I've seen some tweets circulated around suggesting that Ursula's design was based on the drag queen Divine, but have been unable to find any primary sources or actual quotes to back it up. The closest I got was a line in From Mouse to Mermaid: The Politics of Film, Gender, and Culture about how animator Ruben Aquino supposedly based her character design on Divine, but I haven't been able to find any actual interview with him or text where he actually says that was an inspiration. I was largely just wondering if the assertion was true or if it's another case of people trying to insert backstory where it doesn't exist.
In short, yes. Howard Ashman, who worked for Disney as a lyricist but who also had influences on character designs and would sometimes coach the voice actors, was familiar with drag queens and gay culture of the time (and was gay himself). He was also a fan of Divine. Though it was Rob Minkoff who initially sketched out what Ursula would become, Ashman helped refine it as well as the character herself. I believe Ashman may have even given Minkoff the idea to use Divine as an inspiration.
In fact, if Glenn Milstead (aka Divine) hadn't died rather suddenly, there's a decent chance that he would have at least tried out for the role. According to biographers as well as some of his friends, he would have absolutely loved the character. Unfortunately he died only a few weeks after the premiere of Hairspray and never learned of the character.