Did completely gutting and rebuilding the interior of a previously occupied office building count as tax-exempt new construction?

Plain-English summary

The planned project would remove and replace the office building's interior walls, HVAC components, lighting, wiring, plumbing fixtures, ceilings, flooring, windows, and asbestos.

Despite that extensive work, the Comptroller classified it as remodeling rather than new construction. The building's superstructure—including exterior walls, concrete floors, plumbing and sewer lines, and slab—would remain, and the original construction had already included the building's initial finish-out.

Labor to repair or remodel nonresidential real property was taxable under the letter. Labor associated with adding new square footage, however, would be exempt as new construction.

Common questions

Did removing nearly the entire interior make the project new construction? No. The remaining superstructure and prior initial finish-out kept it in the remodeling category.

Was the remodeling labor taxable? Yes.

What work would qualify as new construction? The letter specifically said added square footage would qualify, with exempt labor charges.

Citations and references

• 34 Tex. Admin. Code Rule 3.357(a)(4) (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/9003L1018F11

Original ruling text

March 1, 1990

Dear ****:

Your letter concerning the redevelopment of a 19-floor office building
has been forwarded to me.

In your letter, you stated that all interior walls, heating and air
conditioning duct work, heating and air conditioning units, lighting fixtures,
electrical wiring, plumbing fixtures, ceilings, flooring and windows would be
removed. Also, all asbestos throughout the structure would be removed. All
items removed would then be replaced with new materials.

Labor charges to repair or remodel nonresidential property became taxable
January 1, 1988. Labor charges on new construction are exempt.

The complete gutting-out and subsequent finishing-out with new fixtures
and materials, although an extensive renovation, is still considered
remodeling, and the labor is taxable. The building's superstructure will
remain, including exterior walls, concrete floors, plumbing and sewer lines
and building slab.

Rule 3.357(A)(4) defines new construction as "all new improvements to
real property including initial finish out work to the interior or exterior of
the improvement". The initial finish out work on this building took place at
the time of the original construction. Any subsequent finish out work would be
remodeling.

Please be advised that the addition of new footage would be considered
new construction and the labor charges would be exempt.

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

Please write or call if you have any questions. You can call toll-free
at 800-531-5441. Our regular number is 512-463-3830.

Sincerely,

Larry Koenig
Taxability Section
Legal Services Division