How did Texas divide a strip-center project between new construction and taxable remodeling under a lump-sum contract?

Plain-English summary

For a strip-center project, the Comptroller treated the area demolished and rebuilt from the slab up as new construction. Added square footage was also new construction, governed by Rule 3.291.

Removing some walls and repainting another area was remodeling under Rule 3.357, and the total charge for that remodeling was taxable.

If the contractor billed both parts as one lump sum and the remodeling portion exceeded 5% of the contract price, the entire contract charge was taxable. The letter offered an alternative: show two labeled lump-sum charges in the same contract, tax or tax-include the remodeling amount, and apply the separate rules to each portion.

What this means for you

Under the 1988 guidance, demolition did not determine the answer by itself. Rebuilding completely from the slab and adding new space were treated differently from partial wall removal and repainting.

Clear contract pricing mattered. Separately identifying the remodeling charge allowed the contractor to tax that portion without making the entire mixed project taxable under the stated 5% rule.

Common questions

Was slab-up rebuilding new construction? Yes.

Was added square footage new construction? Yes.

Were partial wall removal and repainting remodeling? Yes, and the remodeling charge was taxable.

Could one contract show two lump-sum charges? Yes. The letter allowed separately labeled new-construction and remodeling amounts, with the remodeling amount taxed or shown as tax included.

Citations and references

• 34 Tex. Admin. Code Rule 3.291, cited for new construction.
• 34 Tex. Admin. Code Rule 3.357, cited for remodeling.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8805L0892G01

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

May 25, 1988

Dear *:

I just want to take a minute to acknowledge your letter and diagram
involving building demolition, new construction, and remodeling in a strip
center.

As we discussed, we will treat the area being demolished and rebuilt from
the slab up as new construction. The additional square footage you are adding
will also be treated as new construction. Your tax responsibilities when you
are performing new construction are detailed in the enclosed Rule 3.291.

You said that the area marked "Demolition and repaint only in this area"
is ripping out some walls and performing some painting work. This is clearly
remodeling and under Rule 3.357. As you know, the total charge for remodeling
is taxable.

In our conversation you said that both the remodeling and new
construction would be done for one lump-sum amount and that the portion
attributable to remodeling might exceed 5% of the contract price. If that were
the case, the total charge for the entire contract would be subject to sales
tax.

In the above situation, if you need to give your customer a lump sum
contract but do not want to be liable for collecting tax on the total charge,
you may give him two lump sum charges in the same contract and then total the
two. The portion attributable to remodeling should be clearly labeled and must
either have tax charged on that amount or you may show it as tax included. You
would comply with Rule 3.357 on the remodeling and Rule 3.291 on the portion
considered to be new construction.

This opinion is rendered based on the facts you presented. Other facts,
though similar, may yield different results.

Please feel free to call or write me any time. My toll free number is
1-800-531-5441.

Sincerely,
Al Van Allan
Tax Policy Division