Was demolition inside an existing commercial building excluded from tax when a contractor rebuilt the space for a new tenant?

Plain-English summary

A general contractor demolished a former tenant's interior lease space, removed the debris, and built new space for another tenant inside the same commercial office building. The contractor asked whether the demolition charge could be excluded from sales tax.

The Comptroller said no. Because the work remained within the framework of the existing structure, the project was remodeling and the entire charge was taxable, including demolition, rubbish removal, labor, materials, overhead, and profit.

A separately stated demolition charge could be excluded only if the old structure were demolished all the way down to the slab. Extensive interior demolition was not enough.

The letter also gave this taxpayer penalty relief for late remittance on demolition charges from October 25, 1991, through February 26, 1992, because the taxpayer had relied on incorrect advice from the Comptroller's office. That relief was tied to this taxpayer and period, not announced as a general exemption.

What this means for you

Commercial remodeling contractors

Separately stating demolition does not make it nontaxable when it is one part of remodeling an existing building. The remaining structural framework controlled the classification in this letter.

Accountants and tax professionals

Distinguish complete demolition to the slab from partial demolition within an existing structure. The ruling drew the tax line there.

Common questions

Was interior demolition separately exempt? No.

When could a separately stated demolition charge be excluded? The letter required demolition of the old structure down to the slab.

Was rubbish removal taxable too? Yes, as part of the total remodeling charge described.

Does the penalty waiver apply generally? No. The letter limited it to the taxpayer's reliance on incorrect advice during the stated historical period.

Citations and references

The letter cited no specific statute or rule.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9202L1163G08

Original ruling text

February 27, 1992

Dear *****

Thank you for your recent letter asking whether sales tax applies to
demolition work and other charges under the following fact situation.

Situation: I am a general contractor. The location is a commercial
office building in Texas. A former tenant has vacated a lease and
will not be reoccupying that lease. My client contracts for me to
demolish that lease and to remove the rubbish of this demolition. My
client further contracts for me to build a new lease space for a new
tenant. My instructions from your representatives when I called are
that I should itemize line by line for my client the (1) cost of the
demolition; (2) cost of the rubbish removal; (3) cost of constructing
a new lease space for the new tenant including labor, materials,
overhead and profit; and 94) sales tax as calculated on all the above
except demolition.

Question: Is this correct?

Response: From the information provided, I must conclude that this
job is a remodeling job. If my conclusion is correct, the total charge,
including the charge for demolition, is taxable.

For a separately stated charge for demolition to be excluded from the
tax base, the old structure would have to be demolished right down to
the slab. While extensive work will be done, it appears the work will
be done within the framework of an existing structure. This is
remodeling work, which is taxable in total.

NOTE: Since you were acting from October 25, 1991, until February 26,
1992, under incorrect advice from this office, you will not be held
responsible for any late filing penalty incurred for remitting sales tax
late on the charge for the demolition work.

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

If you have any additional questions or need more information, you may
call me toll free at 1-800-252-5555, extension 3-4633. The regular
number is 512/463-4633. You may also write to the Tax Administration
Division.

Sincerely,

Wanda Hutcheson
Tax Administration Division