When a building is gutted to its outer walls, are the construction services taxable renovation or exempt new construction in Connecticut?

Plain-English summary

A company undertook a major overhaul of a former warehouse (originally just a roof, four concrete walls, steel supports and a slab). It kept the exterior walls but removed the existing roof and built a gabled skylight roof (adding cubic footage), plus new interior walls, a second floor and support columns, a new concrete slab, an elevator pit, and new electrical/mechanical systems. It also added a new parking lot and roadway and a new lawn sprinkler system. The question: are these construction services taxable renovation of existing real property, or exempt new construction?

The line comes from Conn. Gen. Stat. § 12-407(2)(i)(I) and its regulation. Services to existing industrial, commercial or income-producing real property are taxable; services rendered in new construction are not. DRS walked through each piece:

• Gabled skylight (new roof). Because it increases the building's cubic footage, it is a "new addition that expands the cubic footage of an existing building" — new construction, not taxable.
• Interior walls, second floor, support columns, slab, elevator pit. The regulation has an exception: even where only the exterior walls and roof of an existing building are left in place, the work counts as new construction if new floors, interior walls, support columns and systems are built. Here even less was kept (only the exterior walls; the roof was removed), so a fortiori it qualifies — new construction, not taxable.
• Parking lot and roadway. Improvements that put the property to a new use (roadways, parking lots) are treated as new construction — not taxable.
• Lawn sprinkler system. This is the exception to the exception. Under Conn. Agencies Regs. § 12-407(2)(i)(I)-1(g)(2), services to real property don't include landscaping and horticultural services (§ 12-407(2)(i)(X)), and lawn sprinkler systems are treated as landscaping — which is taxable regardless of whether it accompanies new construction. So the new sprinkler system is taxable.

What this means for you

Contractors and owners on gut-renovation and adaptive-reuse projects

A deep renovation that strips a commercial building to its exterior walls and rebuilds the floors, interior walls, support columns and systems is generally treated as new construction — and the services are not subject to Connecticut sales and use tax. Adding cubic footage (like a raised roof) is also new construction.

Watch the carve-outs that stay taxable

Not everything on a "new construction" job is exempt. Landscaping and horticultural work — including lawn sprinkler systems — is taxable even on an otherwise-exempt new-construction project. Separate and correctly tax those line items.

New-use improvements (roads, parking) count as new construction

Building a new roadway or parking lot puts the property to a new use and is treated as new construction, so those services aren't taxable.

It's about the scope of the work, not the label

Whether a project is "renovation" (taxable services to existing property) or "new construction" (not taxable) turns on the specific regulatory tests — cubic-footage additions, the exterior-walls exception, and new-use improvements. Map each scope item to the right category.

Common questions

Q: Is a gut renovation of a commercial building taxable in Connecticut?
A: Generally not, when the work qualifies as new construction — for example, keeping only the exterior walls while building new floors, interior walls, support columns and systems. Those services aren't subject to sales and use tax.

Q: Does adding a taller roof or extra floor change the answer?
A: Adding cubic footage (like a gabled skylight roof) is a "new addition" and counts as new construction, so those services aren't taxable.

Q: Are the new parking lot and driveway taxable?
A: No. Roadways and parking lots are improvements that put the property to a new use and are treated as new construction.

Q: What about the new lawn sprinkler system?
A: That's taxable. Lawn sprinkler systems are treated as landscaping and horticultural services, which are taxable regardless of whether they accompany new construction.

Citations and references

Statutes, regulations, and case law:

• Conn. Gen. Stat. § 12-407(2)(i)(I) (services to industrial, commercial or income-producing real property); § 12-407(2)(i)(X) (landscaping and horticultural services)
• Conn. Agencies Regs. § 12-407(2)(i)(I)-1(c)(1) (new construction; cubic-footage addition; exterior-walls-and-roof exception); (c)(2) (new-use improvements — roadways, parking lots); (g)(2) (landscaping — lawn sprinkler systems)
• Texaco Refining & Marketing Co. v. Commissioner of Revenue Services, 202 Conn. 583, 600, 522 A.2d 771 (1987)

Related guidance (described in prose, not linked):

• Ruling 96-2 (clarifies this Ruling)

Source

• Landing page: Connecticut DRS Rulings
• Ruling: Ruling 93-10

Original ruling text

Ruling 93-10, Sales and Use Taxes / Services to Industrial, Commercial or Income-Producing Real Property / New Construction

This Ruling is clarified by Ruling 96-2

FACTS:

A company (hereinafter referred to as "the Company") will cause significant changes to be made to a building. Another company had previously built and used the building--which consists solely of a roof, four concrete walls, some steel supports and a concrete slab-- as a warehouse. The building has no existing interior walls or partitions, minimal electrical and mechanical systems and a flat roof. The changes that the Company will cause to be made to the building will largely not affect the existing exterior walls, although some windows and doors may be installed, but the existing roof will be replaced with a gabled skylight, resulting in cubic footage being added to the building. Interior walls and a second floor will also be constructed, requiring additional support columns. The existing concrete slab will be substantially demolished, with plumbing installed under the new slab and an elevator pit excavated. A concrete foundation for the new electrical system will be installed outside the building. Upon removal of part of the lawn surrounding the building, a new parking lot and roadway therefrom to the street will be added. An old sprinkler system in the lawn surrounding the building will be replaced with a new system.

