When does adding square footage or finishing out space in an existing Texas structure count as 'new construction'?

Plain-English summary

Someone asked the Comptroller how Texas defines "new construction" for real-property work. The answer sets out several categories:

• All new improvements to real property, including finish-out work done at any time before an area is first occupied — interior or exterior. The letter's example: a multi-story building where only the first floor has been finished and occupied. Finishing out each additional floor before it is occupied counts as new construction.
• Adding new square footage to an existing structure is new construction (the Comptroller cites Rule 3.357).
• Following meetings with an oil-and-gas industry association, the Comptroller added that improvements to refineries and chemical plants that increase the capacity of a processing unit are new construction. Modifications, improvements, or additions that increase the productive capacity of processing units qualify.

Why the classification matters: Texas Rule 3.357 draws the line between new construction and the repair, remodeling, or restoration of real property, and those two categories are taxed differently. This letter tells you which activities fall on the new-construction side of that line; it does not, by itself, state a tax rate for any particular job. For the full rules on how each category is taxed, the Comptroller directs you to Rule 3.357.

What this means for you

Building owners and general contractors

Finish-out of previously unoccupied space — like completing additional floors of a building before anyone moves in — is new construction, and so is bolting new square footage onto an existing structure. That classification is what determines how the labor is treated under Rule 3.357, so getting it right up front matters for how you bill and document a job.

Refineries and chemical plants

Work that increases the productive capacity of a processing unit is treated as new construction, not remodeling. Modifications, improvements, or additions that expand capacity fall in the new-construction category; routine work that merely maintains or restores existing capacity does not, so distinguish capacity-increasing projects from repair and maintenance.

Common questions

Q: Is finishing out unoccupied space in an existing building "new construction"?
A: Yes. Finish-out work done at any time before an area is first occupied is new construction — for example, finishing each additional floor of a building before it is occupied.

Q: Is adding square footage to an existing building new construction?
A: Yes. The addition of new footage to an existing structure is new construction under Rule 3.357.

Q: What about upgrades to a refinery or chemical plant?
A: Modifications, improvements, or additions that increase the productive capacity of a processing unit are new construction.

Q: Does this letter tell me the tax rate on my project?
A: No. It classifies the work as new construction. Rule 3.357 governs how new construction versus repair/remodeling is taxed, so consult it (or a tax professional) for the tax result on your specific job.

Q: Can I rely on this 1988 letter?
A: Treat it as guidance only. It is based on the specific 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:

• 34 Tex. Admin. Code Rule 3.357 (labor to repair, remodel, maintain, or restore real property; definition of new construction)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8810L0904E01

Original ruling text

October 12, 1988

Dear ***:

Thank you for your letter concerning the definition of 'new construction'.

'New' construction includes all new improvements to real property including
finish out work performed at any time prior to initial occupancy of each area
to either the interior or exterior of the improvement. An example would be a
multiple story building which has only had its first floor finished and
occupied. The finish out of each additional floor prior to occupancy will be
considered new construction. New construction also included the addition of new
footage to an existing structure. Please refer to Rule 3.357.

As a result of meetings with the ABC OIL & GAS ASSOCIATION, new construction
includes improvements to refineries and chemical plants that increase the
capacity of the processing unit. Modifications, improvements, or additions
which increase the productive capacity of processing units will be considered
new construction.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change.

If you have any questions or need more information, please call our toll-free
number 1-800-252-5555, 3-4675. The regular number is 512/463-4600. You may
write me at Tax Correspondence, Comptroller of Public Accounts.

Sincerely,

Tom Soto
Tax Correspondence