When did tenant finish-out work count as new construction rather than taxable remodeling of Texas real property?

Plain-English summary

The Comptroller distinguished initial finish-out work on a true shell from later changes to already improved space. New construction included new real-property improvements and the initial interior or exterior finish-out. The described work qualified as new construction only if “shell” meant that no flooring, walls, or ceiling had yet been installed.

Once flooring, walls, or a ceiling had been installed, requested changes were remodeling. The letter said the total charge for that remodeling job was taxable even if no tenant had ever occupied the space.

Examples of remodeling included replacing vinyl flooring with carpet, adding wallpaper or a different paint color to finished sheetrock walls, installing a dividing wall, or adding built-in cabinets. For new construction, the contractor's tax responsibilities depended on whether the contract was lump sum or separated under Rule 3.291.

What this means for you

Occupancy was not the dividing line in this ruling. The physical condition of the space mattered: initial work on an unfinished shell was new construction, while changes after floors, walls, or ceilings existed were remodeling.

Common questions

Was initial finish-out work new construction? Yes, when the space was truly a shell with no flooring, walls, or ceiling.

Did a space have to be previously occupied before work could be remodeling? No.

Was the total remodeling charge taxable? Yes, under the facts addressed by the letter.

What examples of remodeling did the letter give? New wallpaper or paint, carpet replacing vinyl flooring, a dividing wall, and built-in cabinets in already finished space.

How were new-construction contractor responsibilities determined? By whether the contract was lump sum or separated, with Rule 3.291 cited for contractor treatment.

Citations and references

• 34 Tex. Admin. Code § 3.291 (contractors)
• 34 Tex. Admin. Code § 3.357(a)(6) (real-property repair and remodeling definition)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9102L1075D08

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

JOHN SHARP
Comptroller February 20, 1991

Dear *****:

Thank you for your recent letter concerning new construction and
remodeling.

New construction consists of all new improvements to real prop-
erty, including initial finish out work to the interior or exte-
rior of the improvement. The type of work that you described would
be considered new construction as long as "only a shell" means no
flooring, walls, or ceiling. The tax responsibilities of a con-
struction business doing a new construction job are determined by
whether the contract is lump sum or separated. Please refer to
the enclosed Rule 3.291 on contractors.

However, if flooring, walls, or ceiling had been installed, but
the tenant wanted changes made, then the work is considered to be
remodeling. The total charge for the job is taxable even though
no tenant had ever occupied that space. Enclosed is Rule 3.357 on
real property repair and remodeling. Please note in particular
(a)(6), in which remodeling is defined.

An example of remodeling is where a lease space that has painted
sheetrock walls, vinyl flooring, and acoustical dropped ceiling is
changed so that the walls have wallpaper or a different color of
paint, or the vinyl flooring is replaced with carpeting. Another
example would be taking that same lease space and putting in a
dividing wall or adding some built-in cabinets.

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

You may call me toll free at 1-800-252-5555, ext. 34697. The reg-
ular number is 512/463-4697. You may also write to Tax Adminis-
tration at the above address.

Sincerely,
Sandi Skaggs
Tax Administration Division