ISSUE:

Whether services are considered to be rendered in the construction of new real property or in the renovation of existing real property, where the external walls of a building are left in place but a new roof, new floors, new internal walls, new support columns and new electrical and mechanical systems are constructed.

DISCUSSION:

Conn. Gen. Stat. § 12-407(2)(i)(I) defines "sale" and "selling" as including "services to industrial, commercial or income-producing real property ...." Conn. Agencies Regs. § 12-407(2)(i)(I)-1(c)(1) provides, however, that

[services to real property are within the purview of [Conn. Gen. Stat. § 12-407(2)(i)(I)] if and only if the services are rendered to existing industrial, commercial or income-producing real property. Services to real property that are rendered in the construction of new industrial, commercial or income-producing real property are not within the purview of said section 12-407(2)(i)(I).

Conn. Agencies Regs. § 12-407(2)(i)(I)-1(c)(1) establishes the general rule that

[services to real property will be considered to be rendered in the construction of new real property only to the extent that they are directly connected with the construction of a new building ( or a new addition that expands the cubic footage of an existing building ); otherwise, services to real property will not be considered to be rendered in the construction of new real property. [Emphasis furnished]

The Connecticut Supreme Court has stated that "legislative ratification of a ... regulation supports the position that the regulation is consistent with the general statutory scheme that the regulation was designed to implement." Texaco Refining & Marketing Co. v. Commissioner of Revenue Services , 202 Conn. 583, 600, 522 A.2d 771 (1987).

Because the replacement of the existing roof with a gabled skylight will increase the cubic footage of the building, the gabled skylight is "a new addition that expands the cubic footage of an existing building"; Conn. Agencies Regs. § 12-407(2)(i)(I)-1(c)(1); so that the services involved in constructing the gabled skylight will be considered to be rendered in the construction of new real property. The charges for the services involved in such construction are not subject to sales and use taxes.

Conn. Agencies Regs. § 12-407(2)(i)(I)-1(c)(1) also provides, as an exception to the general rule, that

Where only the external walls and roof of an existing building are left in place, services will nonetheless be considered to be rendered in the construction of new real property, as long as new floors, new internal walls, new support columns and new electrical and mechanical systems are constructed ....

If, under this exception, services may be treated as rendered in the construction of new real property where only the external walls and roof of an existing building are left in place, a fortiori, where only the external walls are left in place (and the existing roof is removed), as in the instant matter, services may be treated as rendered in the construction of new real property. Therefore, the services involved in constructing the new interior walls, the new second floor and the additional support columns required therewith, the new concrete slab and the elevator pit will be considered to be rendered in the construction of new real property. The charges for the services involved in such construction are not subject to sales and use taxes.

Conn. Agencies Regs. § 12-407(2)(i)(I)-1(c)(2) provides that

[services involved in the making of improvements to real property that put the property affected to a new use, such as the construction of roadways [or] parking lots ... will be considered to be rendered in the construction of new real property ....

Therefore, the installation of the new parking lot and roadway therefrom to the street will be considered to be rendered in the construction of new real property. The charges for the services involved in such installation are not subject to sales and use taxes.

Conn. Agencies Regs. § 12-407(2)(i)(I)-1(g)(2) provides that

[Services to industrial, commercial or income-producing real property do not include the rendering of services defined as a "sale" or "selling" under ... subparagraph (X) (landscaping and horticultural services) ... of said section 12-407(2)(i). The services involved in the construction of ... lawn sprinkler systems ... will be treated as services defined as a "sale" or "selling" under subparagraph (X) of said section 12-407(2)(i).

Therefore, the installation of the new sprinkler system will be considered to be the rendering of landscaping and horticultural services, the taxability of which is unaffected by whether or not such installation is directly connected with the construction of a new building (or a new addition that expands the cubic footage of an existing building). The charges for the services involved in such installation are subject to sales and use taxes.

RULING:

Services are considered to be rendered in the construction of new real property, and not in the renovation of existing real property, where the external walls of a building are left in place but a new roof, new floors, new internal walls, new support columns and new electrical and mechanical systems are constructed.

LEGAL DIVISION

May 20, 1993