If a contractor builds a new exterior wall (with window openings) around an existing building, and adds four new floors, but the new wall doesn't create any usable space, is that new construction or remodeling for Texas sales tax purposes?

Subject

Walls — New Exterior Wall Built Around Remodeled Building — No Usable Space Created — Is Remodeling

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9309151L

Plain-English Summary

A contractor was awarded a contract to supply and install window frames and window panes in a new wall built around an existing three-story structure. The blueprints called for the new wall to have windows, and the wall was built with openings for them. The new wall was constructed approximately one foot outside the existing walls of the three-story structure. The existing structure itself was not affected — all of its old walls remained intact. At the same time, four new floors were added on top of the existing three-story building.

The taxpayer asked the Comptroller for a formal ruling on whether building the new wall and installing the metal frame windows in it qualified as new construction under 34 T.A.C. 3.357(a)(4).

The Comptroller's response: if usable space is not created by the addition of the new brick wall, the construction of the wall and the windows will be regarded as remodeling. Because that was the case here, the contractor should collect tax on the total charge for the addition of the window frames and panes. The four new floors added to the existing building, however, do qualify as new construction.

The letter cites Hearings Decision No. 28,539 as addressing a similar situation, in which the construction of a wall around an existing building was considered remodeling because it did not add usable space.

The letter closes with the standard caveat that the opinion is based on the facts presented, and that other facts, though similar, may provide a different result.

What This Means For You

Usable space is the dividing line between "new construction" and "remodeling." This letter shows the Comptroller's key test for a wall built around an existing structure: did it create usable space? Here, the new wall stood about a foot outside the old walls, which remained fully intact — so no new usable space was created, and the wall (and the windows installed in it) is remodeling rather than new construction.

Remodeling labor and materials are taxable; the classification affects what you collect tax on. Because the wall-and-window work was classified as remodeling, the letter directs the contractor to collect tax on the total charge for the window frames and panes.

Vertical additions can be treated differently from wrap-around walls in the same project. Even within a single job, different components can get different classifications — the four new floors added on top of the existing building qualified as new construction, while the wrap-around wall with windows did not.

Rulings are fact-specific. The letter explicitly notes that the outcome is based on the facts presented, and that other, similar-looking facts could produce a different result — so contractors facing a comparable wrap-around wall scenario shouldn't assume this letter automatically covers their situation.

Q&A

Q: Is a new exterior wall built around an existing building automatically "new construction"?
A: Not necessarily. The letter states that if usable space is not created by the addition of the new wall, the construction of the wall (and windows in it) is regarded as remodeling.

Q: Did the wall in this letter create usable space?
A: No. The new wall was built about one foot outside the existing walls of the three-story structure, and the existing structure's old walls all remained intact, so no usable space was created.

Q: Is tax owed on the window frames and panes installed in the new wall?
A: Yes. Because the wall was classified as remodeling, the letter says the contractor's client should collect tax on the total charge for the addition of the window frames and panes.

Q: What about the four new floors added to the building — are those taxed the same way?
A: No. The letter states that the four new floors qualify as new construction, unlike the wrap-around wall.

Q: Did the Comptroller rely on any prior decision?
A: Yes. The letter cites Hearings Decision No. 28,539, which addressed a similar situation where a wall built around an existing building was considered remodeling because it did not add usable space.

Q: Does this ruling apply to any similar wrap-around wall project?
A: Not automatically. The letter notes the opinion is based on the facts presented, and other facts, though similar, may provide a different result.

Original ruling text

September 7, 1993

Dear **:

This is in response to your letter requesting a ruling of the taxability of the
installation of metal frame windows in a newly-constructed wall in front of an
existing three story structure qualifies as new construction pursuant to 34
T.A.C. 3.357(a)(4).

Specifically your client has been awarded a contract to supply and install
window frames and window panes in a new wall that was constructed around an
existing three-story structure The blueprints of the new wall called for the
wall to have windows and, in fact the wall was built with openings for the
windows. The new wall was built approximately one foot outside existing walls
of a three-story structure. The existing three-story structure was not affected
by the addition of the new wall. All of the old walls of the existing
three-story structure remained intact. Four new floors were added to the
existing three-story building.

You are requesting a formal ruling as to whether the construction of the new
wall and the installation of metal frame windows in the wall qualify as new
construction pursuant to 34 T.A.C. 3.357(a)(4).

RESPONSE: If usable space is not created by the addition of the new brick wall,
the construction of the wall and the windows and will be regarded as
remodeling. Your client should collect tax on the total charge for the addition
of the window frames and panes. The four new floors qualify as new
construction.

Hearings Decision No. 28,539, addressed a similar situation, in which the
construction of a wall around an existing building was considered to be
remodeling, because it did not add usable space.

This opinion is based on the facts presented. Other facts though similar may
provide a different result. If you have other questions or need more
information, you may call me at 1-800-531-5441, extension 3-4502. The regular
number is 512/463-4502. You may also write to Tax Administration Division at
the above address.

Sincerely,

Gilbert Zamora
Tax Administration Division