How did Texas separate new construction from remodeling when a project added four floors and expanded an existing building?

Plain-English summary

A client planned to add four floors and expand portions of an existing three-story building, together with elevators, fire walls, smoke-evacuation ducts, plumbing, electrical work, and exterior covering.

The Comptroller said the four-floor addition, lobby expansion, and related work in the added footage were new construction. Changes within the existing structure were remodeling, including removing existing roofing underlayment, demolishing existing walls for the expansion, tying the new footage to the old, and applying new exterior covering to the existing structure. Covering placed on the new floors and new footage was new construction.

If the entire project used a lump-sum contract and remodeling was 5% or less of the total charge, the whole contract was treated as new construction. If remodeling exceeded 5%, the total contract was taxable unless the remodeling charge was separately stated.

STAR now notes that Rule 3.357(a)(8) was amended in 2002 to define new construction as new usable square footage.

What this means for you

An expansion could contain both new construction and remodeling. Work needed to connect or alter the old structure did not automatically become new construction merely because it supported new floors.

Common questions

Were the four added floors new construction? Yes.

Was demolition inside the old building new construction? No; the letter classified it as remodeling.

What if remodeling was 5% or less of a lump sum? The whole contract was treated as new construction.

What if remodeling exceeded 5%? The total contract was taxable unless the remodeling charge was separately stated.

Citations and references

• 34 Tex. Admin. Code Rule 3.357(a)(8) — new-construction definition identified in STAR's amendment alert

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9105L1109A01

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.

May 3, 1991

Dear **:

Thank you for your letter regarding the applicability of sales tax to one of

your clients real property projects.

In brief summary, your client is considering adding four floors to and

expanding portions of an existing three-story building. The project also

includes adding various items such as elevators, fire walls, smoke evacuation

ducts, plumbing and electric, and exterior aluminum covering.

As you stated, the term "new construction" includes "the addition of new

footage to an existing structure" and the term "remodeling" includes activities

"to make over or rebuild real property or structures in a similar but different

way." The fact that changes must or may be made to an existing structure to

accommodate or facilitate new footage and whether or not the changes will

enhance the existing structure does not change remodeling to new construction.

Based on the facts in your letter, both remodeling and new construction are

included in the proposed project. If the contract for the entire project is

lump sum and the portion of the charge applicable to the remodeling is 5% or

less of the overall contract, the entire contract will be considered new

construction. If the remodeling portion is over 5%, the total contract will be

taxable unless the charge for the remodeling is separately stated.

The four floor addition, lobby expansion and related work performed in the new

footage constitutes new construction of real property. The changes and

additions made in the existing structure is remodeling. Remodeling also

includes the removal of the existing roofing foam underlayment, demolition of

existing walls in order to expand the existing structure, "tying" the new

footage to the existing footage, and application of the new exterior covering

to the existing structure. The addition of the exterior covering to the new

four floors and to the new footage is 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 additional information, you may call me toll

free 1-800-252-5555, extension 3-4666. You may write to Tax Administration

Division.

Sincerely,

Jo Ann Dieck

Tax Administration Division