When one contract covers both new construction and remodeling, and includes demolition, which charges are taxable in Texas?

Plain-English summary

A contractor asked the Comptroller how sales tax applies to a job whose single contract covers both new construction and remodeling/repair, and that includes demolition work. The Comptroller, after consulting colleagues, gave these answers:

• Demolition in the remodel area is taxable. Because it is tied to taxable remodeling of existing real property, that demolition work is taxable.
• Demolition to destroy the west annex is not taxable — if debris removal is separated. The demolition to destroy the west annex would not be taxable provided the charges for removing the debris are separately stated and taxed. If the debris-removal charges are not separately stated from the demolition charge, the total charge is taxable.
• Mixed contracts must be split. When remodeling and new construction are performed under the same contract, the taxable and nontaxable portions must be separately stated, or the entire project is treated as taxable. The Comptroller noted the contractor appeared to be complying with this rule and enclosed a copy for reference.

What this means for you

Contractors running mixed new-construction / remodeling jobs

If one contract bundles nontaxable new construction with taxable remodeling or repair, separate the two on your billing. Failing to separate them makes the whole project taxable. Keep the taxable remodeling charges distinct from the nontaxable new-construction charges.

Demolition and debris removal

Demolition tied to taxable remodeling is taxable. Demolition connected to new construction (like clearing a structure) can be nontaxable, but only if you separately state — and tax — the debris-removal charge. Lump it together and the entire demolition charge becomes taxable.

Common questions

Q: If one contract covers both new construction and remodeling, is the whole thing taxable?
A: Only if you don't separate the portions. The taxable and nontaxable work must be separately stated, or the entire project is treated as taxable.

Q: Is demolition taxable?
A: Demolition in the remodel area is taxable. Demolition to destroy the west annex is not taxable if the debris-removal charges are separately stated and taxed.

Q: What happens if I don't separate the debris-removal charge?
A: If debris removal is not separately stated from the demolition charge, the total charge is taxable.

Q: Can I rely on this 1988 letter today?
A: Treat it as guidance only. It is based on the facts presented and can change with different facts; on the STAR system it binds the Comptroller only as to the taxpayer it was issued to and may no longer reflect current policy.

Citations and references

Rules: The letter applies the Comptroller's rule that mixed remodeling/new-construction contracts must separately state taxable and nontaxable portions (a copy was enclosed) but does not cite a specific rule or Tax Code section by number.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8808L0905A01

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

August 17, 1988

Dear **:

I've given a good deal of consideration to your questions and submitted
them to my co-workers for their opinions. We agree that the demolition work in
the remodel area would be taxable. We also agree that the demolition work to
destroy the west annex would not be taxable if the charges for removing the
debris were separately stated and taxed. If the charges for debris removal
were not separately stated from the charge for demolition, the total charge
would be taxable.

As you know, when remodeling and new construction are performed under the
same contract, the taxable and nontaxable portion should be separately stated
or the entire project would be treated as taxable. It appears that you are
complying with this provision of the rule. I am enclosing a copy for your
reference.

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

Please feel free to call or write me any time. You may call me toll free
at
1-800-531-5441.

Sincerely,
Al Van Allen
Tax Correspondence