Is finish-out labor on a vacant, never-finished building taxable as remodeling, or exempt as new construction?

Subject

Finish-Out Labor On A Long-Vacant, Never-Finished Building — Remodeling Vs. 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/9309571L

Plain-English Summary

A taxpayer owned a nonresidential building constructed in 1986 that had never had finish-out work performed (no interior walls, ceilings, doors, etc.) and had remained in shell form. The taxpayer believed that finish-out labor is only taxable as nonresidential remodeling when it's performed to prepare a space for a new tenant replacing a previous tenant. The Comptroller's letter states that this understanding is incorrect.

The letter lays out two separate scenarios in which tenant finish-out labor is taxable:

1. Finishing out a building for the second time — this is taxable regardless of whether the building has been occupied.
2. Finishing out a building for the first time, when the building was occupied or used before that finish-out work was done. The letter gives the example of "a building constructed without finish-out (walls, ceilings, doors, etc..) that is used as a warehouse, gym, recording studio, or any other use, and then finished-out for the first time to lease for other purposes" — that first-time finish-out labor is taxable as remodeling.

The letter enclosed Rule 3.357 (concerning nonresidential remodeling labor) for the taxpayer's review, and noted that Rule 3.291 (concerning contractors) should be referenced instead if the building is residential, or if the finish-out is the initial finish of a building that was previously non-occupied or unused.

The letter closes with the Comptroller's standard caveat that the opinion is based on the facts presented, and that additional or different facts could change the result.

What This Means For You

If your building has sat vacant and unfinished for years: Do not assume that finish-out labor escapes tax simply because the space has never been finished or leased before. Per this letter, what matters is whether the building was occupied or used in its unfinished (shell) state before the finish-out work — not whether a new tenant is replacing an old one.

If your building was used in shell form for some other purpose: The letter's own example — a shell building used as a warehouse, gym, or recording studio before eventually being finished out to lease for other purposes — shows that any prior occupancy or use of the unfinished space can trigger taxable treatment when finish-out work is later performed.

If the building is residential, or truly never occupied or used before its first finish-out: The letter directs taxpayers to Rule 3.291 (concerning contractors) rather than Rule 3.357 (nonresidential remodeling) in those circumstances — signaling a different tax analysis applies.

Always confirm against current rule text: This letter references Rule 3.357 and Rule 3.291 by number only, without quoting their text, and states its answer is based on the facts as presented to the Comptroller. Confirm current rule language and application to your own facts with a Texas tax professional.

Q&A

Q: Is finish-out labor taxable only when redone for a new tenant replacing a previous tenant?
A: No. The letter directly states that this common understanding is incorrect.

Q: If a building is being finished out for the second time, is the labor taxable?
A: Yes — the letter states this is taxable "regardless of whether or not the building has been occupied."

Q: What if a building is being finished out for the first time?
A: Per the letter, remodeling finish-out is taxable in that case too "when the building has been occupied or used prior to finish out" — for example, a shell building used as a warehouse, gym, or recording studio before being finished out to lease for other purposes.

Q: Which rule applies if the finish-out is the very first finish of a building that was never occupied or used before?
A: The letter directs taxpayers to Rule 3.291 concerning contractors in that situation (or if the building is residential), rather than Rule 3.357.

Q: Does this letter guarantee the same result for every vacant building?
A: No. The letter states its opinion "is based on the facts presented" and that "if there are additional or different facts, the opinion may change."

Original ruling text

September 15, 1993

Dear **:

Thank you for your letter of September 3, 1993, concerning the taxability of
labor performed to finish-out a nonresidential building.

Your firm owns a building which was constructed in 1986. Finish-out was never
performed and the building has remained in shell form. Your understanding that
nonresidential remodeling finish-out labor is only taxable when a space is
remodeled for new tenants who are replacing previous tenants is incorrect.

Tenant finish-out labor is taxable when performed on a nonresidential building
that is being finished out for the second time regardless of whether or not the
building has been occupied. Remodeling finish-out is also taxable in the case
of a building being finished-out for the first time when the building has been
occupied or used prior to finish out. A good example of this would be a
building constructed without finish-out (walls, ceilings, doors, etc..) that is
used as a warehouse, gym, recording studio, or any other use, and then
finished-out for the first time to lease for other purposes.

I have enclosed Rule 3.357 concerning nonresidential remodeling labor for your
review. Enclosed Rule 3.291 concerning contractors should be referenced if the
building is residential or if the finish-out is the initial finish previously
non occupied or used building.

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

You may call me toll free at 1-800-531-5441, ext. 5-0613. The direct line is
512/475-0613. You may also write to Tax Administration Division, Comptroller of
Public Accounts.

Sincerely,

Kevin Koller
Tax Administration Division