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Hotel Occupancy Tax Funds – Management and Duty – Part III of III

Hotel Occupancy Tax Issues -- HOT Funds -- Can Be Complicated(March 30, 2011): In Part I, the Hotel Occupancy Tax (“HOT”) was defined and examples of how it can be used were given. Part II examined the two-part test to determine if a proposed expenditure of HOT funds meets the purpose of the HOT tax.

Many cities will hire a third-party firm or organization to manage and use HOT funds.  Texas law allows this. See Texas Tax Code at § 351.101(c). When approving a contract and funding to a third-party the City Council determines if the proposed uses by the third-party is a permissible use and will “directly enhance and promote” tourism and the hotel and convention industry. See Tex.Atty.Gen.Op. No GA-0124 (2003); Texas Tax Code at § 351.101(b).

A contract with a third-party should reference the statute authorizing the Hotel Tax and duties regarding the expenditures of the Tax. This is because the funds are given to the third-party.  The Contract should also specify that any HOT funds given to a third-party should be kept in a separate account by the third-party and the funds cannot be commingled with any other money. Texas Tax Code at § 351.101(c)

Since HOT funds are taxes paid by the public, a fiduciary duty is imposed on the third-party regarding the management of the HOT funds. Id. At the most basic level, fiduciary duty means the third-party would put the City’s interest above its own in the management and expenditure of HOT funds entrusted to it. Additionally, whether by case-law or statute, fiduciary duty also means the third-party needs to maintain complete and accurate financial records of each expenditure of HOT funds and upon request the records should be made available to the City. See Texas Tax Code at § 351.101(d). The level of financial records kept should be such that an independent party could examine the records and determine if the money was spent appropriately.

HOT funds are a public tax. A City that wishes to contract with a third-party to manage HOT funds should have an independent audit conducted every year or two to determine if the monies are being spent appropriately and accurate records are being kept.

A third-party that wishes to manage HOT funds for a city should put in procedures to make sure the HOT funds are maintained in a separate account and that financial records are kept that will show how, when and on what the HOT funds were spent.  Notably, an officer of a corporation is liable for any tort committed through him or her, regardless of whether the officer personally benefits from the tort committed. McCollum v. Dollar, 213 S.W. 259, 261 (Tex.Com.App.1919); Gardner Machinery Corp. v. U.C. Leas., 561 S.W.2d 897, 899 (Tex.Civ.App.1978, writ dism’d) This includes being individually liable for breaching a fiduciary duty owed by the corporation (third-party) to the City. Gardner, 561 S.W.2d at 900; Searle-Taylor Mach. Co., Inc. v. Brown Oil Tools, Inc., 512 S.W.2d 335, 338 (Tex.Civ.App.1974, writ ref’d n.r.e.).   Always, in the handling of HOT funds, whether a City or a third-party, an attorney should be consulted.

Leonard Schneider Healthcare LawyerLiles Parker attorneys and staff have extensive experience representing Texas cities and municipalities.  Should you have questions regarding this article, please call Leonard Schneider for a complimentary consultation.  You may contact us at: 1 (800) 475-1906.         

 

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