Which parts of a shopping-mall project were new construction, and how should shared HVAC and mechanical-installation labor be allocated?

Plain-English summary

The Comptroller addressed four parts of a shopping-mall renovation. Replacing a demolished portion of the existing structure with a theater and food hall was not new construction merely because storage became leasable space. Expanding storefronts into existing interior walkways was also not new construction because the mall's total floor space did not increase.

By contrast, new enclosed exterior entrances were new construction because they added footage to the existing building.

For heating, air-conditioning, and other mechanical equipment serving both new and existing space, the taxable and nontaxable installation labor was allocated by the new construction's share of the total serviced space. The letter used cubic space for HVAC and said square or cubic footage could apply to other equipment, depending on the equipment.

STAR now alerts readers that Rule 3.357(a)(8) was amended effective February 2, 2002, to define new construction as new usable square footage. This page reports the 1989 project-specific analysis and does not present its old paragraph numbering as current.

Common questions

Was converting existing storage into leasable theater and food space automatically new construction? No.

Were the new exterior entrances new construction? Yes, because they added footage.

Did moving storefronts into existing walkways add new construction? No. It reallocated existing mall floor space.

How was shared HVAC labor allocated? By the new construction's percentage of the total cubic space served.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8902L0925C01

Original ruling text

ALERT: Re: the definition of new construction in terms of additional footage, Rule 3.357(a)(8) was amended 02/02/2002 to define new construction as new useable square footage.

February 21, 1989

Gentlemen:

Thank you for your letter of January 26, 1989, regarding "new

construction" vs. repair and remodeling of a shopping mall.

For clarification purposes, I have reiterated portions of your letter and

responded to each individual portion.

FACT: "In addition to remodeling the existing building, the Company

plans to demolish a portion of the building that presently consists of floor

space used by customers to gain access to the retail stores. There is a storage

area beneath this pedestrian walkway that will also be demolished. The

demolished structure will be replaced with a new structure that will house a

movie theatre on a lower level and a food service hall on a second level above

the movie theatre. The new structure will add additional leasable space to the

mall."

QUESTION 1: "Does the construction of the movie theatre and food

hall constitute new construction within the meaning of Section 3.357 (a)

(4)...?"

RESPONSE 1: No.Rule 3.357(a)(6) states in part that "Replacement or

upgrading of any part of an existing structure is remodeling or modification.

Only a portion of the present structure is being demolished. Converting

storage to "leasable space" is not necessarily addition of "new footage" to an

existing structure.

FACT: "Company A plans to add enclosed entrances to the exterior of

the mall. These new entrances will be heated and air conditioned. The general

contractor will separately state the value of services rendered to construct

these entrances. The cost of remodeling services required to attach the new

entrances to the existing building will also be separately stated and will not

account for more than five percent of the cost of construction of the new

entrances."

QUESTION 2: "Does the construction of the new entrances to the mall

constitute new construction within the meaning of Section 3.357 (a) 14)... ?"

RESPONSE 2: Yes. Rule 3.357 (a)(4) states in part that "New

construction also includes the addition of new footage to an existing

structure."

QUESTION 3: "How should the Company allocate the cost of services

purchased to install new heating, air conditioning, and other mechanical

equipment between new construction and improvements to the existing structure?"

RESPONSE 3: Allocation of taxable and non-taxable portions of

installation labor for new heating and air conditioning equipment would be

based on percentage of cubic space added by new construction to total cubic

space serviced by the heating and air conditioning equipment. "Other

mechanical equipment" might be calculated on square footage or (cubic footage,

depending on type of equipment involved. Once this allocation has been made,

this calculation would then be included in the overall calculation of

percentage of new construction and percentage of repair and remodeling.

FACT 4: "Company A also plans to increase the leasable floor space of

the mall by expanding store fronts outward into areas that are presently used

as walkways."

QUESTION 4: "Does the addition of leasable space through expansion

of the store front constitute new construction within the meaning of Section

3.357(a)(4) ... ?"

RESPONSE 4: No; expanding store fronts into the mall area would not

constitute new construction since the floor space of the mall is not being

expanded but merely reallocated between store space and walkway space.

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, extension 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