City Growth through Economic Development
Every city wants to grow, but to grow, you must understand the wheel on which growth occurs. Growth means bringing in more businesses and more businesses attract more consumers, while also providing more jobs. More jobs and consumers mean more people, and more people means more development of homes. For a city, this means more revenue from multiple tax sources which can be reinvested into your city, thus continuing the wheel of growth.
Let’s start with the first spoke on the wheel, business, and more narrowly, industrial developments and use tax, including direct tax permits and Chapter 380 Economic Development Agreements.
A city can enact a sales tax and a use tax. A sales tax is imposed at the time of sale within the municipality where it is purchased. Conversely, a use tax is imposed on the use, storage, or other consumption of taxable items where they are first stored, used, or consumed. The tax code generally assumes the sale of an item and its use will occur in the same municipality, and thus requires the seller of taxable items to collect both sales and use taxes. In many cases though, a business will purchase taxable items in one municipality, and then use, store, or consume them in another.
Sales and Use taxes are delicious apples, and both cities—where an item is sold and where it is used—deserve a bite from it, but how?
This is where direct tax permits come into play. A direct tax permit is held by the purchaser and requires the purchaser, not the seller, to allocate the taxes amongst the proper entities. Industrial developers often purchase products from all around the state, if not the country. If a city has a use tax and the industrial developer is a permit holder, the city will get its bite from the apple. Unfortunately, qualifying for and keeping a direct tax permit can be quite onerous on the holder, requiring detailed accounting and subjecting the permit holder to state audits.
To incentivize businesses to become permit holders, the Legislature enacted Chapter 380 of the Texas Local Government Code.
This allows a city the ability to “establish and provide for the administration of one or more programs, including programs for making loans and grants of public money… to promote state and local economic development and to stimulate business and commercial activity in the municipality.” See Tex. Loc. Gov’t Code §380.001. The true beauty of establishing a program under Chapter 380, is that said program can be funded from nearly any source, including sales and use taxes.
The first step to accessing the Chapter 380 Program funds is to incentivize a business to apply for a direct tax permit.
Since the business would be doing all the work collecting and distributing the tax money, while the city gets to sit back, relax, and enjoy the revenue, the city needs a way to entice businesses to apply for the permit and take on its burdens. Under a Chapter 380 Economic Development Agreement, the city could agree to reimburse the business a portion of the use tax money it receives as a way to lessen the business’s burden and as an incentive to operate in your city. This is possible because Chapter 380 allows cities to use any funds to “promote… local economic development and to stimulate business and commercial activity.” As long as the funds are used in such a manner, such reimbursement would fall under Chapter 380’s provisions. This is where, in true Oprah fashion, we would say, “the city gets money, the business gets money, everyone gets money!”
Even if half the tax money is given away, the city still gets tax money it may not have otherwise generated.
Meanwhile the business gets paid for paying its taxes, thus saving money. A business that can save money in your city while turning a profit would much rather locate there than to a city where it is paying 100% of all its taxes and receiving nothing in return. From the overall perspective, the city has obtained a new business while simultaneously contributing to economic development and its overall revenue stream, which ideally could be reinvested into more economic development and thus turning the city’s wheel of growth.
Remember, the use tax and direct tax permit are not a city’s only tools. The same concept of paying a business out of city taxes through economic agreements could work just as well with sales taxes, but we’ll save that for another day.
Please do not rely on this article as legal advice. We can tell you what the law is, but until we know the facts of your given situation, we cannot provide legal guidance. This website is for informational purposes and not for the purposes of providing legal advice. Information about our commercial and business litigation practice can be found here.