.IOI(a). See
id.§ 351.IOI(a)(l)-(11); Tex. Att'y Gen. Op. No. JM-965 (1988) at 2. The list of permissible uses
includes:

               (1) the acquisition of sites for and the construction, improvement,
               enlarging, equipping, repairing, operation, and maintenance of
               convention center facilities or visitor information centers, or both;

                ... , [and]

               (4) the encouragement, promotion, improvement, and application
               of the arts, ... and exhibition of the[] major art forms.

TEX. TAX CODE§ 351.IOI(a)(l), (4); see also id. § 351.IOI(b) (limiting the revenue from use for
"general revenue purposes or general governmental operations of a municipality").

       As this office previously recognized, we cannot always determine whether an expenditure
under section 351.101 is permissible as a matter of law because of the fact issues involved. See
Tex. Att'y Gen. Op. No. GA-0124 (2003) at 3; see also Tex. Att'y Gen. L0-92-051 (1992) at 2,
L0-92-016 (1992) at 3. In such instances, the governing body of the municipality must make the
determination regarding the propriety of a hotel occupancy tax expenditure, subject to judicial
review. See Tex. Att'y Gen. Op. No. GA-0124 (2003) at 3. Thus, we advise you only generally.

         The first element of subsection 351. lOl(a) requires that the expenditure from the tax must
directly promote tourism and the convention and hotel industry. See TEX. TAX CODE
§ 351.lOl(a)-(b). "Tourism" is defined as the "guidance or management of tourists." Id.
§ 351.001(5). A "tourist" is an "individual who travels from the individual's residence to a
different municipality ... for pleasure, recreation, education, or culture." Id. § 351.001(6). Thus,
the first element requires an expenditure from hotel occupancy taxes to be one that directly guides
or manages tourists to the municipality for pleasure, recreation, education, or culture.

       With regard to the list of specific permissible uses as the second element of subsection
351.1 Ol(a), chapter 351 defines "convention center facilities" as "facilities that are primarily used
to host conventions and meetings." Id. § 351.001(2) (emphasis added). The definition also
includes certain hotel facilities. See id. Only if a particular facility is primarily used to host
conventions or meetings is it a convention center facility and thus a permissible use under
subsection 351.1 Ol(a)(l ).

        In contrast to subsection 351.lOl(a)(l), the promotion "of the arts" use under subsection
351.1Ol(a)(4) does not expressly authorize construction of facilities. Compare id. § 351.1 Ol(a)(l),
with id. § 351.101(a)(4). Thus, construction costs of theater facilities, considered alone, are not
within the scope of subsection 351.101 (a)(4 ). Any construction costs associated with any
particular facility are proper costs for the hotel occupancy tax revenue only if they are incurred
under subsection 351.lOl(a)(l). Id. § 351.lOl(a)(l).
The Honorable Dennis Bonnen - Page 3                       (KP-0131)



        You also inquire about the propriety of hotel occupancy tax revenues for a feasibility study
regarding the Center. See Request Letter at 1. Briefing submitted to this office argues that a
feasibility study "can be a necessary component of moving forward with this type of project" and
is authorized under the plain language of subsection 351.lOl(a). 3 As we noted previously,
expenditures under subsection 351.lOl(a) must directly promote tourism and the convention and
hotel industry. See supra page 1 (citing TEX. TAX CODE§ 351.lOl(a)-(b)). It is the nature of a
feasibility study to examine a given project, which examination could result in either a conclusion
that the project is not feasible and a decision not to proceed with the project or a conclusion that
the project is feasible and decision to proceed. See NEW OXFORD AM. DICTIONARY 632 (3d ed.
2010) (defining "feasibility study" to mean "an assessment of the practicality of a proposed plan
or method"). Yet, irrespective of such a study' s ultimate outcome, an expenditure for the study
considered by itself may be too attenuated to be legitimately characterized as actually attracting
overnight guests in the direct promotion of tourism and the convention and hotel industry. 4

         In the event a feasibility study is found by the governing body of a municipality to satisfy
the first element of section 351.101, the expenditure must also be for one of the permitted uses to
satisfy the second element.




         3
           See Letter from Bill Longley, Legis. Counsel, Tex. Mun. League at 2 (Aug. 31, 2016) ("TML Brief') (on
file with the Op. Comm.).
         4 Briefingsubmitted to this office suggests that the costs for a feasibility study may constitute a permissible
administrative cost under subsection 351. lOl(e). See TML Brief at 3-4. Even such costs must be "incurred directly
in the promotion and servicing expenditures" authorized by the statute. TEX.TAX CODE § 351.10 I (e).
The Honorable Dennis Bonnen - Page 4             (KP-0131)



                                      SUMMARY

                       Under section 351.101 of the Tax Code, a municipality may
               expend its municipal hotel occupancy tax revenue in the direct
               promotion of tourism and the convention and hotel industry,
               provided that the expenditure is for one of the specified uses listed
               in the statute. It is for a municipal governing body to determine in
               the first instance whether an expenditure of hotel occupancy tax
               revenue is proper under section 351.101.

                                             Very truly yours,




                                             KEN PAXTON
                                             Attorney General of Texas



JEFFREY C. MATEER
First Assistant Attorney General

BRANTLEY STARR
Deputy First Assistant Attorney General

VIRGINIA K. HOELSCHER
Chair, Opinion Committee

CHARLOTTE M. HARPER
Assistant Attorney General, Opinion Committee
